Detailed Analysis of IASB ED/2017/4: Proceeds Before Intended Use

This report provides an analysis of the IASB's Exposure Draft ED/2017/4, which proposes amendments to IAS 16 concerning proceeds before intended use, specifically addressing the accounting treatment of revenue generated during the testing phase of property, plant, and equipment (PPE). The report, written on behalf of the Accounting Standards Committee of Germany (ASCG), expresses reservations about the proposed deletion of the established principle in IAS 16.17(e) that allows for the deduction of certain sales proceeds from the costs to be capitalized. It highlights concerns that the amendment might not be the best approach for addressing specific industry issues, such as those in mining and commodities, where significant proceeds are often generated before the production facility's intended use. The analysis suggests clarifying the definition of "testing," ensuring that only sales proceeds from testing are deductible, and establishing a robust principle for differentiating these proceeds from others. While acknowledging the complexities and varying opinions on the issue, the report ultimately leans towards retaining the deductibility of sales proceeds from testing costs, subject to further clarification, to avoid potential unintended consequences.

Contact: Bank Details: Register of Associations:
Zimmerstr. 30 .D-10969 Berlin . Deutsche Bank Berlin District Court Berlin-Charlottenburg, VR 18526 Nz
Phone: [phone] . Account. 0 700 781 00, BLZ 100 700 00 Executive Committee:
Fax: [phone] IBAN-Nr. DE26 1007 0000 0070 0781 00 Prof. Dr. Andreas Barckow (President)
E-Mail: [e-mail] BIC (Swift-Code) DEUTDEBBXXX Peter Missler (Vice-President)
Deutsches Rechnungslegungs Standards Committee e.V.
Accounting Standards Committee of Germany
DRSC
DRSC e. V. • Zimmerstr. 30 • 10969 Berlin
Mr Hans Hoogervorst
Chairman of the
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Dear Hans,
IASB ED/2017/4 Proceeds before Intended Use (Proposed Amendments to IAS 16)
On behalf of the Accounting Standards Committee of Germany (ASCG) I am writing to comment
on the IASB’s ED/2017/4 Proceeds before Intended Use (herein referred to as the ‘ED’). We ap-
preciate the opportunity to comment on this ED.
We are not convinced that the IASB’s proposed amendment represents the best way in dealing
with what appears to be a specific issue in specific industries – e.g. mining, commodities. These
industries typically incur significant proceeds from selling items or material before the intended
use of a production facility (“the item of PPE”) and, in particular, while testing it. Further, there is a
high probability that the proceeds could (and in many cases do) exceed the costs of testing. For
instance, a company operating a gold mine might carve bigger or smaller traces of gold out of the
stone while preparing the shaft for its intended use. Whilst we agree that a clarification of whether
or not the current accounting treatment is appropriate in those circumstances is needed, we have
significant doubts as to a general deletion of the (established) principle in IAS 16.17(e) under
which certain sales proceeds are deducted from the costs to be capitalised. We therefore agree
with the dissenting board member’s opinion. In this context, we also flag that IAS 23.12 consti-
tutes a corresponding principle of deducting income from costs by requiring (or allowing) invest-
ment income to be deducted from borrowing costs.
Having said this, we acknowledge that maintaining the current requirement in IAS 16.17(e) would
not solve the specific issue mentioned above. We believe that more work on clarifying several
aspects and terms is needed:
• Firstly, we agree that the meaning of “testing” requires clarification.
IFRS Technical Committee
Phone: [phone]
E-Mail: [e-mail]
Berlin, 21. August 2017

- 2 -
Deutsches Rechnungslegungs Standards Committee e.V.
Accounting Standards Committee of Germany
DRSC
• Secondly, we agree with clarifying that only sales proceeds from testing be deductible from
the costs of testing. This would require to clearly define the nature or quality of items that are
produced from testing – in order to distinguish them from items produced from non-testing ac-
tivities (but before the asset is available for its intended use), or that are produced while test-
ing but sold after testing (but still before the asset is available for its intended use). In that re-
gard, the IASB should look into how much additional work, cost and processes are required to
sell items produced from testing: If a product was readily marketable straight out of the testing
process without any further processing, certifications etc. and without incurring more than only
insignificant further cost, then it would appear that those products are not related to testing. If,
for instance, raw materials such as ore or gold were dug out of the earth and readily available
for sale, it would seem questionable why the accounting treatment should be different com-
pared to sales outside of the testing period.
• Thirdly, we agree that a robust principle is needed why only sales proceeds from testing, but
no other sales proceeds, be deductible. Admittedly, there are potentially more aspects that
deserve clarification should the principle of deducting proceeds from costs of testing be re-
tained.
We understand and acknowledge that both the IASB and the IFRS IC have discussed the issue
over a long period and have reached varying decisions during their deliberations. We further un-
derstand that both bodies seem to acknowledge that solving the issue holistically would require a
more fundamental review of the requirements surrounding testing. However, we feel that simply
prohibiting an established principle for pragmatic reasons seems to have the potential to create
unintended consequences – which is why, on balance, we have a preference of retaining the de-
ductability of sales proceeds from costs of testing, along with clarifying it as suggested before.
If you would like to discuss our comments further, please do not hesitate to contact Jan-Velten
Große ([e-mail]) or me.
Yours sincerely,
Andreas Barckow
President