IAS 16 Amendment Analysis & AAT Response: Proceeds Before Intended Use

This case study presents an analysis of the proposed amendments to IAS 16 concerning the treatment of proceeds generated before an asset is ready for its intended use. It includes the Association of Accounting Technicians (AAT) response to the consultation, where AAT generally agrees with the proposed amendments, arguing that proceeds from selling items produced during the testing phase of an asset should be recognized in profit or loss rather than deducted from the cost of the asset. The AAT believes that the costs of materials used in testing, which may generate by-products capable of sale, are not directly attributable to preparing the asset for its intended use, and therefore, the proceeds and associated costs should be accounted for separately. The document also provides background information on AAT and its objectives, emphasizing its role in advancing public education and promoting sound accounting practices.

BY EMAIL
Dear Sir/Madam
Association of Accounting Technicians response to Proposed amendments to IAS 16 – Proceeds
before Intended Use
The Association of Accounting Technicians (AAT) is pleased to have the opportunity to respond to the
consultation on Proposed Amendments to IAS 16 – Proceeds before Intended Use.
AAT is submitting this response on behalf of our membership and for the wider public benefit of achieving
decision useful information, including disclosures, in financial statements.
Question 1. The Board is proposing to amend IAS 16 to prohibit deducting from the cost of an item of
property, plant and equipment any proceeds from selling items produced while bringing that asset to
the location and condition necessary for it to be capable of operating in the manner intended by
management. Instead, an entity would recognise the proceeds from selling such items, and the costs
of producing such items, in profit or loss.
Do you agree with the Board’s proposal? Why or why not? If not, what alternative would you propose
and why?
On balance, AAT agrees with the Board’s proposal and is not persuaded by the dissenting view set out in the
Basis for Conclusions to the proposed amendment.
The issue that the proposed amendment is attempting to address affects relatively few industries, primarily
extractive or petrochemical industries where a significant amount of testing may be required before an item
of property, plant or equipment to be used in such activities is ready for its intended use. Any items which are
able to be sold before the item of plant or equipment is ready for its intended use are likely to be by-products
of the testing process rather than directly affecting the cost of the asset itself.
Clearly, only costs – and income – which are directly attributable to bringing an asset to the point at which it
is ready for its intended use should be capitalised as part of the costs of an asset. Whilst the costs of the
testing process itself are clearly necessary to ready the asset for its intended use and therefore should be
capitalised, the costs of materials to be used in that testing and which may generate by-products of testing
which are capable of sale do not appear to be ‘directly attributable’ in the same way. AAT therefore agrees
that the proceeds of such sales, and the costs of producing the items sold, should be shown in profit or loss
rather than capitalised as part of the asset.
AAT also agrees that no specific additional disclosures should be required.
About AAT
AAT is a professional accountancy body with approximately 50,000 full and fellow members and over 90,000
student and affiliate members worldwide. Of the full and fellow members, there are over 4,250 licensed
accountants who provide accountancy and taxation services to individuals, not-for-profit organisations and
the full range of business types.
AAT is a registered charity whose objectives are to advance public education and promote the study of the
practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound
administration of the law.
Please do not hesitate to contact me should you have any queries or require any further information.

Yours faithfully
Adam Harper, Director of Strategy & Professional Standards
T: 020 7397 3075 E: [e-mail]