IAS 16 Amendments: Reviewing the Exposure Draft ED/2017/4 Proposal

This essay provides an analysis of the International Accounting Standards Board (IASB) exposure draft ED/2017/4, which proposes amendments to IAS 16 concerning property, plant, and equipment. The current standard, IAS 16, allows for the deduction of proceeds from selling items produced during the testing phase of an asset from the asset's cost. The proposed amendment aims to prohibit this deduction, instead requiring that these proceeds and related costs be recognized in profit or loss. The author agrees with the proposed amendments, arguing that they simplify financial reporting, remove diversity in treatment, and provide more relevant information to financial statement users by aligning with the principle of recognizing all sales/revenue as income when they occur. The author also notes that the impact of these sales is generally immaterial for most industries, making direct recognition in profit and loss acceptable and improving the overall clarity of financial reporting.

International Accounting Standards
Board exposure draft ‘Proposed
amendments to IAS 16’
Existing provisions and intended proposal:
Paragraph 17(e) of IAS 16 (PPE):
“Costs of testing whether the asset is functioning properly, (ie assessing whether the technical and
physical performance of the asset is such that the asset is capable of being used in the production or
supply of goods or services, for rental to others, or for administrative purposes), after deducting the net
proceeds from selling any items produced while bringing the asset to that location and condition (such as
samples produced when testing equipment)”.
The Present IAS 16 requires on including the cost of testing the proper functionality of the asset after
deducting the revenue generated from selling any items which are produced in bringing the asset to that
location and condition necessary for it to be capable of being operated in a manner intended by the
management.
QUESTIONS ON THE EXPOSURE DRAFT ED/2017/4
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 recognize the proceeds from selling such items, and the costs of producing
those 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?
I agree with the proposed amendments. Generally, in practice, proceed from selling these items are
virtually immaterial for most of the industries purchasing PPE for production, as such, charging it directly
to profit and loss and presented together with other incidental income of the Company would be
acceptable. As mentioned by the Board, this issue mainly affects few industries, such as those in the
extractive and petrochemical industries. I am also in the same view with the Board that this proposed
amendment will simplify and effectively remove the mentioned diversity in treatment, thus would further
improve the financial reporting.
Lastly, I believe that this proposed amendment is a right step towards providing more relevant
information to the users of financial statements by converging the view of recognizing all sales/revenue as
income when they occur rather than offsetting it against the cost.

Sincerly,
Rhafael Larry Mauricio, CPA
Manila, Philippines