Detailed Report: IFRS 16 Amendments on Property, Plant, and Equipment

This report provides an in-depth analysis of the Exposure Draft ED/2017/4, specifically focusing on the proposed amendments to IAS 16 regarding Property, Plant, and Equipment (PPE). The primary amendment discussed involves the prohibition of deducting proceeds from selling items produced while bringing an asset to its intended use from the cost of the asset. Instead, such proceeds, along with the associated production costs, are to be recognized in profit or loss. The report examines the background of these proposed changes, the invitation to comment on the Exposure Draft, and the specific amendments to IAS 16, including the addition of paragraph 20A and amendments to paragraph 17. It also includes draft amendments to other standards, such as IFRIC Interpretation 20. The report covers the Board's approval of the Exposure Draft, the basis for its conclusions, and includes an alternative view. The key focus is on understanding the implications of these amendments for financial reporting and the treatment of PPE costs and revenues during the asset's development phase. The document is a comprehensive review of the proposed changes to accounting standards related to PPE.

IFRS®Standards
Exposure Draft ED/2017/4
June 2017
Comments to be received by 19 October 2017
Property, Plant and Equipment—
Proceeds before Intended Use
Proposed amendments to IAS 16

Property,Plant and Equipment—
Proceeds before Intended Use
(Proposed amendments to IAS 16)
Comments to be received by 19 October 2017

Exposure Draft ED/2017/4Property, Plant and Equipment—Proceeds before Intended Use(Proposed amendments
to IAS 16) is published by the International Accounting Standards Board (Board) for comment only.The
proposals may be modified in the light of the comments received before being issued in final form.
Comments need to be received by 19 October 2017 and should be submitted in writing to the address
below,by email to [e-mail] or electronically using our ‘Open for comment’page at:
http://ifrs.org/projects/open-for-comment/.
All comments willbe on the public record and posted on our website atwww.ifrs.org unless the
respondent requests confidentiality.Such requests will not normally be granted unless supported by a
good reason, for example, commercial confidence.Please see our website for details on this and how we
use your Personal Data.
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ISBN: 978-1-911040-63-7
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CONTENTS
from page
INTRODUCTION 4
INVITATION TO COMMENT 4
[DRAFT] AMENDMENTS TO IAS 16 PROPERTY, PLANT AND EQUIPMENT 6
[DRAFT] AMENDMENTS TO OTHER STANDARDS 8
APPROVAL BY THE BOARD OF EXPOSURE DRAFT PROPERTY, PLANT AND
EQUIPMENT—PROCEEDS BEFORE INTENDED USE PUBLISHED IN
JUNE 2017 9
BASIS FOR CONCLUSIONS ON THE EXPOSURE DRAFT PROPERTY, PLANT
AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE 10
ALTERNATIVE VIEW 17
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
姝 IFRS Foundation3

Introduction
In this Exposure Draft,the International Accounting Standards Board (Board)proposes to
amend IAS 16Property,Plantand Equipment. The amendments would 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 those sales proceeds in profit or loss.
Background
Paragraph 17 of IAS 16 specifies examples of costs directly attributable to bringing an item
of property,plant and equipmentto the location and condition necessary for itto be
capable of operating in the manner intended by management.One such example is the
costs of testing.Paragraph 17(e) of IAS 16 states that the cost of an item of property, plant
and equipment includes the costs of testing whether the asset is functioning properly, after
deducting the net proceeds from selling any items produced while bringing the asset to that
location and condition.
The IFRS Interpretations Committee (Committee)received a request asking two questions
about paragraph 17(e) of IAS 16:
(a) whether the proceeds referred to in that paragraph relate only to items produced
from testing; and
(b) whether an entity deducts from the cost of an item of property, plant and
equipment any proceeds that exceed the costs of testing.
When discussing the issue, the Committee identified a number of related questions about
the cost of property,plant and equipment. After exploring differentapproaches,the
Committee recommended that the Board propose an amendment to IAS 16 to prohibit
deducting sales proceeds from the cost of an item of property, plant and equipment.The
Board agreed with the Committee’s recommendations.
Invitation to comment
The Board invites comments on the proposals in this Exposure Draft,particularly on the
questions set out below.Comments are most helpful if they:
(a) comment on the question as stated;
(b) indicate the specific paragraph(s) to which they relate;
(c) contain a clear rationale;
(d) identify any wording in the proposals that is difficult to translate; and
(e) include any alternative the Board should consider.
The Board is not requesting comments on matters that are not considered in this Exposure
Draft.
EXPOSURE DRAFT—JUNE 2017
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Comments should be submitted in writing so as to be received no later than 19 October
2017.
Question for respondents
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 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?
How to comment
Comments should be submitted using one of the following methods.
Electronically
(our preferred method)
Visit the ‘Open for comment’ page, which can be found at:
http://ifrs.org/projects/open-for-comment/
Email Email comments can be sent to: [e-mail]
Postal IFRS Foundation
30 Cannon Street
London EC4M 6XH
United Kingdom
All comments will be on the public record and posted on our website at www.ifrs.org unless
the respondent requests confidentiality.Such requests will not normally be granted unless
supported by a good reason, for example, commercial confidence.Please see our website for
details on this and how we use your personal data.
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
姝 IFRS Foundation5

[Draft] Amendments to
IAS 16 Property, Plant and Equipment
Paragraph 17 is amended; paragraphs 20A, 80D and 81M are added. Deleted text is
struck through and new text is underlined.
Elements of cost
…
17 Examples of directly attributable costs are:
(a) …
(e) 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 proceedsfrom selling any items produced while
bringing the assetto that location and condition (such assamples
produced when testing equipment); and
(f) …
…
20A Items may be produced while bringing an asset to the location and condition
necessaryfor it to be capableof operating in the manner intended by
management,such as inventories produced when testing an asset.An entity
recognises the proceeds from selling any such items, and the costs of producing
those items, in profit or loss in accordance with applicable Standards.
…
Transitional provisions
…
80D [Draft]Property,Plantand Equipment—Proceeds before Intended Use,issued in [date],
amended paragraph 17 and added paragraph 20A.An entity shall apply those
amendments retrospectively only to items ofproperty,plant and equipment
brought to the location and condition necessary for them to be capable of
operating in the manner intended by management on or after the beginning of
the earliest period presented in the financial statements in which the entity first
applies the amendments.The entity shallrecognise the cumulative effect of
initially applying the amendments as an adjustment to the opening balance of
retained earnings(or other component of equity, as appropriate)at the
beginning of that earliest period presented.
Effective date
…
EXPOSURE DRAFT—JUNE 2017
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81N [Draft]Property,Plantand Equipment—Proceeds before Intended Use,issued in [date],
amended paragraph 17,and added paragraphs 20A and 80D.An entity shall
apply those amendments for annual periods beginning on or after [date to be
decided after exposure].Earlier application is permitted.If an entity applies
those amendments for an earlier period, it shall disclose that fact.
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
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[Draft] Amendments to other Standards
IFRIC Interpretation 20 Stripping Costs in the Production Phase
of a Surface Mine
Paragraph 2 is amended. Deleted text is struck through and new text is underlined.
Background
…
2 During the development phase of the mine (before production begins), stripping
costs are usually capitalised aspart of the depreciablecost of building,
developing and constructing the mine accounted for applying IAS 16 Property,
Plantand Equipment.Those capitalised Capitalised costsare depreciated or
amortised on a systematic basis,usually by using the units of production
method, once production begins.
EXPOSURE DRAFT—JUNE 2017
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Approval by the Board of Exposure Draft Property, Plant
and Equipment—Proceeds before Intended Use published
in June 2017
The Exposure Draft Property,Plant and Equipment—ProceedsbeforeIntended Use(Proposed
amendments to IAS 16) was approved for publication by twelve of the thirteen members of
the International Accounting Standards Board.Mr Zhang voted against its publication.His
alternative view is set out after the Basis for Conclusions on the Exposure Draft.
Hans Hoogervorst Chairman
Suzanne Lloyd Vice-Chair
Stephen Cooper
Martin Edelmann
Françoise Flores
Amaro Gomes
Gary Kabureck
Takatsugu Ochi
Darrel Scott
Thomas Scott
Chungwoo Suh
Mary Tokar
Wei-Guo Zhang
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
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Basis for Conclusions on the
Exposure Draft Property, Plant and Equipment—
Proceeds before Intended Use
ThisBasisfor Conclusionsaccompanies,but is not part of, the proposed amendments.It
summarisesthe considerationsof the InternationalAccounting StandardsBoard (Board)when
developing the proposed amendments.IndividualBoard members gave greater weight to some
factors than to others.
Background
BC1 Paragraph 16(b) of IAS 16Property, Plant and Equipmentexplains that the cost of an
item of property,plant and equipment includes costs directly attributable to
bringing that asset to the location and condition necessary for it to be capable of
operating in the manner intended by management.Paragraph 17 ofIAS 16
specifies examples of directly attributable costs.One example specified is the
costs of testing whether the asset is functioning properly,after deducting the
net proceeds from selling any items produced while bringing the asset to that
location and condition.
BC2 The IFRS InterpretationsCommittee (Committee)received a requestasking
whether:
(a) the proceeds specified in paragraph 17(e)of IAS 16 relate only to items
produced from testing; and
(b) an entity deductsfrom the cost of an item of property,plant and
equipment any proceeds that exceed the costs of testing.
BC3 The Committee noted that feedback from its outreach on the request indicated
that:
(a) the issue mainly affects a few industries,such as the extractive and
petrochemical industries.
(b) diverse reporting methodsare applied. Some entitiesdeduct only
proceeds from selling items produced from testing;others deduct all
sales proceeds until the asset is in the location and condition necessary
for it to be capable of operating in the manner intended by management
(ie available for use).For some entities, the proceeds deducted from the
cost of an item of property, plant and equipment can be significant and
can exceed the costs of testing.
BC4 In addition, feedback from outreach indicated thatentities use different
methods to assess when an item of property,plant and equipment is available
for use.
Prohibit deducting sales proceeds from the cost of an
item of property, plant and equipment
BC5 Having considered the Committee’s recommendations,the Board proposes to
amend paragraph 17 of IAS 16 to prohibit deducting from the cost of an item of
property, plant and equipment any proceeds from selling items produced before
that asset is available for use.As a consequence, an entity would recognise such
EXPOSURE DRAFT—JUNE 2017
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sales proceeds in profit or loss.The Board views its proposals as a simple and
effective way of removing the identified diversity in practice in a manner that
would improve financial reporting.
BC6 The Board concluded that the proposed amendments would provide relevant
information to users of financial statements by requiring entities to recognise all
sales as income (including revenue) when they occur.The existing requirements
in IAS 16 make it difficult for a user to have a clear picture of an entity’s total
revenue in the period because some sales proceeds might be offset against the
cost of property,plant and equipment. Those requirementsalso make it
difficult to have a clear picture of the actualcost of some items of property,
plant and equipment.The cost of those assets can be distorted by deducting
sales proceeds before the assets are available for use.
BC7 During the development of the proposed amendments,the Board observed the
following:
(a) an entity would be required to identify the costs that relate to items
produced and sold before an item of property,plant and equipment is
available for use, and to distinguish those costs from other costs incurred
before that date.This is discussed further in paragraphs BC8–BC10.
(b) before an item of property, plant and equipment is available for use, the
costs of producing any inventories excludes depreciation of that asset.
This is because an entity depreciates an item ofproperty,plant and
equipment only from the date it is available for use.This is discussed
further in paragraph BC11.
BC8 The Board observed that an entity would have to apply judgement in identifying
the costs that relate to items produced and sold before an item of property, plant
and equipment is available for use,and to distinguish those costs from other
costs incurred before that date.However,the proposed amendments would
require little more judgementbeyond that already required to apply IFRS
Standards.For example, an entity is already required to identify and distinguish
the following:
(a) costs directly attributable to making an item ofproperty,plant and
equipment available for use, which the entity includes in the cost of the
asset;
(b) costs of bringing inventories to their presentlocation and condition
included as part of the cost of inventories(paragraph 10 ofIAS 2
Inventories), which it then recognises in profit or loss at the time that the
inventories are sold;
(c) costs excluded from the cost of inventories and recognised as expenses in
the period in which they are incurred,such as abnormalamounts of
wasted materials,labour or other production costs (paragraph 16 of
IAS 2);
(d) costs of stripping activity assets and cost of inventories produced during
the production phase ofa surface mine (IFRIC 20Stripping Costsin the
Production Phase of a Surface Mine); and
(e) costs that it recognises directly in profit or loss, for example:
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
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