Review of proposed amendments Issued by International Accounting Standard Board (IASB) of16 ‘Property, Plant and Equipment’.
Background
The International Accounting Standards Board (IASB) has issued an disclosure draft ‘Property, Plant and Equipment — Proceeds before Intended Use (Proposed amendments to IAS 16)’ on incomes from selling the items produced while bringing an asset into the location and condition necessary for it to be capable of operating in the manner intended by management.
The issue was originally raised with the IFRS Interpretations Committee that had initially intended to develop an interpretation of IAS 16 Property, Plant and Equipment to deal with it. However, during the progression of debates the Committee decided that a narrow-scope alteration to IAS 16 would be a better solution.
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Suggested Amendments
Property, Plant and Equipment — Proceeds before Intended Use (Proposed amendments to IAS 16) suggests to amend IAS 16 to forbid subtracting from the cost of an item of property, plant and equipment any incomes from selling items created while transporting that asset to the location and condition essential for it to be capable of operating in the manner planned by management. Instead, an entity would recognise the incomes from selling such items, and the cost of producing those items, in profit or loss.
Analysis of Amendment of IAS 16 Property, Plant and Equipment
The planned amendment is narrow-in-scope and, once informed, is expected to have an influence on the manufacturing, extractive, and other similar industries. Presently, diverse reporting approaches have been applied by these industries. Some entities subtract only incomes from selling items produced from testing, though others deduct all sales incomes until the asset is available for use. For some entities, the proceeds subtracted from the cost of PPE can be important and outdo the costs of testing. The planned amendment aims to eradicate this diversity in practice.
For foremost time adopters of IFRS, the exemptions in IFRS 1, First-time Adoption of International Financial Reporting Standards offer a believed cost exemption for PPE, specific deemed cost exemptions for entities working in the oil and gas sector and for entities tangled in rate-regulated operations. Accordingly, if a first-time adopter of IFRS does not avail of the estimated cost exemption, it would be required to apply all the requirements of IAS 16 retrospectively.
Comment Letters against Amendment of IAS 16 ‘Property, Plant and Equipment’ Proceeds before Intended use
1. Deloitte comment letter on the IASB’s proposed amendments to IAS 16
Delloite one of the most renowned organisation didn’t agree with the planned amendment to IAS 16 and share several of the worries expressed in the Different View on the exposure draft. They do not consider that the recognition of revenue with no depreciation and slight or no other associated cost would be a suitable outcome. Similarly Delloite do not believe that consumption of property, plant and equipment in development can be assumed to be ‘negligible’.
2. Global IFRS Leader The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IASB exposure draft ED/2017/4 ‘Property, Plant and Equipment — Proceeds before Intended Use (Proposed amendments to IAS 16)’.
Analysis of Comment Letters
EFRAG welcomes and backs the amendment offered in the ED, as we consider it will lessen diversity in rehearsal and, consequently, improve the value of financial reporting under IFRS in regard to property, plant and equipment. However, EFRAG sees no need to comprise a meaning for ‘testing’ as the suggested amendments do not differentiate between net proceeds from selling items created during the testing phase from any other proceeds prior to the item of property, plant and equipment being presented for use.
As per Delloite , the offered amendment is expected to have an influence mainly on entities operating in the energy and extractives industries, where construction of an asset can be a long and multifaceted process with several costs (including those of testing) attributable to getting the asset to the condition essential for it to be capable of operating in the method anticipated by management. Proceeds from, for example, power generated through the commissioning of a new power station, precious metals created prior to completion of a processing plant or minerals removing during construction of an underground shaft for a mining process can be important and can arise over an extended period of time. But I disagree with that and there should be no any consideration although Delloite predicts that the issues arising from such activities (for example, the unit of account for property, plant and equipment relating to a large mining development and the point at which such an asset is determined to be available for use) and similar issues arising in other industries is necessary prior to making amendments to specific IFRSs as a very limited scope amendment such as the one proposed in the exposure draft cannot address those issues and carries the risk of unintended consequences.
I back the proposal of the IASB to forbid the deduction of incomes generated in the process of making an item of property, plant and equipment (PPE) ready for its intended usage by management from the cost of that item. I that those proceeds and connected costs should be accounted for in agreement with other appropriate Standards, generally IFRS 15 Revenue from Contracts with Customers and IAS 2 Inventories. However, I see no need to comprise a definition for ‘testing’. I back the proposed transitional provision because I considers that the cost and difficulty of reiterating items of PPE that are operating before the start of the earliest period offered would outweigh any profits of full retrospective application.
I support the Board’s objective of decreasing diversity in the action of all proceeds from the sale of items created before an asset is ready for its intended use by needing them to be recognised in revenue. However, I am worried that the proposed amendment flops to address the resulting more important issues of: a) the allocation of costs; and b) determining while an asset is ready for its intended use. Cost allocation: The projected amendment offers clear guidance on how to treat this type of revenue and decreases diversity. However, I am concerned that not providing direction on the allocation of costs among property, plant and equipment (PP;E), inventory and profit or loss could lead to arbitrary determination of profit and will not essentially improve financial reporting. In particular, without cost allocation guidance, the anticipated amendment could end in artificially high reported margins on this kind of sale as the cost of sales would not normally include any depreciation of the underlying asset.
Also, it will not essentially provide users with a clear picture of the real cost of an item of property, plant and equipment given the ongoing diversity in how costs are allocated. If the provision of supplementary guidance is not something the Board wants to entertain, precise disclosures may be needed in order to see the objectives of providing users with a clear image of total revenue and also of the actual cost of PP;E. When an asset is ready for use We note that the practice for making this determination differs expressively between industries and countries and can aggravate the accounting concerns about the treatment of proceeds before an asset is ready for its intended use. While I also understand the Board’s foundation for deciding not to illuminate this issue, we believe it is of enough importance to warrant a wider project. However, addressing the issue only is not likely to eradicate the cost allocation issue. Therefore, whether or not the Board addresses the subject of when an asset is ready for its intended use, we believe the Board should report the issue of how to allocate costs.
Conclusion
In the case of this amendment, I agrees with the IASB’s proposal to limit reflective application of the alterations to items of PPE made available for use from the beginning of the earliest period offered. In this case, I do not back full retrospective application of the ED as this would require an entity to go back to early recognition for each related item of PPE in order to determine whether any incomes from selling items produced before the asset was available for use were deducted from the cost of the asset and then adjust the PPE, income and expenses. I reflect that full retrospective application would be heavy for entities to apply and that any aids of restatement are likely to be overshadowed by the costs.
