IFRS shocks accounting world with groundbreaking amendments!

No, relax – I’m only joking. What actually happened is that the IASB recently issued Property, Plant and Equipment: Proceeds before Intended Use, a limited-scope amendment to IAS 16.

It focuses on one of the examples provided in IAS 16.17 of “directly attributable costs” of an item of property, plant and equipment, which are included within the amount recognized as an asset. Prior to the amendment, paragraph 17(e) states that these include “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 (such as samples produced when testing equipment).”

The IASB has now amended this item to read as follows:

  • costs of testing whether the asset is functioning properly (i.e. 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)

(that is, to eliminate the reference to deducting the net proceeds of selling any items)

and to add the following:

  • Items may be produced while bringing an item of property, plant and equipment to the location and condition necessary for it to be capable of operating in the manner intended by management (such as samples produced when testing whether the asset is functioning properly). An entity recognizes the proceeds from selling any such items, and the cost of those items, in profit or loss in accordance with applicable Standards. The entity measures the cost of those items applying the measurement requirements of IAS 2.

The amendment responds to diversity found in practice (often within petrochemical and extractive industries): “Some entities deducted only proceeds from selling items produced while testing; others deducted the proceeds of all sales until an asset was in the location and condition necessary for it to be capable of operating in the manner intended by management (i.e. available for use). For some entities, the proceeds deducted from the cost of an item of property, plant and equipment could be significant and could exceed the costs of testing.” The IASB concluded:

  • Offsetting proceeds against the cost of an asset understates an entity’s revenue (or income) in the period. Moreover, doing so could also have a pervasive and long-term effect on an entity’s performance when the asset has a long useful life. Offsetting proceeds decreased the depreciable amount of such an asset and, consequently, reduced the depreciation charge recognized as an expense over the asset’s useful life…(and) in turn, could reduce the usefulness of financial metrics, such as return on assets, that use the asset’s carrying amount.

The main counter-argument is that “the sales proceeds are generally non-recurring and are not necessarily an output of an entity’s ordinary activities.” The IASB mainly dealt with that by requiring disclosure of “the amounts of proceeds and cost included in profit or loss … that relate to items produced that are not an output of the entity’s ordinary activities, and which line item(s) in the statement of comprehensive income include(s) such proceeds and cost.”

At the same time, the IASB also issued References to the Conceptual Framework, amendments to IFRS 3. I took a futile shot at explaining this one with relative plain language concision at the time of the exposure draft, and certainly wouldn’t do any better at it now. Very briefly, IFRS 3 says that to qualify to be recognized as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definition of assets and liabilities in the conceptual framework: however, it had referred to an old version of the framework rather than to the 2018 update. The IASB had left the outdated reference in place out of concern that to update it without making any other changes to IFRS 3 might carry unintended consequences – such as changing the population of assets or liabilities recognized in a business combination. The Board decided to first analyze the possible unintended consequences and ways of avoiding them.

The main such problems would seem to flow from standards that don’t themselves align with the new conceptual framework definitions, in particular from the way that IAS 37 addresses provisions. This could mean that some assets or liabilities recognized in a business combination (i.e. if recognized with reference only to what the conceptual framework says) might not qualify for recognition subsequently. In such cases, the acquirer would have to derecognize the asset or liability and recognize a resulting loss or gain immediately after the acquisition date. The new amendments provide an exception to the general recognition principle of IFRS 3, so that a provision won’t be recognized in the acquisition equation in the first place unless it meets the threshold in IAS 37. It takes a similar approach toward levies recognized under IFRIC 21, reflecting that IFRIC 21 is an interpretation of IAS 37 and so the issues arising are the same.

Is anyone still there….?

The opinions expressed are solely those of the author.

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