Amendment of IAS 16: Proceeds before intended use
In May 2020, IASB issued the amendment to IAS 16 applicable for the periods starting on or after January 1, 2022.
This amendment says that we should not deduct any proceeds from selling items produced in the process of bringing the asset to the location and condition for the asset to be able of operating as intended by the management from the cost of that asset.
Please, can you explain in plain terms what it means with the example?
Sometimes, when you acquire certain assets, you must perform some operations before you can use the asset in a desired way.
For example, you must install the asset or run the testing operations.
And, sometimes, you can actually produce some products while performing these operations.
Before the new amendment it was not totally clear what to do with income received from selling of these items produced while asset was not put in normal operations.
As a result, some entities recognized these proceeds as revenue in profit or loss, and other entities deducted the sale proceeds from the cost of an asset.
After the new amendment, the second option is prohibited and you can only recognize the proceeds from sales of the products in profit or loss.
ABC acquired a machine for the production of product XY. The acquisition cost including installation and other directly attributable expenses is CU 10 000. Before the machine can be placed into normal operation, the testing is required in order to satisfy the safety conditions.
ABC runs testing of the machine and in the testing operations, the machine produces 100 pieces of XY product that are sold for CU 3 / piece.
How do you recognize the revenue from the sale of 100 produced items? What is the acquisition cost of a machine?
Before, ABC could deduct the proceeds from such a sale from the acquisition cost of a machine. Thus the acquisition cost would be CU 10 000 – CU 300 (3*100) = CU 9 700.
However, new amendment of IAS 16 prohibits that.
Instead, ABC must recognize the proceeds in profit or loss:
Debit Cash received: CU 300
Credit Other operating income in profit or loss (or other line item as relevant): CU 300
The acquisition cost of a machine is then CU 10 000 (no deduction of proceeds from sale).
JOIN OUR FREE NEWSLETTER AND GET
report "Top 7 IFRS Mistakes" + free IFRS mini-course
Please check your inbox to confirm your subscription.
- Silvia on Contract Asset vs. Trade Receivable – What’s the Difference?
- Ann on Contract Asset vs. Trade Receivable – What’s the Difference?
- Adnan Aslam on IFRS 9 Financial Instruments
- Animesh K Chatterjee on IAS 7 Statement of Cash Flows
- Silvia on Accounting for Prepayments in Foreign Currency under IFRS
- Accounting Policies and Estimates (12)
- Consolidation and Groups (24)
- Current Assets (21)
- Financial Instruments (54)
- Financial Statements (45)
- Foreign Currency (9)
- IFRS Videos (63)
- Insurance (1)
- Most popular (6)
- Non-current Assets (54)
- Other Topics (15)
- Provisions and Other Liabilities (43)
- Revenue Recognition (25)
Will the contingent assets have an affect on the decision on stackholder.
That’t up to his decision, isn’t it.
Thank you Silvia. You should also have explained the treatment of cost of producing these goods which were sold at CU 300. The greater complexity lies in the application of IAS 2 because we have to allocate cost of production to these goods.
Sure, but this post was about IAS 16, not about producing the inventories 🙂
Thanks for the article. The question here below is interesting though and I would be interested to read your explanation. Would those cost be capitalized on top of the acquisition in case the asset value is booked as per cost method? or would those cost be incurred in the P&L ? thanks
The costs of producing these goods have nothing to do with the acquisition of a machine itself, but with inventories. So you should account for the cost of producing inventories in line with IAS 2, and then of course in profit or loss as cost of sales once the inventories are sold.