Amendments to IAS 16 Property, Plant and Equipment/PPE: Proceeds before Intended Use

The amendment of this standard is effective January 1, 2022 (global, IAS 16 amendment), while in Indonesia January 1, 2023 (PSAK 16 regarding "hasil sebelum penggunaan yang diintensikan"). Transitional provisions require retrospectively applying these IAS 16 amendments.

IAS 16 amendments consist of four main points:

1. "The net proceeds from selling any items produced while bringing the asset to that location and condition" is not deducted from costs that are directly attributable to the value of the asset (paragraph 17),
2. 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 (Cost of those items can from IAS 2/PSAK 14, while the proceeds from the sale can refer from IFRS 15/PSAK 72),
3. Disclosure: 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,
4. There is a clarification by the Board regarding the definition of "testing". The board concluded that when testing whether an asset is functioning properly, then the entity assesses the technical and physical performance of the asset, rather than assessing the financial performance of an asset.

Before amendment

Paragraph 17(e) specifically states that directly attributable costs, including testing costs are net after deducting the net proceeds from sales of the item produced while bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

Research & Practices

But from the results of research in field practice, it indicates that there are different applications in practice regarding the application of paragraph 17(e):

1. the amount of the deducted proceeds. Some entities deduct all proceeds from all sales of production units when testing, and some other entities from sales units until the assets are ready to operate,

2. proceeds deducted from the cost of an item of PPE can be significant and exceed the cost of testing. As happened in the mining and petrochemicals industry.

Case Example - Before Amendment IAS 16

Wira Corp. bought the land and the old building on it to build a new factory for $350,000. Other costs associated with the purchase of land included accrued property taxes of $35,000 and purchase a lien of $10,000.

Wira Corp. decided to build the new building and demolish the old one for an additional $55,000 demolition cost. Proceeds from the sale of salvage lumber and brick to get the land ready for use was $18,000.

Then the acquisition cost of the land until the land is ready for use before amendment IAS 16 = 350,000 + 35,000 + 10,000 + 55,000 - 18,000 = $432,000

Journal Entries:

1.Record Purchase Cost, Liens and Demolition Cost (cash transactions)

Dr. Land $415,000

Cr. Cash/Bank $415,000

2.Record Accrued Property Tax (non-cash)

Dr. Land $35,000

Cr. Accrued Property Tax $35,000

3.Record proceeds from sale of salvage lumber and brick (cash received, deduct land value)

Dr. Cash/Bank $18,000

Cr. Land $18,000

Case Example - After Amendment IAS 16

Then the acquisition cost of the land until the land is ready for use after amendment IAS 16 = 350,000 + 35,000 + 10,000 + 55,000 = $450,000

Journal Entries:

1.Record Purchase Cost, Liens and Demolition Cost (cash transactions)

Dr. Land $415,000

Cr. Cash/Bank $415,000

2.Record Accrued Property Tax (non-cash)

Dr. Land $35,000

Cr. Accrued Property Tax $35,000

3.Record proceeds from sale of salvage lumber and brick [cash received, recognizes as other operating income in profit or loss (or other line item as relevant]

Dr. Cash/Bank $18,000

Cr. Other Income $18,000

Comparison with U.S. GAAP

Proceeds from selling items before PPE intended for use are recognized in profit or loss. Whereas PPE that is developed and has the intention to be sold or rented out, the proceeds / income earned will be recognized as a deduction from the PPE value.

Source:

Amendment IAS 16 and others relevant article related IAS 16.