ACCOUNTING METHODOLOGICAL CENTRE (AMC) 

Adopted on 20 February 2015 

INTERPRETATION P-57/2015
TESTING AND COMMISSIONING OF PROPERTY, PLANT AND EQUIPMENT RESULTING IN PRODUCTION

ISSUE

An entity has commissioned equipment. On the one hand, this process was aimed at bringing the asset to working condition for its intended use. On the other hand, items may be produced from commissioning such as finished products and recyclable materials that can be sold or used otherwise by the entity. Accounting rules for property, plant and equipment set out in Accounting Statement 6/01 do not regulate accounting for costs related to asset testing and commissioning activities that result in the production of items.

International Financial Reporting Standards contain only one phrase reading that costs included in the cost of a property, plant and equipment should be reduced by proceeds from selling any items produced from testing. The fact that such items can be sold much later after the commissioning and testing process to put the fixed asset into service is not taken into account. No details are also given for situations where such items can be mixed with finished products made in the course of normal operations.

Given the above, it is necessary to determine an approach to accounting for commissioning costs, and the evaluation of items produced from commissioning and their implications for the cost of property, plant and equipment.

CONSENSUS

1.             Commissioning costs increase the cost of property, plant and equipment when they are required and incurred to bring the asset to the condition and location necessary for it to be capable of operating in the manner intended by management.
2.             The items produced from commissioning such as finished products and recyclable materials that the company can and intends to sell or otherwise use for receiving economic benefits are entered at their estimated value determined by the company based on their market value, net realizable value, the value of similar items and other relevant information. This estimated value cannot be higher than actual commissioning costs. This estimated value is deducted from commissioning costs included in the cost of the item of property, plant and equipment.
3.             If the items produced from commissioning have been actually sold before the item of property, plant and equipment becomes ready for use, the cost of the item of property, plant and equipment is adjusted for a gain (loss) from their sale up to the amount of total commissioning costs. Income and expenses related to the sale of such items are not recognized. This paragraph does not apply to commissioning if related costs are not included in the cost of the item of property, plant and equipment and it also may not apply to items that are classified as finished products made and sold by the company during normal operations.
4.             If revenue from the actual sale of items less costs related to their sale or preparation for sale exceeds commissioning costs, this excess amount is recognized as other income.

BASIS FOR CONCLUSIONS

Since asset testing and commissioning is aimed at bringing the asset to working condition for its intended use, unless circumstances dictate otherwise, related costs should be included in the cost of property, plant and equipment. Such work is not intended to produce any items. This means that the economic substance of proceeds from selling such items is about cost reduction, rather than income generation.

This approach is in line with paragraph 17 of IAS 16 reading that examples of directly attributable costs are:

....

(e) 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);

In cases that the proceeds exceed the costs, it appears to be inappropriate to reduce other costs related to the fixed asset by this excess amount. Such proceeds should be recognized as income in profit or loss for the period. Similar conclusions can be found in Discussion Paper 14 that was on the agenda of the IFRIC’s meeting on 15 and 16 July 2014. The paper reads that IAS 16 contains sufficient guidance that revenue from production should be deducted only from the cost of testing, and that no interpretation is necessary.  If the revenue exceeds testing costs, the excess amount should be recognized as income.

However, the company cannot know for sure at what price items produced from testing will be sold until it actually sells them. As such items should be accounted for before their sale, it is necessary to estimate their value.  An approach to determining their estimated value depends on a specific business situation: there is no one-size-fits-all solution for all circumstances.

Upon the actual sale of items produced from testing, the amount of costs related to the item of property, plant and equipment can be adjusted, if the sale occurs before the asset is put into service and its depreciation commences.

However, it is not always possible to adjust their amount. In particular, when such items are identical to products made by the company in the normal course of business, they can be physically mixed with such products. In such instances, commissioning costs are reduced by the estimated value of the items only upon their production. It can be difficult to make further adjustments to the cost of property, plant and equipment, if it is impossible to separate items produced from commissioning from products made during normal operations. In such instances, it seems to be appropriate to account for such items in the usual way that it is done for inventories, which requires, inter alia, the recognition of any revenue from their sale.

ILLUSTRATIVE EXAMPLES

Examples of bookkeeping for items in the scope of this Interpretation

(The examples below exclude the treatment of VAT
because of its irrelevance for the purpose of this discussion)

Example 1

When commissioning an asset, an entity has received items other than products that it makes during normal operations:

Example 2

When commissioning an asset, an entity has received items that are identical to products that it makes during normal operations: