Why Paragraph 17(e) of IAS 16 was Revised ?

In May 2020, the International Accounting Standards Board (IASB) issued the standard of Property, Plant and Equipment - Proceeds before Intended Use, as the amendments to IAS 16 Property, Plant and Equipment,. The amendments prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the assets for its intended use. Instead, a company will recognize such sales proceeds and related cost in profit or loss.

As described in the section of "Amendments to the Basis for Conclusions on IAS 16 Property, Plant and Equipment" of  May 2020 Amendments to IAS 16, before the 2020 amendment, paragraph 17(e) of IAS 16 specified that directly attributable costs included the costs of testing whether an asset was functioning properly, after deducting the net proceeds from selling items produced while bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The Board received a request asking whether :

1. the proceeds specified in paragraph 17(e) related only to items produced while testing; and
2. an entity was required to deduct from the cost of an item of property, plant and equipment any such proceeds that exceeded the costs of testing

As explained in paragraph BC16B, the Board's research indicated that different entities had applied the requirements in paragraph 17(e) differently. 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 (ie 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.

After considering the findings in paragraph BC16B, the Board decided to amend paragraph 17 to prohibit an entity from deducting from the cost of an item of property, plant and equipment the proceeds from selling items produced before that asset is available for use (proceeds before intended use). 

The Amendments to IAS 16 :  Property, Plant and Equipment - Proceeds before Intended Use, which was issued in May 2020 shall be applied by entity for annual reporting periods beginning on or after 1 January 2022. Earlier application is permitted. If an entity applies the amendments for an earlier period, it shall disclose that fact (HRD) ***