Proposed changes to accounting for property, plant and equipment - proceeds from selling test items

A long held principle when determining the ‘cost’ of an item of property, plant and equipment (PPE) to be capitalised in the balance sheet under AASB 116 Property, Plant and Equipment is that ‘costs of testing whether an asset is functioning properly’ are included in the cost of an asset. This is because testing costs are directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

What about proceeds from selling items?

At present, AASB 116, paragraph 17(e) allows the net proceeds from selling any items produced while bringing the asset to that location and condition to be deducted from the cost of the asset. An example given in AASB 116 is the proceeds from selling samples produced when testing of equipment takes place.

Why the need for change?

There is currently diversity in practice regarding the treatment of the net proceeds from selling such items:

  • Some entities deduct only proceeds from selling items produced during testing, and
  • Other entities deduct all sales proceeds until the asset is in the location and condition necessary to be capable of operating in the manner intended by management (i.e. available for use).

What are the proposed changes?

Exposure Draft ED 280 Property, Plant and Equipment – Proceeds before Intended Use was issued by the Australian Accounting Standards Board (AASB) on 21 June 2017 and proposes:

  • To prohibit deducting any sales proceeds from the cost of PPE
  • To clarify the meaning of ‘testing whether the asset is functioning properly’ – to be based on technical and physical performance of the asset, not the financial performance of the asset (e.g. when a certain operating margin is achieved), and
  • To clarify that the proceeds from sale of items produced while bringing an asset into the location and condition necessary for it to be capable of operating in the manner intended by management would be recognised in accordance with applicable accounting standards, for example, the proceeds from selling inventories produced would be recognised as revenue, and the related production costs as cost of goods sold.

Which industries are most likely to be impacted?

Industries likely to be most affected by the proposed changes include those with significant investment in manufacturing PPE such as mining and petrochemicals.


ED 280 proposes that full retrospective restatement will not be required.

Restatement will only be required for items of PPE brought to the location and condition necessary for them to be capable of operating in the manner intended by management on or after the beginning of the earliest period presented (usually just the prior period in Australia).

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