Selling output before an asset is ready for use
Since the 2020 IAS 16 amendment, sales of test output may not reduce an asset's cost. How to find netted entries and fix the ready-for-use date.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A juice producer installs a new bottling line. During commissioning, engineers run it for several weeks to get the fillers and labellers working together, and the bottles that come off it are good enough to sell. The client sells them, and its bookkeeper, reasoning that the line is not yet in use, credits the sales to the bottling line's cost. The new asset ends up on the books at less than it cost, and revenue for the year is understated.
That treatment was once common and arguably allowed. It is no longer. This article covers the 2020 amendment to IAS 16, the kinds of transaction it catches, how to find and correct netted entries, and why the date the asset becomes ready for use matters so much.
The 2020 amendment and what it stopped
The IASB issued Property, Plant and Equipment: Proceeds before Intended Use, an amendment to IAS 16, in May 2020. The IFRS Foundation states that it prohibits a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, the company recognises those sales proceeds and the related cost in profit or loss.
The logic is about what cost means. IAS 16 includes in the cost of an item of property, plant and equipment any costs 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. Sales of output are not a cost of getting there. They are revenue from selling goods, and they belong with the client's other revenue, with the cost of producing those goods alongside.
Testing runs, trial batches and early output
The amendment applies whenever a client sells, or holds to sell, items produced while an asset is being prepared for use. Typical cases in practice:
- trial batches from a new production line in a food, beverage or chemicals plant;
- aggregate produced while a quarry's new crusher is being commissioned;
- printed stock from a new press, sold as seconds;
- output from a new kiln, mill or extruder during its settling-in period.
The costs of getting the asset working remain part of its cost where they are directly attributable to bringing it to the condition management intends, so commissioning engineers' fees and installation still go to the asset. What changes is the treatment of the income from what the asset produced along the way, and of the cost of producing those items.
ACCA adds two related limits on what can be capitalised. Capitalisation stops when an asset is ready for use, even if it is brought into use later. And abnormal costs, such as wasted material, cannot be capitalised. A commissioning period that drags on because of avoidable mistakes does not make the extra waste part of the asset's cost.
Proceeds and related cost go to profit or loss
After the amendment, the juice producer's bottling line is recorded at its full cost. The bottles sold during commissioning produce revenue, and the cost of producing them goes to profit or loss as well. The result is that the year's statements show the line at what it really cost and show the commissioning sales as what they really were.
For the reader this matters in two ways. The asset's carrying amount, and therefore its future depreciation, is not reduced by a one-off trading receipt. And revenue and margins are not distorted by sales that bypassed the income statement.
Finding netted entries in the asset account and correcting them
Clients rarely announce that they netted proceeds against an asset. Look for them:
- Review the additions to each new asset for credits. A credit in an asset-under-construction account is unusual and worth explaining.
- Read the commissioning reports and production records for output during the period before the asset was ready.
- Compare sales records for the period with revenue in the ledger, looking for sales that never reached revenue.
- Ask the production manager directly whether anything produced during commissioning was sold.
A worked example in words. The preparer finds a credit in the bottling line's cost account equal to the sales of commissioning output. The adjusting entry removes the credit from the asset, recognises the proceeds as revenue, and recognises the cost of the bottles produced as cost of sales, with the calculation of that cost kept in the working papers.
In Achekam, the correction is posted as a year-end adjusting entry in the Studio; an entry that proves wrong is reversed with a record of who did it and why, not deleted. Where the client's own books run on Achekam and a correcting journal is proposed from a document or adjustment through Financial Intake, it stays a candidate until a person approves and posts it; AI is refused both steps.
Correcting the asset's cost changes the base for depreciation. Achekam does not calculate depreciation; it presents the depreciation in the trial balance and flags when the charge does not agree with the movement in accumulated depreciation. The client, or the preparer, recalculates depreciation on the corrected cost, and any change is posted as an adjusting entry. Related capitalisation questions are covered in capitalise or expense asset costs.
When the asset becomes ready for use
The date the asset becomes ready for use is the dividing line for everything above. Before it, directly attributable costs are capitalised and output sold is revenue under the amendment. After it, ACCA notes, capitalisation stops, even if the client chooses to bring the asset into use later; costs of running the asset from then on are operating costs.
Record that date in the working papers, with the evidence for it: a commissioning sign-off, an engineer's certificate, or the first full production run at the intended standard. The same date is needed to decide when interest on constructing the asset stops being capitalised, discussed in borrowing costs on constructed assets, and to fix the start of depreciation.
The IFRS Foundation's IAS 16 page summarises how property, plant and equipment is recognised, measured, depreciated and impaired, and records the 2020 amendment on proceeds before intended use. For any client that commissioned a production asset this year, ask one question at the planning meeting: did anything the asset made during commissioning get sold?
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
