The International Accounting Standards Board (IASB) has the mandate to develop and approve the International Financial Reporting Standards (IFRS) as an independent body in the private sector.  International Financial Reporting Standards foundation oversees the operations of IASB. As the basis of its function, IASB involves in the undertaking of multiple projects that review the financial report’s standards. This review results in the revisions, updates, or the amendments of the financial accounting standards. One such an ongoing project is the Property, Plant, and Equipment: Proceeds before Intended Use which is the Proposed Amendments to IAS 16. While bringing into use an item of property,  plant, and equipment into use, net proceeds are realized after the selling of the items produced during the process. Hence, these proceeds need to be accounted for a move that saw this project proposed to clarify the accounting of these net proceeds. The project is meant to see that the diversity in application of IAS 16 is reduced. The project prohibits any cost deduction of any proceeds from selling items produced for an item of property, plant, and equipment before such asset is put into use. Thus, based on the crucial role this project is meant to play, understanding, its background, status, and other the related financial accounting information is essential.

Accounting for net proceeds received by companies after they sell off their items that are produced as they test an item of property, plant, and equipment, before used for the purpose that is intended, varies from company to the other. The use different accounting measures make investors find challenges when they want to understand the financial performances and positions of the companies and compare such. This calls for the need to have transparency and consistency improved by the International Accounting Standards Board. The proposal of the Property, Plant, and Equipment: Proceeds before Intended Use to amend IAS 16 is to provide clarification to the accounting requirements. Through this amendment project, it is within the opinion of the board that a company should be prohibited from making any deduction of any proceeds received from the sale of items produced when testing these assets for the intended purpose from the property, plant, and equipment cost. Instead, what the company can do is to recognize such proceeds either in profit or loss. The board further has decided in the way the proposed amendments would go ahead based on some modifications. The modifications involved making clarifications on how various entities would identify costs associated with the sales of the produced items before putting the property, plant, and equipment. Additionally, there has been a requirement of disclosure and presentation.

Background

According to IAS 16, paragraph 17, there are specific examples of the directly attributable costs to bringing an item of property, plant, and equipment into the use as intended by the management such as testing cost. It is clear that when net proceeds are deducted from the sale of an item that is produced in the process of bringing the asset into use, the cost of testing is included in the cost of a piece of property, plant, and equipment if there is proper functioning of the asset.

Initially, the International Financial Reporting Standards Interpretation Committee that has the mandate to interpret the standards raised the alarm over the issue. This was after their original intention to come up with an interpretation of the IAS 16 Property, plant, and equipment that had to facilitate dealing with it. It was during the discussion to interpret this accounting standard that the committee saw the need to have a better way forward. The issue came up after two questions were referred to the Committee on this paragraph 17 of IAS. The first question intended to clarify as to whether the mentioned net proceeds only regard those items that are produced in the process of testing or any other process before the intended use of the item. The second question was concerned about deducting any proceeds which exist the testing cost from the cost of any item of property, plant, and equipment by an entity. This further led to confusion as the committee discovered that there were so many questions of the sort all related to the cost of property, plant, and equipment. It was after consultation and exploration of various approaches that the committee recommended that there is need to have some small amendments on the IAS 16 that would offer clarification.

The status of the project

Since July 2014, the issue had been on and off within the IFRS Interpretation Committee until October 2016 when first the issue was discussed by IASB. Then on 20th June 2017, that was when IASB published the Exposure Draft Property, Plant, and Equipment: Proceeds before Intended Use. This opened the comment period with which all comments ought to have been made by October 2017. The Board discussed the summary of the feedback by December 2017. Currently, though, no specific date has been announced, but the next milestone of the project is the amendment of the IFRS.

GAAP and current standards related

Currently, some standards are related to the Property, Plant, and Equipment: Proceeds before Intended Use (Amendments to IAS 16) project. Within their work plan, IASB has identified some key areas where cost capitalization diversely applies as part of long-term assets. One such an area relates to IAS 23; Borrowing Cost expresses the costs that qualify for capitalization. Unlike in IAS 16 amendment that examined the qualification of cost as an asset or not, the change on the IAS 23, Borrowing Cost was reached after the Board wanted to project more at the interest rates which could be used for capitalization. Thus, when qualifying an asset that takes a long time to get ready for the intended use such as the property, plant, and equipment, there is an excellent need to determine the borrowing cost that should be capitalized as part of the cost in this case. There is a need for the company to treat any borrowing that still outstands so that qualifying asset can be interpreted as general borrowings. Looking at the proposed change of Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16), some cost such as such as testing cost that incurred before the asset gets into intended use cannot be deducted from the cost of the asset. This is not the case as to the amendment of in IAS 23 that includes the borrowing cost for a qualifying asset to the general cost of the asset.

Another current standards by IASB that is related to the amendment of IAS 16 is the IAS 41 Agriculture. This financial reporting standard requires the agriculture activity-related natural assets be treated as fair value less the cost to sell. These biological assets include bearer plant which is used in growing of produce over a long period which then gets scrapped as after used for long period. As these bearer plants reach maturity, the only economic benefit they generate comes from the agricultural produce they give out rather than the biological transformation. So the accounting of these bearer plants should be the same as property, plant, and equipment identified in IAS 16 Property, plant, and equipment since they operate like manufacturing assets. Therefore, unlike IAS 16 Property, plant, and equipment, the bearer plant, in this case, is only valuable up to the time it becomes mature within which it creates economic benefits.

Bartov, E. (1993). The timing of asset sales and earnings manipulation. Accounting Review, 840-855.

The article is an accounting review by Eli Bartov from New York University who examines how the managers of the companies manipulate earnings from the sale of long term assets. From what the article empirically presents, there are possibilities that managers manipulate proceeds through the income recognition timing after the long term assets have been disposed of. However, based on the principle of cost acquisition that underlines the asset accounting valuation, any market value changes of an asset as from the time of acquisition to the time of selling are reported during the period of sale. The managers have the mandate to choose the period during which the asset will be sold giving them an opportunity to manipulate these earnings at the lowest cost. The manipulation of the earnings can be explained by the debt-equity hypothesis and the earning-smoothing hypothesis. In the earnings-smoothening hypothesis, the manipulation is meant to reduce what the manager my view as the fluctuations around the normal level. Debt-equity suggests the relation between the choice the manager makes on earnings that enhance the activities of the company and its debt-equity ratio. The that managers of the firms have to manipulate the earnings from the assets are some of the actual cases that influenced the proposed amendment. This investigation greatly contributes to the discussion about the acquisition cost and how current cost can be favored in accounting valuation of assets.

Teoh, S. H., Welch, I., & Wong, T. J. (1998). Earnings management and the underperformance of seasoned equity offerings1. Journal of Financial Economics, 50(1), 63-99.

This is a journal of financial economic written by Teoh, Welch, and Wong about the management of the earnings and how it influences the optimism portrayed by investors. Sometimes, the investors may rely on the high earnings that are reported during offering making them predict a high value of what the company may offer them. This is a common case when the items that are created from the long-term assets such as property, plant, and equipment are sold even before the assets are brought into the actual use. However, by the time these assets are brought into the intended use and fail to sustain the pre-issue high earnings, the investors may become much disappointed. Consequently, they may decide to devalue their firm assets to the level they find justified by fundaments. Thus, the proposed amendment on how the proceeds from the assets should be treated is meant to combat this accounting problem. By bring the amendment into use, little manipulation will be done on the earnings made on the assets before their actual use in the sense that seasoned equity offerings are not viewed as if it is underperforming.

Shivakumar, L. (2000). Do firms mislead investors by overstating earnings before seasoned equity offerings?. Journal of Accounting and Economics, 29(3), 339-371.

The accounting review article is written by Lakshmanan Shivakumar from London Business School examining the reporting on the earnings before the offer of the seasoned equity. It has emerged that firms have been overstated which tend to mislead the investors. The article examines in particular how managers reporting behaviors on some corporate events such as selling of the items produced from the long term assets including property, plant, and equipment. The high attention to consider this discussion is because of manager exhibit what we call managerial opportunism and may make adjustments on the earnings or proceeds earned in using the asset. Thus, by making the proposed amendment on how such proceeds from the use or sale of these items should be treated, it opens a way for investors to have a clear view of the earnings the company makes without manipulation. Little has also been known about the response of the investor on how proceeds are managed.  By examining this article, it possible to tell the reaction of the investors on how the earnings before the intended use of the asset are treated.

Herrmann, D., Saudagaran, S. M., & Thomas, W. B. (2006, March). The quality of fair value measures for property, plant, and equipment. In Accounting Forum (Vol. 30, No. 1, pp. 43-59). Elsevier.

Property, plant, and equipped are valued in a move to determine the financial strength of the company and its position as far as paying for the liabilities is concerned. Through this article, Hermann and the colleagues examine at the need to have fair measures of value for property, plant, and equipment. It as well calls for the continued maintenance of the strict historical costs involved in these long term assets including property, plant, and equipment until the said asset gets impaired. The article examines the asset valuation internationally in a view that revaluations to fair value are practices that are widely accepted at the international and national level standards. Regarding the feedback value, predictive value, consistency, and comparability, measures of fair value are based are superior when compared to historical cist.  Hence, there should be proper and relevant standards to guide the process of the fair value of the property, plan, and equipment in a way that any proceeds made before the asset gets into use is treated differently and should not involve cost deduction.

Aboody, D., Barth, M. E., & Kasznik, R. (1999). Revaluations of fixed assets and future firm performance: Evidence from the UK1. Journal of Accounting and Economics, 26(1-3), 149-178.

In this article, the writers Aboody with the colleagues examines how the UK firms revalue their fixed assets including property, plant, and equipment with an upward trend. The revaluations however positively relate to the future performance changes. The evaluations are further measured by operational cash and the operating income an indicator that they reflect the changes in the asset value. The constant revaluation of the asset before they are put into actual use is meant to understand the viability of the asset when finally put into use. Therefore, the proceeds that are made from the valuation exercise should be treated differently from the actual use of the asset hence the need to amend the guiding standards so that we can have costs not deducted.

Stakeholders

Managers form the first group to be affected by the proposed change on the accounting for proceeds before the intended use of property, plant, and equipment. The accounting standards will be more elaborate on how all such proceeds are treated hence managers will have to abide by the rule. Investors will also be affected by the change in the sense that they will understand all the earnings made by the firm and whether the assets within the firm will earn them expected returns and how much to offer regarding shares. Auditors form another group to be affected in the sense that they have a uniform approach on how to treat any proceeds made by the firm. The differences that have been experienced among the auditing firms will be resolved.

#    Date    Question Pursuing, Information Sought, Rationale for Search     Tool or Source Used     Concepts or Keywords, Terms, Phrases    Search Strategy    Results

1    02/05    Information on the managerial opportunism    Google scholar search    Earnings, proceeds     Topic search    Found an article with enough information on the managerial opportunism when handling the proceeds or earnings due to the use of the fixed assets

2    02/05    More information on managerial opportunism    Online library search    Earning management     Topic search    The article had enough information on how the managers treat the earnings from the sale of items created from fixed assets

3    02/05    Examining the view of the investors    UMUC library search    Investors. proceeds    Keyword search    Found another article examining the view of the investors on the net profits made from assets

4    02/05     Valuation of the property, plant, and equipment    Google scholar    Fixed assets, proceeds         Found a relevant book called “The quality of fair value measures for property, plant, and equipment” with rich information on the value of the property, plants, and, equipment

5    02/05    Revaluations of the property, plant, and equipment.    Google scholar search    Value of the property, plant, and equipment    Keyword search    The book found was almost similar to the initial one with information related to asset valuation.

 
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