obtained during the exploration, evaluation or development phases should be treated in
the same manner as the proceeds from the sale of product in the production phase, i.e.
recognised in profit or loss as part of income.
AGAAP required the estimated cost of producing the quantities concerned to be
deducted from the accumulated costs of such activities and included as part of costs of
goods sold.110 By contrast, the former OIAC SORP was more specific and stated that an
amount equivalent to the revenues should be both charged to cost of sales and credited
against appraisal costs to record a zero net margin on such production.111
The various practices that are currently adopted and accepted in practice include:
• all pre-commissioning/test production revenue is considered integral to the
development of the mine or field and is therefore credited to the asset in its entirety;
• only revenue genuinely earned from the testing of assets, e.g. product processed as
a result of testing the processing plant and associated facilities, is credited to the
associated asset, with all other revenue being recognised in profit or loss; or
• all pre-commissioning or test production revenue is recognised in profit or loss.
For entities that recognise pre-commissioning or test production revenue in profit or
loss, various approaches have been observed in practice to determine the amount to be
included in cost of goods sold and include:
• an amount equivalent to the revenues is charged to cost of sales and credited
against the asset to record a zero net margin on such production (similar to the
guidance in the former OIAC SORP);
• a standard or expected cost of production is ascribed to the volumes produced, e.g.
weighted average cost per tonne/barrel based on actual results over a historical
period, e.g. the last two or three years; or for new mines or fields, the expected
cost per tonne/bbl as set out in the business, mine or field plan, producing a
standard margin;
• recognising only the incremental cost of processing the product; or
• recognising nothing in cost of goods sold.
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The net effect of all of these approaches is that any excess of the total cost incurred
over the amount recognised in profit or loss as cost of goods sold, is effectively
capitalised as part of the asset. Note that the first approach, where cost of goods sold is
recognised at the same amount as the revenue, produces the same net balance sheet
and profit or loss result as if the revenue had been credited to the asset in its entirety.
While diverse treatments may have been adopted and accepted in practice to date,
it is unlikely the third and fourth cost of goods sold approaches would be
appropriate because they would not provide a fair reflection of the cost to produce
the saleable product.
There is a significant degree of divergence as to how entities account for pre-
commissioning revenue. Significant judgement will also be required to determine when
the asset is in the location and condition to be capable of operating as intended by
management, i.e. when it is ready for its intended use. In the absence of specific
guidance this divergence will continue. However, capitalisation (including recognising
income as a credit to the cost of the asset) is to cease when the asset is ready for its
intended use, regardless of whether or not it is achieving its targeted levels of production
or profitability, or even operating at all.
12.1.2.A Future
developments
One aspect of accounting for revenue in the development phase was referred to the
Interpretations Committee in July 2014 and was considered several times since this date.
The Interpretations Committee received a request to clarify two specific aspects of
IAS 16, including:
• whether the proceeds referred to in IAS 16 relate only to items produced from
testing;
• whether an entity deducts from the cost of an item of PP&E any proceeds that
exceed the cost of testing.
After exploring different approaches to the issue, the Interpretations Committee
recommended to the IASB to amend IAS 16. In June 2017, the IASB issued an exposure
draft (ED) Property, Plant and Equipment – Proceeds before Intended Use (Proposed
amendments to IAS 16 (ED/2017/4).
The ED proposed to amend IAS 16 to prohibit deducting from the cost of an item of
PP&E any proceeds from selling items produced while bringing that asset to the location
and condition necessary for it to be capable of operating in the manner intended by
management (i.e. the point up until it is available for intended use). Instead, such
proceeds would be recognised in profit or loss. The proposed amendments stated that
the costs of producing items of inventory before an asset is ready for its intended use
must be recognised in profit or loss in accordance with applicable standards, i.e. IAS 2.
[IAS 2.34].
The IASB decided that additional disclosure requirements were not required because
the existing requirements of relevant standards were sufficient. Instead, it considered
that if revenue and the cost of inventories produced before an item of PP&E is available
for its intended use has a material effect on an entity’s financial statements, the entity
would apply the following standards’ disclosure requirements:
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• IFRS 15: these disclosures would be considered to determine if they are relevant.
In particular, revenue from the sale of these pre-production inventories might be
considered as a category of revenue when disclosing disaggregated revenue
information. [IFRS 15.114].
• IAS 2: the disclosures, regarding the costs of producing inventories, including the
accounting policy, the carrying amount of inventories (if any) and the amount of
inventories recognised as an expense, [IAS 2.36], will be required.
The effective date was to be decided after exposure of the proposed amendment. The
transitional provisions proposed are that an entity would apply these amendments
retrospectively only to items of PP&E 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 in the financial statements in which the
entity first applies the amendments.
While the proposed amendments would provide consistency in how revenue earned
before an asset is ready for its intended use would be treated (i.e. all revenue will be
recognised in profit or loss regardless of when earned), it would not necessarily reduce
diversity. This is because even though the proposed amendment stated that the costs of
producing items of inventory before an asset is ready for its intended use must be
accounted for in accordance with IAS 2, it had not provided any additional guidance on
how to allocate costs between those that relate to:
• costs of inventory which is produced and sold before an item of PP&E is available
for its intended use;
• costs that relate to PP&E; and
• costs that should be excluded from the cost of inventories, such as abnormal
amounts of
wasted materials or labour.
In addition, while the proposed amendments will lead to greater visibility of different
revenue classes, should this revenue be so material that separate disclosures are
required by IFRS 15, it would direct more attention to the date at which an asset is ready
for its intended use, i.e. the commissioning date. This is a critical date as it impacts other
aspects of accounting for such assets, such as when costs (including borrowing costs)
should cease to be capitalised, when accounting for stripping costs changes (mining
companies only), and when depreciation commences.
The Basis for Conclusions to the ED indicated that, while the IASB observed that an
entity would have to apply judgement in identifying the costs, the proposed
amendments would require little more judgement beyond that already required to apply
current IFRS standards when allocating costs incurred.
The ED also acknowledged that while such an approach would mean that the cost of
such inventories would exclude depreciation of PP&E used in the production process,
the IASB observed that any such consumption of the PP&E before it is available for its
intended use is likely to be negligible.
While the ED provided no specific guidance, for those entities that currently recognise
pre-commissioning or test production revenue in profit or loss, the various approaches
that have been observed in practice to determine the amount to be included in cost of
goods sold are discussed at 12.1.2 above. Similar issues and considerations are likely to
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continue to arise and will require entities to exercise judgement. It is expected entities
will use their disclosures to clarify their approach to pre-commissioning/testing revenue
and the determination of cost of goods sold.
The comment period on this ED ended in October 2017. Many respondents to the ED
either disagreed with, or expressed concerns about, the proposed amendments. In the
light of the feedback received, the Interpretations Committee’s staff performed
follow-up research with a number of respondents in order to: (a) clarify some of the
matters raised in comment letters; and (b) obtain a better understanding of some of
the practical challenges identified. At the June 2018 Interpretations Committee
meeting, the staff provided an analysis of the feedback and proposals for next steps.
Several approaches, with associated advantages and disadvantages, were considered
which included:
• proceed with the ED as published;
• proceed with the ED with some modifications; and
• proceed with additional disclosure requirements and consider alternative
standard-setting approaches.
The staff indicated that in their view, that the benefits of proceeding with the first
approach might not outweigh the costs. In particular, they noted the risk that in reducing
the diversity in the reporting of sale proceeds, the proposed amendments could create
new diversity in the costs recognised in profit or loss.
The staff will continue to explore these approaches and will present the Interpretations
Committee’s advice to the Board at a future meeting, together with advice from the
Accounting Standards Advisory Forum (ASAF).112
Entities should continue to monitor developments relating to this topic.
12.2 Sale of product with delayed shipment
From time to time, an entity may enter into a sales arrangement where the purchaser
pays a significant portion of the final estimated purchase price but then requests delayed
shipment, for example, because of limited storage space. These sales can sometimes
also be referred to as ‘in store sales’ or ‘bill-and-hold’ sales. These are commonly seen
in the mining sector.
The application guidance in IFRS 15 specifically addresses bill-and-hold arrangements.
IFRS 15 states that an entity will need to determine when it has satisfied its performance
obligation to transfer a product by evaluating when a customer obtains control of that
product (see Chapter 28 at 8 for more information on transfer of control). In addition to
applying these general requirements, an entity must also meet the criteria to be able to
demonstrate control has passed for a bill-and-hold arrangement. [IFRS 15.B79-82].
See Chapter 28 at 8.6 for more information.
IFRS 15 also states that even if an entity recognises revenue for the sale of a product
on a bill-and-hold basis, it will also need to consider whether it has remaining
performance obligations (e.g. for custodial services or security services) to which the
entity will need to allocate a portion of the transaction price. [IFRS 15.B82].
See Chapter 28 at 8.6 for more information.
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12.3 Inventory exchanges with the same counterparty
Mining companies and oil and gas companies may exchange inventory with other
entities in the same line of business, which is often referred to as ‘loans/borrows’. This
can occur with commodities such as oil, uranium, coal or certain concentrates, for
which suppliers exchange or swap inventories in various locations to supplement
current production, to facilitate more efficient management of capacity and/or to help
achieve lower transportation costs.
IFRS 15 scopes out certain non-monetary ‘exchanges between entities in the same line
of business to facilitate sales to customers or potential customers’. [IFRS 15.5(d)]. The
legacy scope exclusion in IAS 18 – Revenue – was different. IAS 18 used the words
‘similar in nature and value’ and did not focus on the intention of the exchange. [IAS 18.12].
Therefore, some transactions that were treated as exchanges of dissimilar goods (and,
hence, revenue-generating under IAS 18) may now not be considered to be revenue-
generating if the entities are in the same line of business and the exchange is intended
to facilitate sales to customers or potential customers. Conversely, some exchanges of
similar items (and, therefore, excluded from IAS 18) may not be intended to facilitate
sales to customers or potential customers and would, therefore, be within the scope of
IFRS 15.
Accounting for exchanges of inventories requires a degree of judgement particularly:
• interpreting what ‘same line of business’ means and how broadly or narrowly this
should be interpreted;
• whether the exchange is to facilitate sales to customers or potential customers; and
• whether the transaction is non-monetary and the impact of settling net in cash may
have on this assessment.
Furthermore, while the scope section of IFRS 15 makes it clear that such inventory
exchanges do not result in revenue generation, it does not provide application guidance
on how these transactions between the two parties would be accounted for and no other
specific requirements exist within IFRS. Despite this, any receivable or payable balance
would not entirely meet the definition of inventory in IAS 2 but instead would likely be
a non-monetary receivable or payable. The product receivable or payable would
normally be recorded at cost within current assets or liabilities. However, given the lack
of clarity, diversity in accounting practice may continue.
&nbs
p; 12.4 Overlift and underlift (oil and gas)
In jointly owned oil and gas operations, it is often not practical for each participant to
take in kind or to sell its exact share of production during a period. In most periods,
some participants in the jointly owned operations will be in an overlift position (i.e. they
have taken more product than their proportionate entitlement) while other participants
may be in an underlift position (i.e. they have taken less product than their
proportionate entitlement).
Generally, costs are invoiced to the participants in a joint operation in proportion to
their equity interest, creating a mismatch between the proportion of revenue lifted and
sold and the proportion of costs borne.
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Imbalances between volumes for which production costs are recognised and volumes
sold (for which revenue is recognised in accordance with IFRS 15) may be settled
between/among joint operation participants either in cash or by physical settlement.
The accounting may be different depending on the specific terms of the agreement.
Such lifting imbalances are usually settled in one of three ways:113
• in future periods the owner in an underlift position may sell or take product in
excess of their normal entitlement, while the owner in an overlift position will sell
or take less product than the normal entitlement;
• cash balancing may be used, whereby the overlift party will make a cash payment
to the underlift party for the value of the imbalance volume; or
• if the co-owners have joint ownership interests in other properties, they may agree
to offset balances in the two properties to the extent possible.
12.4.1
Historical industry practice
Two main methods of accounting for underlifts and overlifts have arisen historically to
deal with accounting for these imbalances – the sales method and the entitlements
method. The sales method and the entitlements method under IFRS have arisen as a
result of entities applying the hierarchy in IAS 8, [IAS 18.12], and considering guidance
from other sources in arriving at the accounting policy under IFRS. These sources
included US GAAP, the former UK OIAC SORP114 and former Australian GAAP.
Under the sales method, revenue was the value of what a participant actually sells or
the value of all product that has been transferred to its downstream activity.115 Although
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 653
