The IASB (‘Board’) has concluded that the cost of an asset includes any costs attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. One of those costs is testing whether the asset is functioning properly.

The amendment to IAS 16 prohibits an entity from deducting from the cost of an item of property, plant and equipment (‘PP&E’) any proceeds received from selling items produced while the entity is preparing the asset for its intended use (for example, the proceeds from selling samples produced when testing an item of PP&E to see if it is functioning properly, or incidental revenue generated from developing a mine which is above a body of resource). The proceeds from selling the output generated when the item of PP&E is in the development phase, together with the costs of production, are now recognised in profit or loss. An entity will use IAS 2, ‘Inventories’, to measure the cost of the output generated. The cost of the output will not include depreciation of the PP&E being tested, because depreciation only commences when the item of PP&E is ready for its intended use and has moved to the production phase.