Nor Kartini Mohd
Rodzi, Senior Lecturer of Faculty of Accountancy, UiTM Perlis Branch
MFRS116
is a Malaysian Financial Reporting Standard applicable for long-term assets
that outlines the accounting treatment for property, plant and equipment. In
June 2020, a new amendment on MFRS 116 Property, Plant and Equipment
related to the proceeds received before the asset's intended use had been
prescribed by Malaysia Accounting Standard Board (MASB). Proceed received
before the asset's intended use means the difference between sales of items
produced during the testing process and related costs incurred in bringing the
assets to their location before the intended use. The effective date of the
amendments is on or after 1st January 2022. However, entities are
allowed to apply the amendment before the effective date. These changes applied
to all Malaysian corporate entities for the financial reporting of the
business.
The
current requirement is to deduct the proceeds from selling the items from the
initial cost of property, plant and equipment (PPE). It resulted in entities
incorporating amounts that did not faithfully represent its performance. The
other impacts are understating the entity's income and the carrying amount of
the asset. The current practice impaired the usefulness of financial
information such as return on asset ratio to users of financial statements.
Different
interpretation uses with regards to the proceeds from selling items derived
during the testing process. Some entities deduct only the proceeds from the
sale of sample items derived during the testing process. Other entities subtract
proceeds of all sales until an asset is ready to operate as required by
management. The deducted proceeds should exceed the cost of testing and be
significant to the initial costs of the assets. To encourage harmonization of
the accounting practices among corporate entities in Malaysia, MASB agreed to
clarify this matter through the amendments as below:
- Any
proceeds from selling items derived during the testing process are recognised
as an income in profit or loss per MFRS15 Revenue from Contracts with Customers
or MFRS140 Agriculture.
- Costs
of such items produced during the testing process using the measurement method
of MFRS102 Inventories are recognized in profit or loss.
The
scenario below further explains the amendment on proceeds before intended use.
Table 1 shows a comparison of the initial cost of the amendment.
Company A acquired machinery from a foreign
country to increase the production of organic fertilizer for RM900,000. The
following information relates to the new machinery.
|
|
RM
|
|
Delivery
cost
|
50,000
|
|
Installation
cost
|
10,000
|
|
Testing
of machinery by producing samples
|
12,000
|
|
Proceeds
from sales of sample produce during the testing process
|
4,500
|
Determine the initial cost of
the new machinery.
Table 1: Calculation of initial cost of the asset
before and after amendment using the above scenario
|
Before Amendment
|
RM
|
After Amendment
|
RM
|
|
Purchase
price
Delivery
cost
Installation
cost
Testing
cost
Proceeds
from sales of sample
Initial
costs
|
90,000
50,000
10,000
12,000
(4,500)
157,500
|
Purchase price
Delivery cost
Installation cost
Testing cost
Proceeds from sales of sample
Initial costs
|
90,000
50,000
10,000
12,000
(4,500)
162,000
|
|
Effects
of the adjustment:
1. Income
understated in profit or loss
2. Carrying
amount of asset understated in the financial position
|
Note: Proceeds from sales of the sample are recognized
as an income in profit or loss.
Effects of the adjustment:
1. Improve entities performance
2. Carrying amount of assets is NOT
understated in financial position.
|
The
new amendment prohibits entities from deducting proceeds from the sale of
sample items as part of PPE costs (Selvarajah, 2021). After the
amendment, the amount capitalized as the initial cost is limited to the testing
cost of the asset. Instead, sales proceeds and related costs are recognized in
profit or loss since they satisfy the definition of income and expenses that
reflect the entity's performance for the period.
Entities
are required to apply retrospective application by treating as if the new policy
had always been in use. The adjustment for the opening balance of retained
earnings is compulsory to show the restated balance amount for the earliest
prior period presented. The timeline below explains the practice of retrospective
application.
Figure
1: Example of timeline for the retrospective application
Source:
(The AccSense Team,
2021)
Based
on the above example, the PPE item is ready for its intended used by management
is on 1st April 2021. All entities are required to restate the
opening balance of retained earnings on 1st January 2021 to reflect
the effect of the amendments. Therefore, any sale proceeds and related costs generated
during the testing period are recognized in profit or loss starting on 16
November 2020.
The
amendment will improve financial reporting on the entity's performance as well
as users’ decision-making. Furthermore, the harmonisation
of accounting practices among corporate entities in Malaysia is achievable. It
enhances the comparability of the entity's financial reports and makes the
accounting information is more relevant and faithfully represented.
References:
Selvarajah, J. (2021, September 6).
MFRS 116 (IAS16) Property, Plant and Equipment Latest Update. MIA-ACCA Train
the Trainer (10th Session).
The AccSense Team. (2021, September
2). Amendments to MFRS 116 Property, Plant and Equipment: Proceeds before
Intended Use - TheAccSense. Retrieved from https://www.theaccsense.com/:
https://www.theaccsense.com/accounting/financial-accounting/amendments-to-mfrs-116-property-plant-and-equipment-proceeds-before-intended-use/
