• Discussed by IFRIC 2005-2008
• Discussed at December 2008 IASB Meeting
• December 2008 Added to the IASB's Agenda
• Discussed at February 2009 IASB Meeting
• Discussed at April 2009 IASB Meeting
• Discussed at May 2009 IASB Meeting
• Discussed at June 2009 IASB Meeting
• Exposure Draft published 22 July 2009. Click for More Information.
• Discussed at February 2010 IASB Meeting
• Discussed at July 2010 IASB Meeting
• Discussed at September 2010 IASB Meeting (jump to notes below)

Timetable

• Click for IASB Project Timetable

IASB Project Insights

• A quick overview of this project is available on our IASB Project Insights page

Discussion at the December 2008 IASB Meeting

The Board considered a request to add to its technical agenda a project on rate regulated activities. The issue is whether regulated entities could or should recognise a liability (or an asset) as a result of rate regulation by regulatory bodies or governments. The IFRIC had tentatively agreed not to add this item to its agenda at its November meeting, citing the reason that divergence in practice in jurisdictions using IFRSs does not seem to be significant.

The staff noted that, in bringing the Agenda Proposal to the Board, it had restricted the scope of the project to those kinds of regulation with the potential to lead to the recognition of assets and liabilities; this meant that 'price cap' regulation would be excluded because, in the staff's view, this type of regulation would rarely, if ever, have such potential.

Board members agreed with the staff's approach, but several were worried that the analysis of 'price cap' and similar types of regulation would inform and provide the background to the Board's potential conclusions about the accounting effects of other types of regulation.

A Board member spoke in favour of the project and complimented the staff analysis. He noted that the current definitions of an asset and a liability should be able to solve many of the accounting issues, although there will be some nuances around 'control' that must be resolved. He acknowledged that the project risk was how far towards US GAAP would the IASB want to go: too 'principles based' and constituents would want the detail in US GAAP; too much like US GAAP and constituents would complain about excessive rules. He favoured an approach that developed the Framework guidance on assets and liabilities without going into excessive, jurisdictional-specific detail.

The Board agreed that it should develop an IFRS on this topic and that an 'interim or holding' IFRS (similar to IFRS 4 and 6) should not be prepared.

The Board approved the proposed project timetable, which proposes publishing an exposure draft in May 2009, but added that they thought such a timetable was ambitious.

Discussion at the February 2009 IASB Meeting

The purpose of this session was to set the scope of the project. The Board had added rate-regulated activities to its active agenda in December 2008. Further the staff informed the Board that at this meeting it will propose scope exemptions, provide illustrative examples for applying the scope and a comparison to the US guidance.

Scope

The staff identified two criteria for a rate regulation to be in scope of any future IFRS guidance:

1. Rate-setting mechanism: rates must be set by an independent regulator; and
2. Cost-of-service regulation: the rate mechanism must be designed to reimburse the regulated entity for costs incurred for the goods/services plus a specified return (similar to a guarantee).

Board members asked questions about specific designs of rate regulation, but agreed with the scope definition in principle.

Definition of an asset or liability

The staff continued to explain to the Board why it believed that rate regulation can create assets or liabilities. The analysis was mainly based on the definitions of an asset and a liability under the Framework.

Some Board members expressed their support for the analysis, while others were concerned over the possible interaction with other assets (for example, a licence – is the rate regulation part of the valuation of a licence?). The staff responded that they are different, because the licence granted the right to provide goods or services compared to the goods or services themselves, where the regulatory assets/liabilities are derived from. This could lead to a licence being impaired, but the regulatory asset actually increasing in value.

There seemed to be consensus around the table that the definition is met at this point.

Scope exclusions

The staff presented the Board with its thinking on scope exclusions. It proposed to exclude regulations that are not akin to a guarantee to recover incurred costs plus a specified return and situations where the definitions of a financial instrument would be met as this would be covered by IAS 32/39.

Illustrative examples

The Board was presented with some examples on the application of the scope. Some Board members highlighted a potential issue as they believed while the rate regulation set price for goods/services, those would still have to be consumed by customers (that is, they are contingent on events outside the control of the entity). The staff responded if one went down that route, none of the schemes within the scope would meet the definition of an asset/a liability.

Comparison to US GAAP

The Board was informed that while there were minor differences to SFAS 71 due to the interaction of other pronouncements under US GAAP vs. IFRS, the scope was broadly aligned with the US guidance.

Discussion at the April 2009 IASB Meeting

Recognition and measurement

The Staff explained that the essential approach being adopted by the staff when drafting the Exposure Draft is that an entity subject to rate regulation should apply IFRS to its assets and liabilities first and, as a second step, determine whether the specific effects of rate regulation give rise to assets and liabilities not otherwise recognised. If such assets and liabilities are identified, these would be recognised in accordance with the proposed IFRS.

What kind of asset?

The staff explained that the proposed unit of account is the aggregate pool of customers of the rate-regulated activity, not individual customers.

In addition, the asset created by the effects of rate regulation is neither tangible nor financial; by elimination the staff concluded that it is an intangible asset. However, the asset involved has some but not all the attributes of an intangible asset, which means that IAS 38 cannot be used to recognise and measure these items. In reaching this conclusion, the Board agreed that assets arising from rate regulation meet the requirements of IAS 38 paragraph 9-17 in that they:

• Arise from a contractual or other legal right. (IAS 38.12(b)
• Are controlled by the entity-the entity has been granted the right by the rate regulator to increase future billings to the aggregate customer base (IAS 38.13); and
• Are increased future billings that will result in future economic benefits in the form of increased cash receipts from customers (IAS 38.17)

The Board noted that while they can be identified separately, the effects of rate regulation are not 'separable' from the related activities, which is why the emphasis is on identifying the effects of rate regulation.

With these clarifications, the Board agreed that:

• To the extent possible the requirements of the proposed IFRS would be consistent with the requirements of other standards addressing similar assets and liabilities.
• Regulatory assets meet the definition of intangible assets in IAS 38.
• IAS 37 provides guidance on the accounting for liabilities for which no specific standard exists. Consequently, once the standard resulting from this project is issued, regulatory liabilities will be within its scope rather than IAS 37.

What to recognise?

As a general principle, the Board agreed that an asset arising from the effects of rate regulation would reflect what the rate regulator permitted (sometimes called 'allowable costs'). This is not the measurement required by IAS 38, and this was the source of considerable concern to several Board members and much discussion among the Board generally. Board members noted that evidence that could support the recovery of costs includes:

• statutes or regulations that specifically provide for the recovery of the cost in rates and cannot be overturned by future regulatory decisions;
• rate orders from the regulator specifically authorising recovery of the cost in rates;
• previous rate orders from the regulator allowing recovery for substantially similar costs (precedents) for a specific entity or other entities in the same jurisdiction;
• written approval from the regulator (although not a formal rate order) approving future recovery in rates;
• uniform regulatory accounting guidance providing for the accounting treatment of various costs that is typically followed by the regulator in setting rates;
• written approval from the regulatory staff of the jurisdiction suggesting they will support rate recovery of the cost (but is not legally binding on the regulatory body that sets rates); and
• analysis of recoverability from internal or external legal counsel.

This evidence serves two functions: to determine whether there is an asset to be recognised and, if so, what costs can be included in the initial measure of that asset. With this clarification, the Board agreed that a discussion of the evidence the entity considers in assessing whether costs will be allowed by the regulator be included as application guidance in the standard.

The Board considered a related issue: whether return on equity is an allowable cost. Treating return on equity as an allowable cost was inconsistent with the Board's conclusions in IAS 23R. Board members were uncomfortable with the staff rationale. They agreed that if the rate regulator permitted some measure of a return on equity to be layered on the allowable costs, then it was part of the measure: however, how that principle was articulated was the issue.

A Board member suggested that the correct rationale was that the 'cost of equity' represents a discount factor because the costs are incurred in one period while they will be recovered over a number of future periods. The Board seemed content to have this as the explanation.

Measurement

The Board agreed that that assets arising from the effects of rate regulation should be measured, both on initial recognition and subsequently, on the basis of the probability-weighted average of all possible outcomes. This is consistent with the measure being developed in the amendments to IAS 37, which should be issued by the time this IFRS is finalised. There was more discussion of the appropriate discount rate to use in the measure: whether it should be the risk-free rate or the rate that the rate regulator allows (or would allow). The discussion was difficult to follow, and although the decision on the use of probability-weighted cash flows was approved, there was no consensus on the appropriate discount rate.

Presentation issues

The Board agreed that assets and liabilities arising from the effects of rate regulation should not be offset in the statement of financial position.

The Board agreed that current and non-current assets and liabilities be presented separately in the statement of financial position.

The Board debated a staff recommendation that the effect of rate regulation should be presented as a single line in the statement of comprehensive income, but did not approve the recommendation. Nor did they reach agreement on how it should be presented and the staff will return at a later date with alternative proposals.

Scope-additional considerations

The Board agreed to include illustrative examples of the type of rate regulated activities that are in the scope of the proposed IFRS. The examples wiuld be included in the ED to help constituents understand the Board's proposals, but may be removed to Education Guidance when the IFRS is finalised.

Discussion at the May 2009 IASB Meeting

The staff outlined the proposed project timetable for the Board. The publication of the exposure draft is currently scheduled to occur in late July 2009. The Board agreed with the project timetable.

The staff the introduced the first issue for discussion which is the measurement and expected cash flows for rate-regulated activities.

The staff detailed the cause and effect relationship between the entity's costs and its rate based revenue stream. The staff noted that the cause and effect relationship between an entity's costs and its rate based revenue stream provides evidence of the existence of an asset in accordance with the definition of an asset as set out in paragraph 49(a) of the Framework. A regulatory asset is a right to recover previously incurred costs through rates over future periods as a result of action by a regulator. Thus, the asset is the right to identifiable cash flows to be received from the customer base. The staff believes that this cause and effect relationship is important to the conclusion that a recognisable asset exists.

The staff then went on to outline issues relating to a discount rate being applied to the cash flows. The staff noted that at the Board meeting in April 2009 the Board agreed with the staff's recommendation that the risk of disallowance of incurred costs should be captured by the probability-weighted average of all possible outcomes. Consequently, this risk would not be one that is considered as part of the risk specific to the asset for which the future cash flow estimates have not been adjusted.

One Board member noted that he had heard scepticism from others as to how these items are assets and liabilities in keeping with the Framework. There needs to be discussion of this in the exposure draft. In particular, concerns had been noted as to what the resource was. Is it a promise by the regulator or the customer? The staff responded by saying that they though the resource was a promise from the regulator to include costs in future rates. So the resource is a right - more specifically, the believed that the resource is the expected future cash flows arising from that right.

Another Board member stated that this was similar to buying an intangible right such as a phone license where the right is to charge customers.

The Board then moved on to discuss what it was they were actually capitalising. One Board member summed up the rather confused discussion by saying that his understanding was that if something is already permitted to be capitalised under other IFRSs then they don't need to identify this separately as a rate-regulated asset. Rate-regulated assets are only relevant for amounts that are not otherwise capitalised. The staff agreed. This was further reiterated by another Board member who noted that they were only dealing with costs that are incurred that would otherwise be charged as an expense. The staff noted that this affects the timing of when these amounts are recognised through income, and amounts are expensed in a different period than would otherwise be the case.

Another board member then asked the staff if regulatory approval is generally performed on each individual item (or cost) or as a package. The staff responded by saying that practically this was normally dome as a package. The staff also noted that companies affected by this type of regulation keep very detailed records as the regulators can request look at individual items.

The same Board member also asked if the rate-regulation was referring to actual or estimated expenses. The staff responded by saying that the only way that these companies can come up with a rate for 2009 in December 2008 is to make estimates of costs. There will always be estimates in the rates, although these estimates will be trued up to actual in subsequent periods.

Another Board member asked if the company needed to wait until approval before an asset could be recognised? The staff responded by saying that this was not the case - it may be that a past track record of approvals would be sufficient. This is why the model they have developed is a probability weighted model.

A further Board member said that a lot of judgement is involved to determine if something is probable in some jurisdictions. The Board then returned to the recommendation of the staff that the discount rate be determined on the same basis as in IAS 36 and IAS 37. The Board agreed.

The Board then moved on to discuss the effect of including amounts permitted by regulation in the cost of self-constructed assets. Allowable costs are usually defined as the actual or estimated costs for which revenue is intended to provide recovery. The staff presented two alternatives to the Board:

• Alternative 1: The new standard permits an entity to recognise assets in accordance with other IFRSs and for specific costs incurred that meet the standard's criteria to be recognised.
• Alternative 2: The new standard permits an entity to recognise assets in accordance with other IFRSs and for identifiable amounts the regulator specifically permits to be included in the determination of rates.

The majority of the Board agreed with Alternative 2. it was noted that this view is also consistent with the existing US GAAP guidance.

The Board then discussed illustrative examples on presentation and disclosure. The staff included recommendations for minimum disclosure in the financial statements, including a recommendation that such information should be presented in a tabular format. The Board agreed with the staff recommendations; however, the staff noted that they would be removing a recommendation to disclose costs being amortised in accordance with the actions of a regulator, but which are not being allowed to earn a return during the recover period as well as the remaining amounts being amortised and the remaining recovery period. The Board agreed that the tabular format should be required unless an alternative presentation method is more appropriate.

The staff will proceed with drafting the exposure draft. In response to a question from the staff, one Board member indicated they were considering dissenting.

Discussion at the June 2009 IASB Meeting

Recoverability of regulatory assets and impairment testing

The Board had previously determined that regulatory assets and regulatory liabilities should be measured at the present value of expected cash flows both on initial recognition and subsequently and therefore a discussion of recoverability and impairment was deemed unnecessary.

However, staff raised a concern about the combined effect on an entity's rates of all the regulator's decisions with respect to the recovery of individual costs.

In other words, the regulator may permit the entity to recover a variety of previously incurred costs without regard to their combined effect. However, when the total effect of those costs on future rates is considered, the entity might conclude that at the rates implied by the inclusion of those costs, its total revenue might still not cover the all the costs because of reduced demand.

The Board decided that:

• an entity should be required to consider the overall effect of regulatory assets on future rates and its ability to generate sufficient revenue to recover them;
• the cash-generating unit in which the regulatory assets are included should be tested for impairment in accordance with IAS 36 if recovery of the net regulatory assets and regulatory liabilities is not reasonably assured. Regulatory assets and liabilities must be tested for impairment as part of a CGU as they do not generate independent cash flows;
• any impairment loss should be allocated to individual regulatory assets based on the period and amount by which estimated future cash flows are affected; and
• in subsequent periods the amount and timing of the estimated cash flows used in determining the amount of the impairment loss should be used to measure the asset.

Presentation of regulatory assets associated with other assets

The Board concluded at its meeting in May that an entity should recognise a regulatory asset for amounts the regulator permits to be included in rates associated with self-constructed assets. Those amounts may relate to indirect overheads and financing costs that would not be recognised as part of property, plant and equipment in accordance with IAS 16. The issue is whether those amounts must be presented separately as regulatory assets or whether they may be included as part of the cost of the PP&E.

Some Board members and staff thought that on cost-benefit grounds it was reasonable to include these regulatory assets within the cost of the PP&E and therefore depreciate them over the same useful lives as the PP&E. Other Board members and staff argued that regulatory assets do not have the same characteristics as PP&E and therefore should be presented separately. Those Board members also questioned whether it was appropriate to depreciate the regulatory assets over the same period as the PP&E where the useful economic lives differed.

Overall, a majority of Board members agreed that an entity should include all the amounts the regulator permits to be included in the cost of self-constructed assets or internally generated intangible assets as part of the related asset. These costs would therefore not be re-measured at the present value of future cash flows but be treated as part of the total cost of the asset under IAS 16 or IAS 38. It was agreed that the basis for conclusions would explain that there is no conceptual basis for this decision; rather it is an exception that has been allowed on cost benefit grounds. For these reasons it would not be appropriate to analogise to this exception in other circumstances. Furthermore, the Standard would remind users of the requirements of IAS 16.57 that the useful economic life of an asset is defined in terms of the asset's expected utility to the entity and that the useful life of an asset may be shorter than its economic life.

Transition

The Board agreed that fully retrospective application would be too onerous and therefore decided that an entity should apply the requirements of the Standard to regulatory assets and liabilities existing from the beginning of the comparative period, that is, there would be an adjustment to opening retained earnings. In respect of the effective date, it was agreed that sufficient lead-time should be granted to allow entities to collate the required information for the comparative period.

First-time adoption

The Board agreed that a consequential amendment to IFRS 1 is required as part of this project. That amendment would permit entities not to restate PP&E to recognise separately amounts that would qualify for recognition as regulatory assets. There would no longer be a need for a definition of rate regulated operations in IFRS 1 or a separate impairment test.

Exposure Draft Issued July 2009

On 22 July 2009, the IASB published and invited comment on proposals on the accounting for rate-regulated activities. The proposals are set out in an exposure draft Rate-regulated Activities. Comments are due 20 November 2009. The objective of the proposals is to establish whether and how assets and liabilities resulting from rate-regulated activities should be recognised and measured under International Financial Reporting Standards (IFRSs). If adopted, the proposed IFRS would:

• define regulatory assets and regulatory liabilities.
• set out criteria for their recognition.
• specify how they should be measured.
• require disclosures about their financial effects.

The ED proposes that when an entity conducts rate-regulated activities that meet the following two criteria, the entity recognises regulatory assets and regulatory liabilities in addition to the assets and liabilities recognised in accordance with other IFRSs:

1. an authorised body is empowered to establish rates that bind customers.
2. the price established by regulation (the rate) is designed to recover the specific costs the entity incurs in providing the regulated goods or services and to earn a specified return (cost-of-service regulation).

The effect of this requirement is initially to recognise as an asset (liability) an amount that would otherwise be recognised as an expense (income) for the period.

On initial recognition and at the end of each subsequent reporting period regulatory assets and regulatory liabilities are measured at their expected present value. Regulatory assets are assessed for impairment when the entity concludes that it is not reasonable to assume that it will be able to collect sufficient revenues from its customers to recover its costs.

The IASB was asked for guidance on the issue from many jurisdictions. Clarifying the accounting for rate regulation is of particular importance for jurisdictions that are in the process of adopting IFRSs and where accounting for the effect of rate regulation is in place for some sectors. In those cases entities are currently recognising sometimes significant 'regulatory' assets and liabilities by reference to an existing US standard, in the absence of an IFRS. Click for IASB Press Release (PDF 107k).

Discussion at the February 2010 IASB Meeting

Summary comment letter analysis

The staff presented a summary of their comment letter analysis of comments received on Exposure Draft ED/2009/8 Rate-regulated Activities. No technical decisions were made, but significant scheduling issues were addressed and it is now unlikely that the original timetable for redeliberation and approval of an IFRS can be sustained. Since many of the routes open to the Board would involve re-exposure of the proposals, the earliest that an IFRS could be issued is now estimated to be Q3 or Q4 2011.

The Observer Note for this meeting is available on the IASB's Project Page. It presents a comprehensive and balanced assessment of the key issues raised as a result of the ED. Outside the utilities sector respondents, respondents agreeing with the ED's proposals and those who did not support them were evenly balanced. The utilities sector, particularly from North America, was strongly supportive of the ED.

The staff were not satisfied that they had sufficient international consensus to recommend any direction for the Board at this time. They asked the Board to allow them to undertake further research and analysis on the fundamental issue of whether assets and liabilities arising as a result of the actions of a regulator exist in accordance with the current IASB Framework and consistently with other IFRSs.

While supporting the staff's desire to explore further the issues identified in the comment letters, several Board members were concerned that the results of that analysis would not lead them to come to a different conclusion on the fundamental issue identified by the staff.

At least one Board Member noted that in his discussions with national standard-setters and other constituents, it was obvious that the ED had not convinced those constituents. The IASB's model was not well understood and had not been accepted. Another Board member remained concerned about the inference that the ED was an 'industry-specific', almost jurisdiction-specific proposal. He was opposed to such standards and would seek to have the IFRS apply generally (that is, look at the fundamental issue broadly).

Another Board Member noted that having opened the debate, the IASB had to act in some way, or risk a lack of comparability in the future. He noted that some aspects of FAS 71 (the US standard) are incompatible with IFRSs, and the Board needed to make that clear in any IFRS or other communication.

The staff noted that they would require at least two months to conduct the additional analysis and consequently redeliberations of the ED could not begin until late Q2 2010.

The Board agreed the staff's request for more time to analyse the technical merits of the fundamental issue identified.

Transition relief for first-time adopters

The Board agreed to remove from the ED 2009/8 project and approve as an Amendment to IFRS 1 the proposal that an entity with operations subject to rate regulation be permitted to elect to use the carrying amount of items of property, plant, and equipment held, or previously held, for use in such operations as their deemed cost at the date of transition to IFRSs. This was exposed in September 2008; comments were received by 23 January 2009; and the Board completed its redeliberations in May 2009. Finalisation of the amendments was postponed with the intention that they be incorporated in the standard on Rate-regulated Activities. The staff was confident that all due process steps with respect to the 'deemed cost' exception had been completed and that the amendment could be issued without further delay. The Amendment would be included in the next omnibus Improvements to IFRS, due to be issued in April 2010.

Discussion at the July 2010 IASB Meeting

At the February 2010 Board meeting, the Board requested the staff to perform additional research and analysis on the key issue of the recognition of regulatory assets and liabilities. The staff presented the Board with a detailed analysis of the various regulatory environments, an analysis of the scope, a comparison of the rate-regulated activities project to current IFRSs as well as to current IASB projects and a summary of the outreach efforts.

The staff reported back that the results of the additional research and analysis did not provide a clear direction for the project. That is, that all aspects of the staff's efforts resulted in some information that is supportive and some information that is not supportive of the recognition of regulatory assets and liabilities.

The Board was presented with two alternatives with regards to the future direction of the project:

• View 1 � recognition of regulatory assets and liabilities on a 'cost-plus aggregate contract' approach where the time delay required by regulations between incurring the unanticipated costs of the current period goods and services sold (not already included in current period rates) and invoicing the aggregate customers in a future period for this unanticipated variance is reflected as a regulatory asset or liability as at the current period end.
• View 2 � Disclosure only of the impact of regulations on the entity (i.e. no recognition of regulatory assets and liabilities).

Before opening the floor for the deliberation of the presented alternatives, the Chairman noted that key question the Board needs to consider is whether these regulatory activities give rise to assets that meet the definition of an asset as set out in the Framework.

There appeared to be significant confusion amongst the Board members as what the asset would be. A Board member wanted to know whether these 'regulatory assets' would be separately identifiable assets when acquired in a business combination or if they would just be included in goodwill. The staff responded that in North-America, these are likely to be recognised as separate assets, whereas in Europe they are generally included as part of the licence.

A Board member asked what constitutes 'the resource controlled by the entity'. The staff explained that any variance that exists between the beginning of period expected costs and the actual costs incurred in providing the goods or services that have already been delivered, is deemed an 'unbilled receivable'. Another Board member enquired if that would imply that a utility entity that has a recognised regulatory asset, controls the individual customers? The staff responded that although the 'unbilled receivable' technically is an intangible asset, the realisation of the economic benefits is more akin to a financial asset.

One Board member asked why there was an apparent inconsistency between the proposed recognition of regulatory assets and the recognition of the right to charge customers as described in IFRIC 12. Another Board member noted that in some circumstances it may also be possible to analogise the Regulator to an insurer/guarantor and that there is also an inconsistency with that treatment.

In general, the Board members were split between those believing that regulatory assets and liabilities should be recognised and those that don't believe the definitions in the Framework are met. Several Board members felt that the Board has not looked at the elements of a regulatory 'asset' close enough to conclude that an asset meeting the definition in the Framework exists.

The Board had an extended discussion on whether the definition of asset in the Framework is met, only briefly considering whether the definition of a liability would be met. A Board member expressed his surprise with the number of Board members focussing solely on the definitions in the Framework, whereas the Board has decided to recognise various other 'items' as assets or liabilities although the definitions were not clearly met, such as options and participation features.

One Board member summarised the position by concluding that there appears to be general agreement that there are assets that exist through the regulatory system. However, the key question to consider is whether these assets are recognised or not. It was suggested that by analogy to other intangible assets, it could be decided that unless these regulatory assets were acquired directly or through a business combination, they are not recognised.

Other Board members supported this on the basis that if it is decided that regulatory assets should be recognised, it will be very difficult to define the scope as there are other similar situations where entities are governed by regulation where these principles could equally apply. A Board member acknowledged that on the whole, it appears that the definition of an asset could be met, but questioned whether the recognition thereof would provide any decision-useful information for the general users of the financial statements.

One Board member noted that the Regulator in Brazil has issued a statement indicating that it will not influence any accounting decisions relating to the transitioning to IFRS, but that they will maintain and require information for regulatory purposes separately.

Some Board members were of the opinion that the conceptual framework question is being brought into a industry-specific question and that accounting principles should not be forced purely because there are principles under IFRSs that do not fit well with the current practice of a specific jurisdiction.

The Chairman noted that it seems unlikely for the Board to reach a decision that would allow solution to be found in time for the adoption of IFRSs by Canada. He provided the Board with three options to consider with regards to the matter:

• The Board does nothing and leave it put to the Canadian adopters to apply the principles in the Framework. This may result in a precedent being created that cannot be stopped once it has started and will open the door for many such situations by future adopters of IFRSs;
• Develop a short-term Standard to resolve the matter, similar to IFRS 6. It was acknowledged that this will not be a quick solution either;
• Formulate a 'quick-fix' solution for the short-term to assist Canada and Brazil in the transition to IFRSs.

The Chairman instructed the staff to contact the Canadian standard setter to determine what alternatives they may have as a solution.

The matter will be discussed during at a later session once the staff had time to liaise with the Canadian standard setter. The Board also asked the staff to prepare a paper that rationalise the approach adopted for service concessions in relation to regulatory activities.

The Board continued its discussion from earlier in the week regarding the accounting for rate regulated activities as no consensus had previously been reached. The staff provided the Board with four potential alternatives of how to move forward with the project.

Those include:

• a "fast-tracked" standard,
• an interim solution for those pending initial adopters of IFRS while later considering a longer term solution,
• an amendment to IFRS 1 to permit the continued use of previous national GAAP for rate regulated activities for first time adopters, and
• continue with the existing project under its current timeframe.

After deliberations of the four alternatives, the Board agreed to continue its current project under the existing timeframe without amending IFRS 1.

Discussion at the September 2010 IASB Meeting

The Board was presented with the staff's research and analysis on the accounting for regulatory assets and liabilities in accordance with the existing accounting requirements.

In the staff's opinion, the impact of regulators may have an economic impact on entities subject to rate-regulation in form of an increase (regulatory asset) or decrease (regulatory liability) in the value of the underlying licence or right. As such, the regulatory assets do not meet the requirements for separate recognition as specified in IAS 38, neither do they meet the definition of a financial asset. Similarly, regulatory liabilities do not meet the definition of a provision in IAS 37, as the reduction in a future inflow of economic benefits is not a liability in accordance with the Framework. They also do not meet the definition of financial liabilities.

The Board considered whether to finalise the project through the issue of a final Standard that confirms that IFRSs do not permit the recognition of regulatory assets or liabilities and require specific disclosures of the impact of regulations on an entity's activities. The Board further considered a proposal to incorporate into future comprehensive projects, either in Phase B of the Conceptual Framework or a review of accounting for intangible assets, the issue of how the effects of rate-regulation should be accounted for.

A Board member expressed disappointment with the fact that the agenda papers do not include any consideration of the right-of-use concept developed for lease accounting. Another Board member agreed that the discussion should start with whether or not the definition of an asset is met and then move on to when and how to recognise it. This Board member is not convinced that a regulatory asset could never satisfy the definition of a financial asset.

A Board member requested any analysis to focus on the rights and obligations granted by the regulator, as the right to collect more rates in the next year is separate from the licence to operate in the jurisdiction. Although it is not yet clear whether such a right is a financial or non-financial asset, it would seem wrong not to recognise anything. Several other Board members supported this view, as they regard an order by a regulator to "pay back" the rates overcharged in the current year, during the next year, as an obligation to pay.

It was observed that rate-regulated activities clearly are a difficult area and that it is possible to make a case in any directions, whether it is line with leases, the revaluation of intangible assets or no recognition at all. Several Board members noted that further analysis is required and that is related to the broader question on accounting for intangible assets.

The Chairman summarised the discussion, observing that the Board is split. He thanked the staff for their comprehensive analysis, but acknowledged that there are a number of considerations that could be added. The Chairman was adamant that the Board could not continue doing further analysis on the matter indefinitely and put the following alternatives to the Board to consider:

• develop disclosure requirements on rate-regulated activities;
• develop an interim standard (similar to IFRS 4 and 6);
• a medium-term project to the post-2011 agenda on intangible assets, but only focus on regulatory assets and liabilities; or
• a major project on accounting for intangible assets.

Although no formal vote took place, there appeared to be general agreement to use expand on the existing agenda papers and consider that as a medium-term agenda proposal for the post-2011 work plan.