Rate regulated activities
In September 2012, the IASB decided to restart its project on Rate-regulated Activities with the development of a Discussion Paper (DP) to document different rate regulation regimes and identify whether any of those rate regulations create rights or obligations that meet the IFRS definitions of assets and liabilities. At this meeting, the Board discussed issues to be addressed in the DP, the need for an interim Standard and a proposed project plan.
Issues to be addressed in the Discussion Paper
The staff proposed that the following issues should be addressed in the DP (but subject to change):
- What do we mean by “rate regulation” and should we define it (e.g., what features distinguish rate-regulated activities from non-rate regulated activities and do different forms of rate-regulation create different rights and obligations)?
- What should be the scope of guidance on Rate-regulated Activities?
- What characteristics of the rights and obligations created by rate regulation meet the definitions of assets and liabilities in the IFRS Conceptual Framework?
- If the rights and obligations created by particular rate regulation do meet the definitions of assets and liabilities, what type of asset, liability or combination of assets and liabilities are created?
- For any assets or liabilities identified, what are the relative advantages and disadvantages of alternative accounting models for recognition and measurement?
- Does IFRS already include appropriate accounting models for recognition and measurement that can be applied to any regulatory assets or regulatory liabilities identified?
- How should any regulatory assets and regulatory liabilities be presented in the financial statements?
- What disclosures are needed to help users understand the impact of rate regulation on the financial position, performance and cash flows of the rate-regulated entity?
- If the conclusion is that rate regulation does not create additional assets and liabilities to be recognised, what information about the rate regulation needs to be presented, and how should this be done?
Reviewing this summary, Board members highlighted other possible issues to consider on the project, including:
- defining the unit of account (i.e., what is a customer), although the staff believed this issue would be considered naturally in discussing the above topics.
- considering other possible presentation and disclosure possibilities rather than strictly analysing whether rate regulation creates rights or obligations that meet the IFRS definitions of assets and liabilities. For example, he mentioned use of disclosure or two separate balance sheets as possibilities to show the effect of rate-regulated activities.
The Board was not asked to specifically vote on this issue; however, no fundamental objections were expressed.
The staff recommended that a separate working group not be established for this project. Instead, the staff intended to make use of the Conceptual Framework consultative group (which consists of standard-setters) given the projects are closely interlinked.
Many Board members believed a separate working group should be established for rate regulation given the possible benefits stemming from engaging constituents with an expertise in this area. With little additional debate, the Board tentatively decided a separate working group should be established for this project.
Development of an interim Standard
The Board discussed possible development of an interim Standard for jurisdictions moving to IFRS pending the completion of the comprehensive project on Rate-regulated Activities. Possible approaches to an interim Standard outlined by the staff (assuming an interim Standard was viewed favourably by the Board) included a disclosure only standard, developing new interim requirements and some form of grandfathering of existing previous GAAP recognition and measurement accounting policies (although mandating certain presentation and disclosure requirements) for the accounting for the impacts of rate regulation for those rate-regulated entities that have not yet transitioned to IFRSs.
Many Board members expressed support for the development of an interim Standard; generally expressing preference for an interim Standard that permits some form of grandfathering. Some of the reasons for this support included that an interim Standard permitting grandfathering would: reduce the disruption to trend information for these entities on transition to IFRS until clearer guidance is developed; and avoid the entities applying these policies having to make a major change to their accounting policies that might be followed by another major change once the comprehensive project is completed. However, other Board members expressed concern with the development of an interim Standard – particularly on based on grandfathering. Reasons for this concern including a fear of the unknown (i.e., an incomplete understanding regarding what is being done in the area of rate regulation around the world); concern over the implications development of an interim standard may have on adoption of IFRSs (e.g., will entities defer adopting IFRSs until such point that an interim standard is issued given that the staff’s proposals were only relevant to those entities that have not yet transitioned to IFRSs); and a belief that the interim Standard would only apply to a small number of jurisdictions (Canada, India and possibly the US were mentioned as jurisdictions with significant rate-regulated entities where entities may be transitioning to IFRSs in the future), and therefore, should not be the immediate focus of the Board. Others questioned the benefits of an interim standard (asking whether it only served to claim compliance with IFRSs as issued by the IASB), or asked whether an interim standard would be viewed favourably by jurisdictions to which the interim Standard was intended to apply.
After a lengthy debate, the Board tentatively decided that an interim Standard should be developed which permits some form of grandfathering of existing GAAP recognition and measurement accounting policies for the accounting for the impacts of rate regulation for those rate-regulated entities that have not yet transitioned to IFRS. The interim Standard would include presentation and disclosure requirements designed to assist users in understanding the implications of rate regulation on the entity. The Board intends to discuss presentation and disclosure requirements at a future meeting.
The staff outlined their project timeline for both the longer term project to address accounting for the impacts of rate regulation and the shorter term project to develop an interim Standard to be applied by rate regulated entities that have not yet adopted IFRSs.
Under the project timeline:
- deliberations for an interim Standard would commence in January 2013. The staff anticipates the Board publishing an exposure draft for the interim Standard during the first quarter of 2013 with a 120-day comment period.
- deliberations on its comprehensive project on rate-regulated activities would resume in the second quarter of 2013, with an intention to publish a DP during the second half of 2013 with a 120-day comment period.