Rate regulated activities
The IASB has supported giving priority to developing a proposal for a standards-level project for rate-regulated activities. This meeting discussed the staff’s proposal that they develop a Discussion Paper on rate-regulated activities using the existing research from the 2008–2010 project to assess whether the IASB should develop an IFRS (or amend existing IFRSs). The staff have analysed feedback received from the Agenda Consultation and also the rate-regulated project that was undertaken in 2008–2010 and have noted that there are particular issues and challenges in practice and there is a requirement for guidance in this area. There are currently very divergent views as to whether or not regulatory assets or regulatory liabilities exist and should be recognised in the Statement of Financial Position. The staff would aim to publish the Discussion Paper in the fourth quarter of 2013.
The staff paper noted that, in some jurisdictions (for instance Canada), the impact of rate-regulated activities is recognised directly in the financial statements of rate-regulated entities either as a regulatory asset (a right to charge higher prices in the future) or a regulatory liability (an obligation to reduce prices in the future) (under their national GAAP) and in others (where IFRS is adopted) regulatory assets and liabilities are generally not recognised in the financial statements (although this is hard to assess without further work). There are many different types of rate-regulation (such as “cost of service” and “price cap”) and differences between these regimes may lead to different rights and obligations for the rate-regulated entity. The staff noted that a Discussion Paper would help to identify, across a range of common regulatory regimes, the differentiating factors of rate-regulation (i.e. the nature of rights and obligations that could give rights to assets and liabilities) and would help to set out in a more balanced way the arguments for and against recognition of regulatory assets and liabilities under IFRS. The staff also noted that it was important to ensure that consistency was adopted in definitions of assets and liabilities with the Conceptual Framework and that a Discussion Paper for rate-regulated Activities could test the definitions of assets and liabilities being develop in the soon to be restarted, Conceptual Framework project.
The 2009 Exposure Draft (ED) did not address these different types of regime and a discussion as to what characteristics of these regimes lead to different rights and obligations. A lack of explicit guidance in IFRSs in this area is seen by some as a barrier to adoption (and is creating uncertainty) as, for instance, in Canada some are switching to US GAAP (or deferring adoption of IFRSs) in order to still recognise such regulatory assets and liabilities that they had recognised under their existing GAAP.
The staff, therefore identified that the key questions that needed to be answered (and would attempt to through a Discussion Paper) were:
- what features of rate-regulation differentiate rate-regulated activities from non-rate-regulated activities;
- do such differentiating features give rise to rights and obligations that meet the definitions of assets and liabilities in the IFRS Conceptual Framework;
- if so, should they be recognised in accordance with the Conceptual Framework; and
- if they are to be recognised, how should they be accounted for?
One IASB member noted that there had currently been three attempts between IRFIC, the IASB ED and joint work with the FASB to address the above issues without success. The member mentioned that there was a requirement to start from the beginning as the rate-regulation regimes have moved on from just the “cost of service” regime identified in the previous ED. The member questioned whether the Discussion Paper would include the IASB’s preliminary views, as these are sometimes included within Discussion Papers. The staff mentioned that they are yet to decide on this as it would be difficult at the moment as to what the IASB view would be without further research. The IASB member mentioned that an up-to-date survey should be performed and asked what the current IFRS practice was today country by country as he was of the view that some of the IFRS adopters are accounting for the regulatory assets and regulatory liabilities within the Statement of Financial Position. The member stated that the Discussion Paper should be clear on what the starting point is to be — that these assets and liabilities are recognised or not — this view was also shared by another member. Another IASB member highlighted a similar point that the staff paper was making, that IFRS adopters are not recognising regulatory assets and liabilities and also questioned this assertion. The staff noted that further work was required to provide an answer to this as IFRS financial statement disclosures do not currently make it clear that regulatory assets and liabilities exist.
One other IASB member noted that the staff paper mentions diversity and in the context of IFRSs this means that IFRS applicants are diverging in applying IFRS in practice. He asked that the Discussion Paper address this issue with updated information. The divergent practice in Brazil was mentioned where some IFRS adopters had not recognised regulatory assets and liabilities and others that were influenced by US GAAP did.
Another IASB member mentioned that developing a Discussion Paper at the same time as the Conceptual Framework project will be beneficial as the rate-regulatory project will inform the Conceptual Framework, particularly the definitions of assets and liabilities. The view of this IASB member was that the issues with rate-regulation stemmed from the concept as to whether rate regulated activities actually meet the definitions of assets and liabilities under the Conceptual Framework. It was mentioned that at the end of the project the likely conclusion was that some rate regulated activities would meet the definition and some would not. It was noted that within the financial statements these assets and liabilities meeting the definitions within the Conceptual Framework would probably not be called regulatory assets or liabilities but potentially financial assets/liabilities or IAS 36 Impairment of Assets/IAS 38 Intangible Assets recognised assets/liabilities.
One IASB member preferred an Exposure Draft rather than a Discussion Paper due to the urgency of issuing guidance in this area.
The majority of the IASB members tentatively supported the proposals for a Discussion Paper on rate-regulated activities. There was one dissenting member vote who preferred an Exposure Draft instead.
Also discussed at the meeting was whether an interim IFRS should be published for use until a more comprehensive solution, or full IFRS is developed, which it was noted would take some time. The request for such an interim IFRS was from jurisdictions such as Canada who have raised concerns that they would have to fundamentally change their accounting treatment for rate-regulated activities under IFRS. This would reduce the gap of uncertainty as to whether rate-regulated assets and liabilities can be recognised in the Statement of Financial Position before a full IFRS is developed. It was noted that these interim measures would apply equally to first time IFRS adopters and non first time adopters. The staff noted that resources utilised in the development of an interim IFRS would also potentially push back the timing of the Discussion Paper.
The staff presented four alternatives for an interim IFRS for the IASB to consider (and also asked whether the IASB had any further options that were not considered or whether any issues needed to be taken to the Advisory Council:
- A disclosure only IFRS which would provide users with more transparent and relevant information to enable them to better understand the potential impact of rate-regulation on the activities of the entity.
- An IFRS 6-style “grandfathering” option where an entity would be able to apply IFRS and apply its existing accounting policy on rate-regulated activities subject to certain requirements.
- A national-GAAP “grandfathering” option where entities would be permitted to use their national GAAP to account for rate-regulated activities.
- An interim IFRS with specified accounting requirements where an interim IFRS would be developed based upon the requirements of an existing national GAAP relating to rate-regulated activities (i.e. developing an interim IFRS based upon the requirements of a country that currently recognises regulatory assets and liabilities).
The IASB asked the staff whether they had a preference and it was noted that the staff’s preference would be to go straight to a Discussion Paper rather than an interim option. Hence they advocated that none of the above options should be chosen.
The majority of the IASB members supported an interim solution along the lines of IFRS 6 Exploration for and Evaluation of Mineral Resources. It was suggested by one member that the 2009 ED had created the diversity in practice and hence an interim solution was required to address this. Another member asked that if an IFRS 6 interim solution was adopted, whether the IFRS preparers could go back to the regime they were following the instant before they adopted IFRS which would reduce the diversity, especially in Canada. The staff responded that this would reduce diversity in Canada but did not want to address this in the paper as it could create situations where IFRS adopters who had removed their rate-regulated assets/liabilities from their Statement of Financial Position upon adoption of IFRS would then have to re-recognise these. One of the IASB members supported going to the Advisory Council.
Only two of the IASB members were of the view that increased disclosures were the best option for an interim measure.
No vote was held as to the potential interim options discussed.