Rate-regulated activities (IASB only)
Interim Standard: Sweep issues
The IASB continued its discussions on a proposed interim Standard for Rate-regulated Activities that would allow entities adopting IFRS to continue to use their local GAAP requirements for rate-regulated activities until the comprehensive project is completed. Several application issues were identified by the staff in drafting. The purpose of this meeting was to clarify these issues and ask the IASB to decide whether to include application guidance in the proposed interim Standard or to make consequential amendments to other Standards.
Earnings per share (EPS)
The IASB previously tentative decided that the regulatory deferral account balances recognised in accordance with the proposed interim Standard should be presented separately in the statement of financial position. Movements in those balances should be presented separately in the statement of profit or loss immediately below an appropriate subtotal for ‘profit (or loss) before taxation and regulatory amounts’. The staff asked the Board to consider the impact of this separate presentation on the requirements in IAS 33 Earning per Share.
The staff recommended that entities that present regulatory deferral account balances in accordance with the interim Standard should be required to exclude the movement on those balances from the earning figure used to calculate EPS in accordance with paragraph 9 (and paragraph 30) of IAS 33. However, if an entity wishes to disclose EPS including the regulatory line item, in addition to the basic and diluted EPS excluding the regulatory line item, the staff proposed that an entity should be permitted to do so in accordance with paragraph 73 of IAS 33.
One Board, commenting more on the proposals taken holistically as opposed to the specific proposal associated with EPS, expressed concern with treating grandfathered regulatory assets and liabilities as ‘second class citizens’. Specifically, he believed the proposals were isolating grandfathered regulatory assets and liabilities to too great a degree; implicitly suggesting that recognition of rate-regulated assets and liabilities was incorrect but allowable in the short-term. While this Board member believed that isolating EPS information was valid for the sake of comparability across jurisdictions, he did not believe some of the other staff proposals (discussed below) were valid as it extended beyond comparability concerns.
Other Board members, building on the general concern of over-isolating regulatory balances, preferred the interim Standard mandate (as opposed to permit) disclosure of an EPS ratio including the movements in the regulatory balances (in addition to a ratio excluding the movements in the regulatory balances), so as to not suggest that one approach was more technically correct than another.
Another Board member commented that the staff proposal suggested the need for a consequential amendment to IAS 33. He preferred that the proposals associated with the interim Standard be self-contained (i.e., the interim Standard would be viewed as a standalone document without providing consequential amendments to other standards). Many Board members supported this view, as they noted the shelf life of the interim Standard was expected to be relatively short.
After a debate, the Board modified the staff proposal and tentatively decided that an entity should present, with equal prominence, an EPS ratio including the movements in the regulatory balances and an EPS ratio excluding the movements in the regulatory balances.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
The staff noted that a similar issue to that noted for IAS 33 arises when considering whether the relevant regulatory deferral account balances should be included in any discontinued operations or disposal group presented separately in accordance with IFRS 5. The staff asked the Board to consider whether the regulatory deferral account balances should be measured in accordance with IFRS 5 and whether the regulatory deferral account balances that have been recognised and that relate to the discontinued operations or disposal group should remain in the separate line items for regulatory items, or reclassified to be included in the amounts presented in accordance with IFRS 5.
The staff recommended that entities that present regulatory deferral account balances in accordance with the interim Standard should not apply the measurement provisions of IFRS 5 to those balances. They also recommended that the regulatory deferral account balances relating to any discontinued operations or disposal group should continue to be presented within the separate line item for regulatory items, without being reclassified to the discontinued operations or disposal group amounts presented in the primary statements.
One Board member believed an entity should apply judgement in determining the appropriateness of financial statement presentation of regulatory items. In particular, he believed presentation of regulatory items alongside the regulatory balance on the face of the financial statements or as part of the notes to the financial statements should be determined on the basis of significance to financial statement users. Many Board members supported this view.
With little additional debate, the IASB tentatively decided that regulatory deferral account balances should be outside the scope of the measurement requirements of IFRS 5. The IASB also tentatively decided that an entity should present regulatory balances that form part of a discontinued operation and/or disposal group within the appropriate regulatory line items. However, the entity should apply judgement to decide whether to highlight the discontinued/disposal amount by presenting it alongside that regulatory balance or instead, by identifying it as part of the analysis of the regulatory line item in the relevant disclosure note.
IAS 36 Impairment of Assets
The IASB previously tentatively decided that an entity could continue to apply its existing local GAAP accounting policy for the assessment and measurement of any impairment of its regulatory deferral account balances.
The staff noted that it has subsequently been asked for guidance on how to apply IAS 36 to a cash-generating unit (CGU) containing rate-regulated activities when IAS 36 requires that CGU to be tested for impairment (for example, because the CGU also contains goodwill).
The staff believed that the determination of which cash flows are used to calculate the recoverable amount of a CGU is a matter of judgement based on the specific facts and circumstances under review. Consequently, the staff believed an entity should determine, on the basis of their specific facts and circumstances, whether the regulatory balances recognised should be included in the calculation of the recoverable amount of the CGU. Once this has been decided upon, the entity should apply the existing guidance in IAS 36 for the purposes of testing that CGU for impairment (i.e., the relevant regulatory deferral account balances should be treated in the same way as asset balances contained in the CGU).
Without debate, the IASB supported the staff recommendation. The existing requirements of IAS 36 would apply to any CGU that includes regulatory balances in the same way as they apply when other specific items that are excluded from the scope of IAS 36 are included in the CGU.
IAS 12 Income Taxes
The IASB was asked to consider whether the tax effects of an entity’s recognised regulatory deferral account balances could be separately identified and presented. The staff highlighted some practical difficulties in separately presenting the tax impact of regulatory balances. Specifically, the staff highlighted that separate presentation may lead to a ‘simultaneous equation/circular reference’ in grossing up regulatory balances, deferred taxes and income taxes in profit or loss in certain situations. For example, the staff noted that the recognition of tax-related regulatory balance, as well as other regulatory balances, might create a further temporary difference for which, in accordance with IAS 12, a further deferred tax amount would be recognised. This in turn might increase the regulatory balance, which again might create a further temporary difference. This process is then repeated through an iterative process until the additional amounts generated cease to be material. The staff did not believe that applying IAS 12 to the regulatory deferral account balances adds value to the information provided to users of the financial statements in this particular situation. However, the staff also noted that continuation of the entity’s existing local GAAP treatment was inappropriate in IFRS financials.
As a result of its analysis, the staff recommended that the recognised carrying amount of the regulatory deferral account balances should be explicitly excluded from the temporary differences to which IAS 12 is applied. Like, previous local GAAP accounting policies for deferred tax should not be grandfathered.
Many Board members expressed strong reservations with the staff proposal. These Board members noted that the Board previously tentatively decided that recognised regulatory deferral account balances under existing GAAP were ‘valid’ balances for purposes of application of the interim Standard. Therefore, they believed the notion of balance validity must be followed through, whereby recognition of deferred taxes under IAS 12 would be necessary. They saw the staff’s proposal as not faithfully representing the regulatory balance.
Assuming recognition of taxes on regulatory balances in accordance with IAS 12, several Board members then discussed presentation of tax balances; specifically, the Board discussed whether the balance should be presented within the regulatory line items or within the tax line items. Most Board members preferred that deferred tax balances be segregated/isolated, and therefore, preferred presentation adjacent with the regulatory line items as opposed to including within the tax line items as they saw the latter option as misleading financial statement users.
Ultimately, the IASB tentatively decided that deferred tax should be calculated on regulatory deferral account balances in accordance with IAS 12, but that the amounts recognised should be included within the regulatory line items instead of within the tax line items.
Finally, the Board was asked to consider the application of other IFRSs to the regulatory balances. The staff recommended that the interim Standard should include brief application guidance to clarify that, when an existing Standard interacts with a regulatory deferral account balance, the existing requirements of IFRS should apply to that regulatory balance unless otherwise specified in the interim Standard. Without debate, the Board tentatively agreed with the staff recommendation.
Research project: Request for information
The staff then requested permission to publish, as an optional due process step in the Rate-regulated Activities research project (the comprehensive project on rate-regulated activities), a Request for Information (RFI) to help more clearly define the scope of the project and to provide more factual evidence to assist in developing the discussion paper. The RFI would be designed to consult broadly with constituents to more clearly identify what types of rate regulation exist and what industries rate regulation affects. The staff identified tentative questions for the RFI, including:
- what are the objectives of the rate regulation and how do they influence the interaction between the rate regulator, the rate-regulated entity and the customers;
- how are these objectives reflected in the nature of the rate-setting mechanism;
- what sort of rights or obligations does the regulation create; and
- how are those rights enforced or obligations settled?
The RFI would have a 60-day comment period.
One IASB member requested that the RFI include a direct question requesting which types of rate-regulation should be considered in the scope of the project. The staff noted it would consider this point.
Other Board members had other recommendations for questions, including how do you currently present and disclose regulatory balances, as well questions directed at users regarding how regulatory balances are assessed. However, other Board members believed these questions would be more applicable to the discussion paper as opposed to the RFI.
Without additional debate, the IASB tentatively supported the staff proposal to publish a RFI designed to gather more factual evidence about the different types of rate regulation.