In September 2012, the IASB had started a comprehensive rate-regulated activities project, which was begun with a research phase to develop a Discussion Paper. Three months later, the IASB had decided to add an additional phase to the rate-regulated activities project to develop a limited-scope Standard. That project phase led to the issuance of IFRS 14 Regulatory Deferral Accounts on 30 January 2014 and was aimed at helping rate-regulated entities transitioning to IFRSs by keeping their local accounting requirements pertaining to regulatory account balances. Work on the comprehensive project never stopped and has now led to the publication of the DP.
Objective of the paper
The IASB notes that rate regulation is widespread and many different kinds are seen in practice, though not all forms of rate regulation cause issues in financial reporting. However, some forms can significantly affect the economic environment of rate-regulated entities, both in terms of the amount of revenue to be earned, and the timing of the cash flows associated with the rate regulation. It is these forms that the IASB is particularly interested in. The objective of the Discussion Paper is to gain input from constituents on two key questions:
- Are there features that make the economic environment of a rate-regulated entity different from others? If so, what are they? and
- Should those characteristics be reflected in general purpose financial statements by modifying existing IFRS reporting requirements?
In its DP the IASB is not proposing any specific accounting requirements. Rather, the purpose is to consider the characteristics of rate-regulated activities and to assess how these characteristics could be reported best so as leading to relevant and representationally faithful IFRS financial statements.
An overview of the main contents
The Discussion Paper contains some 105 pages and is divided into seven chapters covering the following topics:
||Providing useful information about rate regulation
||What is rate regulation?
||The distinguishing features of defined rate regulation
||Possible financial reporting approaches
||Presentation and disclosure requirements in IFRS 14
Chapters 3 to 5 are the core of the paper.
What is rate regulation?
To focus the discussion, the IASB has tentatively decided to examine a generic type of rate regulation called 'defined rate regulation' that represents a group of features of a number of types of rate regulation that is considered to be common to a wide variety of rate-regulatory schemes around the world and at the same time is clearly distinguishable from the rights and obligations arising from other activities that are not rate-regulated. The IASB hopes that the consistent fact pattern will allow for discussing the financial effects of rate regulation in IFRS financial statements across all jurisdictions.
The distinguishing features of defined rate regulation
The main features of this defined rate regulation are:
- little or no choice but to purchase the goods or services from the rate-regulated entity,
- established parameters to maintain the quality and availability of the supply of the rate-regulated goods or services,
- etablished parameters for rates to support stability of prices and to support the financial viability of the rate-regulated entity,
- recovery of a determinable amount of consideration in exchange for the rate-regulated activities performed, and
- established regulated rate or rates per unit.
Possible financial reporting approaches
Chapter 5 discusses various alternatives for reporting the financial effects described in the preceding sections. These range from doing nothing through disclosure only to a narrow or wider change to current financial reporting requirements. The following approaches are discussed:
- recognising the regulatory agreement as an intangible asset (a licence);
- providing an exemption to enable rate-regulated entities to apply regulatory accounting requirements that would otherwise conflict with IFRSs;
- developing specific IFRS accounting requirements to defer or accelerate cost, revenue or a combination of costs and revenue; and
- prohibiting the recognition of regulatory deferral account balances.
Questions and comment deadline
The paper is accompanied by questions at the end of each section (13 questions in all) intended to guide the discussion. Respondents need not comment on all of the questions and are encouraged to comment on any additional matters. The IASB appreciates any input by 15 January 2015.