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Issue Description:

The fundamental issue is whether a rate-regulated entity using IFRSs should recognise as assets and liabilities costs and obligations that arise from the rate-regulation process (regulatory assets and liabilities). That is, can rate regulation create an asset or liability meeting the definitions and recognition criteria for assets and liabilities that are found in the IASB's Framework for the Preparation and Presentation of Financial Statements.

For example, are the higher revenues expected to be collected from future customers as a result of a particular rate regulation order the kind of 'future economic benefits' referred to in the Framework's definition of an asset. If yes, how is the requirement that the entity 'control' those future benefits assessed? What if, for instance, the rate regulator has decided that an entity is allowed to recover certain costs in its future rates to customers, but that decision could be reversed or challenged under the law?

Background

At the March and September 2007 meetings of a group of National Standard Setters (NSS), the NSS considered whether to publish an NSS discussion paper on this topic, as a potential contribution towards the initial development of international guidance in this area. However, there was general agreement that the first priority should be to put the issues before the IFRIC, with a view to obtaining IFRIC's views. The NSS believe that resolution of the issue is an urgent matter, particularly in those jurisdictions about to adopt IFRSs as their primary basis for financial reporting. The NSS are concerned about inconsistent practices developing in this area.

August 2005 IFRIC Agenda Decision

In August 2005, the IFRIC Declined to Add to its Agenda the following IAS 38 issue:

Subsequently, in October 2005, in a letter to one of the NSS group, the IFRIC Coordinator acknowledged that recognition of an the asset or liability created by rate regulation is not precluded by IFRSs or by the IFRIC's August 2005 decision:

Discussion at the September 2008 IFRIC Meeting

The IFRIC held an educational session devoted to accounting for the effects of rate regulation in the context of reporting under IFRS. Although many rate-regulated entities already report using IFRS, several jurisdictions considering or already committed to adopting IFRS have local GAAP requirements that are different to IFRS. Preparers in those jurisdictions, in Europe and North America, have raised questions about the appropriate application of IFRS in their situations.

The IFRIC held a wide-ranging and interesting debate, but it did seem that their initial point of view was that non-IFRS accounting treatments, such as those in FAS 71 Accounting for the Effects of Certain Types of Regulation, were not consistent with IFRS. Although that conclusion might be uncomfortable, there was little to suggest that it was an incorrect analysis of the issue. IFRIC members noted that similar issues had be addressed in the development of IFRIC 12 Service Concession Arrangements but had not led to assets and liabilities being recognised in the financial statements that did not meet the IASB Framework definitions of those items. During the discussion, an observer noted that there were some similarities between 'cost-plus' contract accounting (IAS 11) and rate-regulated activities. However, it was noted that the critical difference between the two was that the IAS 11 relationship was a contractual right to recover the 'plus' bit, something that was usually absent in rate-regulated utilities.

The IFRIC staff will continue its data gathering and analysis of issues and will return to a subsequent meeting with an agenda proposal.

Discussion at the November 2008 IFRIC Meeting

The staff presented the IFRIC with its recommendation on regulatory assets and liabilities based on the background information research it undertook. The staff's proposal was not to add the item to the IFRIC's agenda, but to refer it to the Board with a recommendation to add it to the agenda.

It was acknowledged that this issue was of particular relevance for jurisdictions moving towards IFRS that, under local GAAP, recognised regulatory assets and liabilities.

The IFRIC had some discussion on whether such assets and liabilities exist at all or only in very rare circumstances. Some IFRIC members had strong views on this issue. It was noted that the ability to charge favourable prices in the future does not create an asset as their realisation depended on future revenues; nor does the requirement to charge a lower price in the future create a liability (unless the contract is made onerous thereby).

Many IFRIC members disagreed with the staff analysis while agreeing with the staff's recommendation not to add the item to the agenda.

It was noted that this issue can be addressed using existing Standards, but there was no divergence in practice under IFRS as such items are only rarely recognised by entities using IFRS.

Ultimately, the IFRIC agreed by a majority vote tentatively not to add the item to the agenda and not to recommend that the item be referred to the IASB.