Rate-regulated Activities – International Accounting Standards Board

Date recorded:

At its meeting on March 19, 2020, the IASB met to discuss the treatment of ‘target profit’ in the accounting model it is developing for regulatory assets and regulatory liabilities. Target profit is the profit that an entity is entitled to include in the regulated rate. Principles that the Board had already discussed establish when the following elements of target profit are part of total allowed compensation:

  1. regulatory interest—over the period in which the related regulatory asset or regulatory liability is outstanding; and
  2. profit margins that vary with the amount of an expense, for example, a fixed percentage mark-up on the expense—when the related expense is recognized in accordance with IFRS Standards.

At this meeting, the Board tentatively decided that:

  1. regulatory returns on a construction work-in-progress base included in the regulated rates charged to customers during the construction period form part of total allowed compensation only during the period when the asset is in operation and is being used to supply goods or services;
  2. performance incentives (whether construction-related or non-construction-related) form part of total allowed compensation for goods or services supplied in the period over which the relevant performance criteria are monitored and evaluated; and
  3. all other elements of target profit that a regulatory agreement entitles an entity to charge customers in a period, including regulatory returns on a regulatory capital base, form part of total allowed compensation for goods or services supplied in that period. The Board expects to publish an exposure draft in the second half of 2020.

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