Rate-regulated activities

Date recorded:

The Board was presented with the staff's research and analysis on the accounting for regulatory assets and liabilities in accordance with the existing accounting requirements.

In the staff's opinion, the impact of regulators may have an economic impact on entities subject to rate-regulation in form of an increase (regulatory asset) or decrease (regulatory liability) in the value of the underlying licence or right. As such, the regulatory assets do not meet the requirements for separate recognition as specified in IAS 38, neither do they meet the definition of a financial asset. Similarly, regulatory liabilities do not meet the definition of a provision in IAS 37, as the reduction in a future inflow of economic benefits is not a liability in accordance with the Framework. They also do not meet the definition of financial liabilities.

The Board considered whether to finalise the project through the issue of a final Standard that confirms that IFRSs do not permit the recognition of regulatory assets or liabilities and require specific disclosures of the impact of regulations on an entity's activities. The Board further considered a proposal to incorporate into future comprehensive projects, either in Phase B of the Conceptual Framework or a review of accounting for intangible assets, the issue of how the effects of rate-regulation should be accounted for.

A Board member expressed disappointment with the fact that the agenda papers do not include any consideration of the right-of-use concept developed for lease accounting. Another Board member agreed that the discussion should start with whether or not the definition of an asset is met and then move on to when and how to recognise it. This Board member is not convinced that a regulatory asset could never satisfy the definition of a financial asset.

A Board member requested any analysis to focus on the rights and obligations granted by the regulator, as the right to collect more rates in the next year is separate from the licence to operate in the jurisdiction. Although it is not yet clear whether such a right is a financial or non-financial asset, it would seem wrong not to recognise anything. Several other Board members supported this view, as they regard an order by a regulator to "pay back" the rates overcharged in the current year, during the next year, as an obligation to pay.

It was observed that rate-regulated activities clearly are a difficult area and that it is possible to make a case in any directions, whether it is line with leases, the revaluation of intangible assets or no recognition at all. Several Board members noted that further analysis is required and that is related to the broader question on accounting for intangible assets.

The Chairman summarised the discussion, observing that the Board is split. He thanked the staff for their comprehensive analysis, but acknowledged that there are a number of considerations that could be added. The Chairman was adamant that the Board could not continue doing further analysis on the matter indefinitely and put the following alternatives to the Board to consider:

  • develop disclosure requirements on rate-regulated activities;
  • develop an interim standard (similar to IFRS 4 and 6);
  • a medium-term project to the post-2011 agenda on intangible assets, but only focus on regulatory assets and liabilities; or
  • a major project on accounting for intangible assets.

Although no formal vote took place, there appeared to be general agreement to use expand on the existing agenda papers and consider that as a medium-term agenda proposal for the post-2011 work plan.

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