Rate-regulated activities — Initial analysis of responses to the Discussion Paper

Date recorded:

The Assistant Technical Manager opened the session by saying that the responses from constituents on the Discussion Paper (DP) had showed that there were three main points that constituents agreed on. The first was that there were distinguishing features of rate regulation that should be identified and many had agreed that the DP had provided a good description of those characteristics. The second was that the combination of rights and obligations that were created by defined rate regulation might not be faithfully represented in the financial statements. Therefore, they supported developing specific requirements. They expressed also strong support for using IFRS 14 as a starting point for the disclosure requirements. On the other hand, there was only limited support for the disclosure-only and the intangible-asset approach and no support for using regulatory accounts. There was some support for prohibiting regulatory deferral accounts.

One Board member asked how many companies would be affected in the UK, Australia or France, for example. The Senior Technical Manager replied that in terms of numbers of companies, it would not be many, however those companies were rather large as they were major transport, water or electricity companies. One Board member added that entities outside of the scope of the project would still be affected by the disclosures.

Another Board member referred to the comments made with regard to the definition of the scope of any specific guidance resulting from this project. Many respondents had suggested that it would be better to distinguish mandatory criteria from supporting conditions or indicators. He asked the staff for their thoughts on these comments. The Senior Technical Manager replied that they would explore if some of the key characteristics could be reduced to indicators rather than mandatory criteria. She said that, for example, there were markets that had several competitors, however the competition was overridden by the regulation.

A Board member said that if some of the key characteristics were reduced to indicators, there would still be questions of how they would influence measurement. The Senior Technical Manager agreed with that.

One Board member warned that once rate regulation was defined, certain industries could not be scoped out of the definition. He also referred to the paragraph in the agenda paper where it was stated that respondents suggested an approach that was based on the principles included in IFRS 15, focusing on the entity’s rights and obligations relating to the customers as a whole. He said that IFRS 15 was based on the contract. Also, the behaviour of the customer could not be assumed. The Vice-Chairman concluded that this might influence the measurement.

One Board member asked whether those who did not support proceeding had based their proposal only on the Conceptual Framework. She said that the possibility of earnings management was raised as well but the Framework was the main reason. She said that compared to the previous project, more people believed that the rights and obligations arising from rate regulation would fit the definition of assets and liabilities in the Conceptual Framework. The Chairman conceded that most of those were interested parties. The Senior Technical Manager said that there was indeed a different level of support amongst respondents that were in the rate-regulated industry and of those that were not. However the level of support had risen amongst non-rate-regulated respondents compared to the previous project.

The Vice-Chairman mentioned a paragraph in the agenda paper that referred to obligations imposed on the customers by the rate regulation. He asked which obligations those were. The Senior Technical Manager replied that this was the obligation to pay the rate that had been agreed through the rate regulator.

One Board member asked whether the strong support for the requirement to disclose a reconciliation of opening to closing balances of the recognised regulatory deferral account balances came mainly from users. The Senior Technical Manager negated that and said that this was driven mainly by preparers as they would like to give information to their lenders. The Board member was also concerned that considering the net effects of the rights and obligations and thinking about the customer base as a whole would be inconsistent with other Standards. She also said that the difference between regulatory accounts that arose from volume and input cost variances and those that arose from calculation differences (e.g. capitalisation of cost in regulatory accounts only) should be distinguished in the financial statements as this had been demanded by some of the respondents. With regard to incentive-based schemes she said that the focus should be on whether there was a rate-setting mechanism. She said that once the project had reached the Exposure Draft (ED) stage, the Board should reconsider whether the areas covered would be worth the added complexity of a special model.

A Board member said that the working draft of the Conceptual Framework should be considered. He asked the staff what responses they had received from outreach activities that were not reflected in the comment letters. The Senior Technical Manager replied that the responses varied. IOSCO had pointed out that it would take some time to get used to reading regulatory accounts. In general, those familiar with regulatory accounts had a higher acceptance for recognising regulatory balances.

One Board member had heard from constituents that they were concerned about applying IFRS 15 to regulatory accounts. He said they were struggling with the fact that the transfer of control and the recognition of revenue would occur in different periods. The Senior Technical Manager confirmed that it would be challenging to identify what the components of the prices were and which were the performance obligations that triggered revenue recognition. Also, the recognition of adjustments to the infrastructure would provide a challenge to the project.

No decisions were made.

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