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Rate-regulated activities (education session)

Date recorded:

Project status and next steps and developing a revenue approach

The Senior Technical Manager introduced the two topics of the meeting, i.e. giving an update on the project status and the planned next steps as well as developing a revenue approach for the accounting for rate-regulated activities.

The main point on the project management issue was the recommended publication of a second Discussion Paper (DP) rather than going directly to an Exposure Draft (ED). The recommendation was based on the positive responses to the (first) DP which were in favour of continuing the project. However, the staff wanted to examine interactions with the Conceptual Framework as well as IFRS 15. As regards the Conceptual Framework, respondents had expressed concerns about regulatory deferral balances meeting the definition of assets and liabilities. The staff therefore recommended holding back on an ED until the Conceptual Framework was finalised. The time in between could be sensibly used to develop the revenue approach which had been favoured by constituents. The staff expected the second DP to be published at the beginning of 2016 at the earliest.

As regards the revenue approach, the main issue concerned the triangular relationship between the rate-regulated entity, its customers and the rate regulator. IFRS 15 would only consider the customer-entity relationship but not the relationship between the rate regulator and the entity. For example, entities commonly have obligations with the regulator that would not be captured by IFRS 15, for example an obligation to maintain a network. The staff therefore recommended the development of a Standard dealing with rate-regulated accounting issues rather than amending existing Standards.

One Board member expressed support for publishing a second DP and said that the staff should take some time to develop the model. However, he expressed discomfort with the term ‘revenue approach’ as the approach concerned all Standards and not just IFRS 15. He said that he had dissented from the 2009 ED because he disagreed with the scope of the ED and the measurement proposals. He welcomed the consistency with the current FASB decisions. The Senior Technical Manager agreed but said that the name was chosen to distinguish from the ‘cost approach’ that had been pursued in the 2009 ED, which had been rejected by constituents as it was too narrow in scope.

The Chairman asked why constituents did not agree that the timing differences caused by rate regulation were assets and liabilities under the revised Conceptual Framework. The Senior Technical Manager replied that the issue was mostly around liabilities.

One Board member had received feedback from constituents that IFRS 14 was unfair as it was for new IFRS adopters only. This had caused a jurisdictional friction. The Senior Technical Manager acknowledged the issue. He pointed out that the accounting for the customer/entity relationship would require different guidance than the regulator/entity relationship. One Board member disagreed and said that the customer/entity relationship and the regulator/entity relationship would not always create different rights and obligations. He asked if the regulator could be seen as an agent for the customer, as they negotiated the prices with the entity. The Chairman said that he saw the customer as an agent because the relationship was actually between the entity and the regulator and the customer was only involved to pay the consideration.

One Board member doubted that a stand-ready obligation to maintain a network could be seen as delivering a good or service. The Director of Implementation Activities replied that this part of the discussion was similar to IFRIC 12. In some cases, the only difference between IFRIC 12 and rate regulation accounting was that in IFRIC 12 the infrastructure was controlled by the grantor whilst in a rate-regulated environment it was controlled by the entity. The Senior Technical Manager indicated that one possible route would be to integrate IFRIC 12 in the rate regulation Standard. She added that respondents to the DP had asked why IFRS 15 could not be applied to the customer base as a whole. The staff had found, however, that regulated rates also applied to future customers which caused a tension with IFRS 15.

One Board member said he disagreed with the cost deferral approach that was prevalent in the US. The Senior Technical Manager replied that today the US also had a rights and obligations approach but agreed that it was primarily based on the cost deferral approach which had been the prevailing approach in the 1980s.

One Board member highlighted the importance of global comparability of entities that operated in a rate-regulated environment.

When asked by a Board member, the Senior Technical Manager confirmed that the suggested approach would go in the direction of IFRS 14, i.e. apply IFRS 15 accounting and then have a Standard that overlaid the IFRS 15 accounting with guidance specific to rate regulation.

The Senior Technical Manager noted that in some cases the entity also paid to the customer, for example if the customer created power that would be fed into the network. This issue of ‘negative’ revenue would also have to be examined. It would also be considered how payments from the customer for future network extension would be accounted for. If an asset were to be recognised, it would need to be decided on which basis it would be released into P&L, as this could be based on the percentage of completion of the extension or it could be proportionate to the depreciation of the extension.

No decisions were taken.

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