Rate-regulated activities

Date recorded:

Rate-regulated Activities - Cover note and summary of the model - Agenda paper 9

This wasan education session to update the Board on the Staff’s progress in developing a new accounting model for rate-regulated activities. This paper summarises the core features of the model, including a description of and the basis for the objective, core principle, scope, recognition and derecognition, initial and subsequent measurement, as well as presentation and disclosure requirements proposed by the model (see table on pages 4-10 of the AP).

The Staff has developed the model taking into account the feedback received on the discussion paper Reporting the Financial Effects of Rate Regulation, subsequent outreach, as well as discussions held with the members of the Accounting Standards Advisory Forum from 2014 to 2016 (see AP 9B Responding to issues raised in ASAF discussions).

The Board will not be asked to make any decisions about the model at this meeting; however, they will be asked to comment on the core features of the model.

Rate-regulated Activities - Overview of the core features of the model - Agenda paper 9A


This paper expands on the core features of the model. Appendix B includes the fact pattern of an example that is used throughout the paper to illustrate, numerically, how the proposals would result in the recognition of regulatory assets and regulatory liabilities.

Core objective and principles of the proposed model

The core objective of the model is to inform users of financial statements about the effects of rate regulation arising from past transactions, events and conditions on the entity’s financial position, performance and cash flows. To achieve that objective, the model:

  • (a) supplements, but does not override, other Standards. Consequently, all other Standards are applied first before applying the model.
  • (b) focuses on the effects of the rate regulation by capturing, through the recognition of assets and liabilities in the statement of financial position, the rights and obligations created by the rate regulator’s intervention in setting the rate chargeable to the customer-base.
  • (c) restricts the scope of the proposed accounting to those regulatory adjustments that link, through the rate-setting mechanism:
    • (i) the entity’s right to charge a determinable amount in exchange for satisfying specified regulatory obligations; and
    • (ii) the entity’s satisfaction of those obligations.
  • (d) presents separately:
    • (i) revenue recognised as (or when) the entity satisfies performance obligations contained in contracts with individual customers using IFRS 15, using the regulated rate; and
    • (ii) regulatory assets and regulatory liabilities resulting from regulatory adjustments that are included, or expected to be included, in the regulated rate to be charged to the customer-base in future periods.


For adjustments to be within the scope of the model, the rate regulator must have the power to bind both the entity and the customer-base to a rate and the rate regulation must establish:

  • (a) the obligations that the entity must satisfy; and
  • (b) the entity’s right to charge the customer-base a determinable amount in exchange for satisfying those obligations.

To establish the link within (b) above, the regulatory agreement must include a rate-setting mechanism that (i) sets out how the regulated rate is calculated, and (ii) adjusts the future regulated rate for the effects of past transactions, events or conditions. This rate-setting mechanism, in particular the requirement to adjust future rates for the effects of past events, forms the basis for recognising a regulatory asset/liability (see ‘recognition’ section below).

Recognition — a revenue ‘supplementary’ approach

The model requires the entity to apply IFRS 15 first, without modification, to recognise revenue from contracts with customers, before applying the model. This means that the amount of revenue recognised is based on the regulated rate and the quantity of goods or services transferred to individual customers during the period.

The entity then recognises regulatory assets and regulatory liabilities resulting from regulatory adjustments that arise due to:

  • (a) specified variances between the actual and estimated amounts used in the calculation of the regulated rate (estimation adjustments);
  • (b) the application of bonuses or penalties for exceeding or failing to meet specified targets (bonus/penalty adjustments). The model recognises the bonus or penalty in the period in which it is earned/charged, rather than the period in which it is included in the regulated rate; and
  • (c) performance timing differences between:
    • (i) the entity’s performance (by satisfying its regulatory obligations); and
    • (ii) the performance of the entity’s the customer-base (making payments).

See paragraphs 26-37 of AP 9A for numerical examples of these adjustments.


The entity derecognises a regulatory asset/liability as the originating regulatory adjustment reverses through the updated rate charged to the customer-base. Amounts that are no longer expected to be reversed through the rate charged will be adjusted through subsequent measurement or impairment of the related regulatory asset/liability.


A regulatory liability is measured initially at the amount charged to the customer-base in advance of the entity fulfilling the related regulatory obligation, or by applying the agreed or expected rate reduction in future periods. A regulatory asset is measured initially at the amount included, or expected to be included, in the rate that can be charged to the customer-base in future periods in respect of the regulatory obligation already satisfied, or partially satisfied. If an entity considers that a regulatory balance is not expected to be included in establishing the future regulated rate, it is not recognised as a regulatory asset/liability until such time when there is sufficient evidence that it will be included in the rate.

The carrying amount of the regulatory asset/liability recognised will be adjusted to reflect any changes due to new facts and circumstances. This includes impairment and reversal of impairment of the regulatory asset. For a regulatory liability, if the expected cost of satisfying that obligation is higher than the amount of regulatory liability recognised, the entity recognises an increase in the regulatory liability, unless it expects the rate regulator to approve a commensurate increase in the future regulated rate.

Presentation and disclosure

The model recognises regulatory assets separately from regulatory liabilities and a net regulatory adjustment for the corresponding net movement in regulatory assets/liabilities. The model also discusses the relationship between contract assets, receivables (both in terms of IFRS 15) and regulatory assets; as well as the relationship between contract liabilities, payables and regulatory liabilities.

In a future meeting, the Staff will ask the Board to consider whether and to what extent an entity can offset regulatory assets against regulatory liabilities, and whether those items should be split between current and non-current amounts.

Regulatory obligations related to the entity’s own assets

Given the significant investment in the maintenance, replacement and enhancement of assets required to produce the regulated goods or services, the rate regulator typically ensures that the entity is provided with sufficient funding for such investments by using the regulated rate and/or other funding sources, such as government grants. The model proposes that irrespective of the method used by the rate regulator to fund such activities, the same principles should be applied to account for the funding received and the related costs.

The model adopts a capitalisation approach for costs incurred that is similar to the one for recognising costs to fulfil a contract under IFRS 15. For funding received via a rate adjustment, the pre-funded amount charged to the customer-base is recognised as a regulatory liability and will be amortised to profit or loss once the entity satisfies its regulatory obligation by using the enhanced asset. This approach is consistent with the gross presentation approach in IAS 20 for recognising government grants.

In a future meeting, the Staff will ask the Board to consider the capitalisation, amortisation and impairment requirements of the capitalised costs in more detail.


In general, the Board was strongly supportive of the model. One Board member reiterated his concerns regarding this model due to jurisdictional and behavioural reasons (aversion to change deeply entrenched accounting practice in a jurisdiction where there were lots of regulated activities).

The Staff updated the Board on the discussions of the ASAF meeting held in December 2016, saying that the ASAF members generally agreed with the model but that the Staff should research more into the following topics: measurement; interaction with the time value of money, especially how the discount rate should be determined; the fact that the regulatory assets and liabilities recognised per the model might not meet the definition of assets and liabilities per the Conceptual Framework; how to identify the timing and extent of when the regulatory asset/liability should reverse out; and interaction with IFRIC 12.

The Board raised the following comments:


  • One Board member was uneasy with relegating the characteristics that defined rate regulation from scope requirements (i.e. the regulated activity must have all these characteristics before they were within the scope of the model) to merely indicators of rate-regulated activities. She believed that this might result in many entities that had their pricing regulated in some way (e.g. regulators setting a maximum amount that they could charge) being within the scope of the model, or might result in their having to spend time assessing whether certain price-regulated transactions might be within scope.
  • One Board member did not fully agree with the notion of the customer base and said that this notion might not support the recognition of regulatory assets/liabilities in all situations. This stemmed from the fundamental issue that the recovery of the regulatory asset and settlement of the regulatory liability within the ambit of both the customer base notion and the rate adjustment mechanism were dependent on the sale of electricity (or other rate-regulated activities) in the future (which was why the regulatory asset/liability did not sit well with the conceptual framework’s asset and liability definitions in the first place). There was no contractual relationship between the regulated entity and the customer base, nor was there any form of a tripartite agreement between the current customers, future customers and the regulated entity to justify the recognition of such regulated asset/liability. There was significant discussion on this topic by different Board members who explained how they viewed the notion of the customer base, and why they thought it worked well within the model.


  • A couple of Board members asked the Staff to simplify the explanation of the rate adjustment regarding performance timing difference in the storm damage example (paragraphs 35-37). Staying with this example, there was also quite a bit of discussion on whether, and when, any margin should be recognised on the repair work carried out by the regulated entity. The Staff noted that this would depend on whether the item being repaired was the regulated entity’s asset or not, but acknowledged further that other factors should be considered as well and that they would bring back further details for future discussion.

Derecognition and measurement

  • How would an entity track the different rate adjustments for derecognition purposes? In particular, it might not be easy to componentise a rate into the portion that was: (i) for old adjustments, (ii) for the current period, (iii) for future capital expenditure, and (iv) for other items. This would be difficult especially when various rate adjustments had taken place over time and blanket adjustments were made e.g. to cap the rate at a certain level.
  • Regulators were moving towards a more incentive-based mechanism that allowed the regulated entities to keep a portion of the savings, e.g. the future rate would be adjusted down by only 50% of the savings and the entity would keep the rest. How would that affect whether this transaction was within or outside the scope of the model in the first place?
  • How would an entity assess the expectation of whether the regulator would approve an increase in the future regulated rate that would be commensurate with the increased expected costs when subsequently measuring the regulatory liability?

Presentation and disclosure

  • What was the nature of the regulatory asset/liability? It was not a financial instrument, nor did they sit squarely within any of the other standards e.g. intangible assets or contract assets.

Regulatory obligations related to the entity’s own assets

  • To explore whether the entire compensation received from the government or through rate adjustments related to the cost of the asset, or whether it also compensated the entity for the time value of money and provided the entity with a margin. If so, how should they be accounted for.
  • The Board also asked the Staff to look at how this aspect of the model interacted with the requirements of IFRIC 12.

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