Rate-regulated activities

Date recorded:

Rate-regulated Activities – unit of account and the asset / liability definitions - Agenda paper 9A


In this paper, the Staff discussed what the most appropriate unit of account is to account for the rights and obligations arising from the rate adjustment mechanism. They also revisited whether such a right and obligation meet the revised definitions of an asset and a liability respectively under the forthcoming revised Conceptual Framework.

Staff analysis and recommendation

Unit of account

The Staff recommend that the model identifies the unit of account as the individual timing differences (as opposed to the net of all timing differences) arising from the regulatory agreement for the following reasons:

  • although there is some interdependency between all the timing differences and the overall rate chargeable to customers over time, the individual timing differences are assessed separately by the entity and the regulator and the effect of each timing difference on future rate calculations and cash flows can be identified;
  • individual timing differences and their subsequent effects on cash flows expire in different patterns; and
  • the right to charge higher amounts in the future for services already performed have sometimes been factored and used as security for borrowings, separately from other factoring or borrowing transactions.

Consequently, using the individual timing differences as the unit of account will provide users with useful information about the expected pattern of reversal of timing differences and the timing of when they will affect the entity’s future cash flows. 

This assessment is consistent with the Staff’s analysis to date although they have not explicitly referred to the unit of account concept in previous papers.

Asset and liability definitions

The Staff believe that the regulatory right meets the definition of an asset because:

  • it is a present economic resource: the entity has an existing ability to charge a higher amount in the future arising from the rate adjustment mechanism which will lead to economic benefits. This right is stipulated in the regulatory agreement.
  • controlled by the entity: only the entity can charge the higher rate and thus obtain benefits from it.
  • as a result of past events: the entity has already carried out the related services.

Similarly, the regulatory obligation meets the definition of a liability because:

  • it is a present obligation of the entity: the entity has an existing duty to charge a lower rate in the future due to the operation of the rate adjustment mechanism. The entity has no practical ability to avoid charging a lower rate because it is specified in the regulatory agreement.
  • to transfer an economic resource: the entity is obliged to charge a lower rate in the future.
  • as a result of past events: the entity has already received economic benefits for performance not yet fulfilled.

Next steps

In the next meeting, the Staff will ask the Board to decide on:

  • proposals about the scope and recognition aspects of the model; and
  • whether the next consultative document should be a discussion paper or an exposure draft.


The Board approved the Staff’s recommendations.

All who spoke agreed the regulatory obligation meets the definition of a liability although they got there in different ways. One Board member questioned whether it would be more appropriate to regard the obligation as a negative asset given that the customers are charged a single rate that incorporates all previous rate adjustments. This indicates to him that information on a net basis is more useful to users, otherwise the entity will have to distinguish a receipt between collection of an asset and a repayment of a liability. Another member suggested that the Board could consider this as part of the gross or net presentation of the regulatory asset and liability discussion.

There was not much discussion about the unit of account issue.

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