Sweep issues (Agenda Paper 9)

Background

This paper discussed sweep issues that have arisen during the drafting of the exposure draft (ED) on regulatory assets and regulatory liabilities including the definition of a regulatory asset and regulatory liability, regulatory returns on assets not yet available for use, the effective date and the comment period.         

Staff recommendations

The staff recommended defining:

• a) a regulatory asset as an enforceable present right, created by a regulatory agreement, to add an amount in determining a regulated rate to be charged to customers in future periods because part of the total allowed compensation for goods or services already supplied will be included in revenue in the future; and
• b) a regulatory liability as an enforceable present obligation, created by a regulatory agreement, to deduct an amount in determining a regulated rate to be charged to customers in future periods because the revenue already recognised includes an amount that will provide part of the total allowed compensation for goods or services to be supplied in the future.

The staff suggested that regulatory returns on a balance relating to an asset not yet available for use form part of the total allowed compensation for goods or services supplied once the asset is available for use and over the remaining periods in which an entity recovers the carrying amount of the asset through the regulated rates.  Furthermore, the staff recommended that the entities should apply the final Standard for annual reporting periods beginning on or after a date 18-24 months from the date of its publication and to extend the comment period of the ED Regulatory Assets and Regulatory Liabilities from 120 days to 180 days.

Board discussion

Agenda Papers 9 and 9A were discussed together.

Most Board members agreed with the proposed definition of regulatory asset and regulatory liability. However, some Board members suggested that the staff clarify the rationale for referring to revenue recognised and not to amounts charged to customers in the proposed definition in the Basis for Conclusions (BC). Board members agreed that it was useful to clarify the difference between contract assets or contract liability arising from IFRS 15 and regulatory assets or regulatory liability.

Board members recommended the staff explain in the BC the Board’s decision to have two recovery periods, one for the regulatory returns (e.g. over the regulatory period) and another for the regulated assets (e.g. useful lives as per relevant IFRS). The staff clarified that this consideration was for cost benefit reasons and that if the regulated asset had a different useful life than the regulated recovery period, allocating the regulatory returns on the basis of goods and services supplied by the regulated asset could be burdensome for the entity. When the regulatory agreement entitles the entity to include in the rates, a return for an asset, the staff assume this corresponds to the total allowed compensation for the goods and services for the period in which the regulatory agreement entitles the entity to those sales. When those returns on the asset which is not yet available for use, the staff’s view is that those returns should be reflected in the profit or loss once the asset is available for use but over the period in which the asset will be recovered through the rates in the regulatory agreement. The staff further clarified that the issues considered in this paper do not relate to performance incentives from construction work. This paper considered returns for amounts invested in an asset during the period in which the asset is not available for use.

Some Board members supported the staff’s recommendation of extending the comment period from 120 days to 180 days. However, the majority of Board members expressed concerns that extending the consultation period should not be done habitually and only upon requests by stakeholders.    

Board decisions

10 of the 13 Board members agreed with the definition of regulated assets and regulated liabilities and that regulatory returns on a balance relating to an asset not yet available for use form part of the total allowed compensation for goods or services supplied once the asset is available for use and over the remaining periods in which an entity recovers the carrying amount of the asset through the regulated rates.

12 Board members agreed that the entity should apply the final Standard for annual reporting periods beginning on or after a date 18-24 months from the date of its publication.

The Board agreed to extend the comment period from 120 days to 150 days.

Total allowed compensation—regulatory returns on an asset not yet available for use (Agenda Paper 9A)

Background

In March 2020, the Board tentatively decided that regulatory returns on a construction work-in-progress base form part of the total allowed compensation only during the period when the asset is in operation and is being used to supply goods or services. This paper discussed when the period described above should end.

Staff analysis

The BC on the ED will confirm that an entity is allowed to charge customers a regulatory return on an asset before the asset is available for use. This raises the question of the period over which those regulatory returns should form part of the total allowed compensation for goods or services supplied. The staff considered two potential requirements for the period over which those regulatory return should form part of the total allowed compensation for goods or services supplied being:

• a) the remaining period in which the asset is recovered through the regulated rates, once the asset is available for use; or
• b) the asset’s useful life determined by applying IFRS Standards.

Staff recommendations

The staff recommended that the regulatory returns on a balance relating to an asset not yet available for use form part of the total allowed compensation for the goods or services supplier over the remaining periods in which an entity recovers the carrying amount of asset through the regulated rates, once the asset is available for use. The staff did not recommend that the Board specify the pattern in which these regulatory returns form part of total allowed compensation for goods or services supplied over the period because the appropriate pattern will depend on the specific facts and circumstances.

Board discussion and decision

This agenda paper was discussed together with Agenda Paper 9 above. See above for the Board discussion and decision.