Cover note (Agenda Paper 9)

At this meeting, the IASB continued redeliberating the proposals in the Exposure Draft Regulatory Assets and Regulatory Liabilities (ED).

Inflation adjustment to the regulatory capital base (Agenda Paper 9A)

This paper sets out staff analysis and recommendations on the proposals in the ED for dealing with inflation adjustments to an entity’s regulatory capital base.

Illustrative example 7C.2 accompanying the ED illustrates that if a regulatory agreement adjusts the regulatory capital base in the current period for inflation, giving an entity the right to add an inflation adjustment in the regulated rates to be charged to customers in future periods, that right would not meet the definition of a regulatory asset. This is because, according to the ED, that right is not a right to recover total allowed compensation for goods or services already supplied to customers.

A few respondents to the ED disagreed with the illustrative example. These respondents thought the final Standard should treat an inflation adjustment to the regulatory capital base as a regulatory asset.

The staff think that an entity’s right to add an amount relating to the inflation adjustment to the regulatory capital base to regulated rates charged in the future would give rise to a regulatory asset if that right is enforceable. The staff think that, however, the costs arising from the recognition of that asset would outweigh the benefits of the information provided for users.

Staff recommendation

The staff recommended that the final Accounting Standard specify that an entity shall not recognise inflation adjustments to the regulatory capital base as a regulatory asset.

IASB discussion

IASB members generally agreed with the staff recommendation. It was acknowledged that without the provision proposed by the staff, there would be diversity in practice. It would also simplify the requirements, which are already becoming quite complex.

One IASB member considered whether an option would be possible, i.e. let entities decide, by way of an accounting policy choice, whether they recognise inflation adjustments as a regulatory asset. However, the staff replied that this would hamper comparability and add complexity.

IASB decision

All IASB members voted in favour of the staff recommendation.

Consultative Group for Rate Regulation meeting (Agenda Paper 9B)

This paper included the summary notes and the material prepared for the Consultative Group for Rate Regulation (CGRR) meeting held on 4 October 2022 dealing with the topic analysed in Agenda Paper 9A.

These notes and the material were for information only and was therefore not discussed.

Other items included in the regulatory capital base (Agenda Paper 9C)

This paper set out staff analysis and recommendations on the proposals in the ED for the accounting for allowable expenses or performance incentives included in an entity’s regulatory capital base.

Staff recommendation

The staff recommended that the final Accounting Standard specify that:

• An entity shall recognise a regulatory asset (regulatory liability) relating to an allowable expense or performance incentive included in its regulatory capital base when:
  • There is a direct relationship between the entity’s regulatory capital base and its property, plant and equipment
  • The entity has an enforceable present right (obligation) to add (deduct) the allowable expense or performance incentive to (from) future regulated rates
• An entity shall not recognise a regulatory asset (regulatory liability) relating to an allowable expense or performance incentive included in its regulatory capital base when there is no direct relationship between the entity’s regulatory capital base and its property, plant and equipment

IASB discussion

IASB members noted that, while not disagreeing with the staff recommendation, the order in the staff recommendation of having an enforceable present right and direct relationship should be reversed. The staff agreed with this.

IASB decision

All IASB members supported the revised staff recommendation.

Use of the direct relationship concept—Overview (Agenda Paper 9D)

The IASB had been redeliberating the proposals in the ED addressing total allowed compensation. One of the drivers of the IASB’s tentative decisions in this area was whether an entity’s regulatory capital base has a direct (no direct) relationship with its property, plant and equipment. This paper provided an overview of the use of the direct (no direct) relationship concept in the IASB’s redeliberation of the proposed model.

The paper was for information purposes only. The staff did not ask the IASB to make decisions on this paper. However, the staff asked the IASB for any questions or comments on the use of the direct (no direct) relationship concept in its tentative decisions to date.

IASB discussion

IASB members noted that the paper was a good summary of the issues around direct relationship and that it would be a good starting point for application guidance or educational material. The Chair said that in addition to application guidance or educational material, the staff should consider webcasts in the lead up to the final standard so that stakeholders are aware of what is coming.