Rate-regulated Activities

Date recorded:

Cover note (Agenda Paper 9)

In January 2021, the IASB published Exposure Draft ED/2021/1 Regulatory Assets and Regulatory Liabilities. The comment period ended on 31 July 2021. In this meeting, the IASB continued its discussions of the feedback received in response to the ED.

Scope—Overview (Agenda Paper 9A)

This paper set out the topics that the staff recommend the IASB redeliberates within the scope workstream. The staff did not ask the IASB to make decisions on this paper. However, the staff asked the IASB to comment on any additional matters that the staff may need to consider in the redeliberations of the scope proposals.

Many of the respondents agreed with the proposed scope. However, many respondents to the ED said the proposed scope may be broader than intended. Many respondents also said that the scope proposals are not sufficiently clear to help them determine whether an agreement, arrangement or activity would be in the scope of the ED.

According to the feedback, the lack of clarity in the proposed scope is mainly caused by:

  • Difficulty in identifying the rights and obligations that may constitute a regulatory agreement
  • Uncertainty about whether particular features (for example, a regulatory agreement that creates regulatory assets or regulatory liabilities, but not both) may cause a regulatory arrangement to be within, or outside, the scope of the proposals
  • Uncertainty about whether a right or obligation is enforceable, and how the assessment of enforceability interacts with the recognition and measurement proposals
  • Exclusion of some features of ‘defined rate regulation’ in the conditions for a regulatory asset or regulatory liability to exist in the ED
  • Uncertainty about whether the proposals are intended to provide information that supplements only the information already provided by IFRS 15. This is mainly caused by uncertainty about the interaction of the proposed model with IFRS 9 and IFRS 17
  • Uncertainty about the interaction of the proposed model with IFRIC 12
  • Uncertainty about the boundary between financial instruments and regulatory assets and regulatory liabilities in certain fact patterns unrelated to IFRIC 12— for example, regulatory agreements that create not only rights and obligations to adjust future regulated rates, but also rights and obligations to receive or pay cash in specific circumstances
  • A lack of clarity about:
    • The proposed definition of ‘regulatory agreement’ and the term ‘customers’, including their application to more discretionary rate-setting processes or more complex billing arrangements
    • Whether a regulator must exist for a right or obligation to meet the definition of a regulatory asset or regulatory liability

Respondents who expressed concerns about the scope recommended that the IASB minimise the risk the final Standard unintentionally captures a wide range of regulatory arrangements, or is applied inconsistently, by:

  • Restricting the scope of the final Standard
  • Clarifying the regulatory arrangements that would be within, or outside, the scope of the final Standard
  • Clarifying the interactions with other IFRS Accounting Standards

Many respondents asked the IASB to clarify the interaction between the proposals and IFRIC 12. Most respondents commenting on this topic suggested the IASB provide guidance and illustrative examples on how an entity would account for regulatory assets and regulatory liabilities applying the financial asset, the intangible asset or a hybrid model in IFRIC 12.

IASB discussion

There was a short discussion of IFRS 17 and IFRIC 12.

On IFRS 17, one IASB member asked the staff when they were planning to bring the proposals to the IASB given the Standard is still in its implementation phase. The staff confirmed that this would be towards the end of 2022. One IASB member said that the IASB needs to ensure that the implementation process for IFRS 17 is not disrupted.

On IFRIC 12, a IASB member asked how the staff was planning to address the issue of unintended consequences. The staff said that they will prepare an illustrative example and perform outreach on the example in jurisdictions that have a high prevalence of transactions that fall within the scope of IFRIC 12. This will ensure that the example is realistic and reveal any unintended consequences. One IASB member added that the staff should examine how an IFRIC 12 receivable is treated when the entity loses the concession to another company.

Scope—Determining whether a regulatory agreement is within the scope of the proposed model (Agenda Paper 9B)

This paper analyses and makes recommendations about specific aspects of the scope proposals in the ED dealing with the conditions for a regulatory asset or a regulatory liability to exist and some of the concerns raised by respondents on the difficulty of determining whether a regulatory agreement is within the scope of the ED in specific circumstances.

Staff recommendations

The staff recommend the IASB:

  • Reconfirms:
    • The proposal to require an entity to apply the final Standard to all its regulatory assets and regulatory liabilities
    • The proposal that the final Standard should apply to all regulatory agreements and not only to those that have a particular legal form
    • The proposed conditions for a regulatory asset or a regulatory liability to exist
  • Does not explicitly specify in the final Standard which regulatory schemes would be within or outside its scope
  • Clarifies in the final Standard that:
    • A regulatory agreement may encompass enforceable rights and enforceable obligations to adjust the regulated rate beyond the current regulatory period
    • Regulatory agreements that create asymmetric rights and obligations— for example, a regulatory agreement that gives rise to only regulatory liabilities—are within the scope of the requirements
    • Regulatory assets and regulatory liabilities may arise from a regulatory agreement that originates differences in timing when a specified regulatory threshold is met—for example, cap and floor schemes
    • A regulated rate need not be determined using an entity’s specific costs for the entity to be within the scope of the final Standard

IASB discussion

There was some discussion on whether the final Standard should explicitly specify that a regulatory agreement that places a cap on the price that an entity can charge customers (price cap regulation) does not give rise to any regulatory asset or regulatory liability. One IASB member said that this should not be included as there could still be a regulatory asset which is price-capped. It was suggested to not state specific labels that are included in or excluded from the Standard.

On the recommended clarifications, the Chairman asked whether they would actually clarify or the opposite. The language of “may”, “need not”, etc. could be perceived as ambiguous and bring more confusion than clarity. He acknowledged that the IASB cannot provide bright lines but he thought that many respondents to the ED did not raise this issue, so to them the matter was clear. The IASB would have to be careful now not to confuse a majority only to clarify matters for some.

IASB decision

11 of the 12 IASB members agreed that the IASB should reconfirm:

  • The proposal to require an entity to apply the final Standard to all its regulatory assets and regulatory liabilities
  • The proposal that the final Standard should apply to all regulatory agreements and not only to those that have a particular legal form
  • The proposed conditions for a regulatory asset or a regulatory liability to exist

All IASB members agreed not to explicitly specify in the final Standard which regulatory schemes would be within or outside its scope and to clarify in the final Standard that:

  • A regulatory agreement may encompass enforceable rights and enforceable obligations to adjust the regulated rate beyond the current regulatory period
  • Regulatory agreements that create asymmetric rights and obligations— for example, a regulatory agreement that gives rise to only regulatory liabilities—are within the scope of the requirements
  • Regulatory assets and regulatory liabilities may arise from a regulatory agreement that originates differences in timing when a specified regulatory threshold is met—for example, cap and floor schemes
  • A regulated rate need not be determined using an entity’s specific costs for the entity to be within the scope of the final Standard

Scope—Definition of regulator (Agenda Paper 9C)

The ED does not specify whether a particular type of body, such as a regulator, is required for a regulatory asset or regulatory liability to exist. Many respondents to the ED commented that the scope of the proposals would be clearer if a regulator was required. This paper analysed those comments and mades recommendations to amend the proposals.

Staff recommendations

The staff recommended the final Standard:

  • Includes the existence of a regulator in the conditions that are necessary for a regulatory asset or regulatory liability to exist
  • Defines a regulator as ‘a body that is empowered by law or regulation to determine the regulated rate or a range of regulated rates’
  • Includes guidance to clarify that self-regulation (i.e. situations when the price is not determined by a regulator) is outside the scope. However, the final Standard would apply to cases when an entity determines its own rates (for example, some co-operatives) or related parties (for example, an entity’s own governing board) determine the rate but in both cases they do so in accordance with a framework that is overseen by a body empowered by law or regulation

IASB discussion

IASB members agreed that rights and obligations should be enforceable to meet the definition of a regulatory asset or liability. However, IASB members had mixed views as to whether existence of a regulator is a necessary condition for a regulatory asset or liability to exist or whether it is merely a supporting condition.

The Chairman asked whether the staff had come across regulated entities that do not have a regulator. The staff replied that some entities determine the rates by themselves within legal boundaries. There are some mechanics to ensure that the rate meets the legal requirement, but these do not necessarily involve a regulator. One IASB member suggested to state that self-regulation is outside the scope of the Standard. However, it should also be stated which scenarios do not automatically qualify as self-regulation. Another IASB member agreed with that but said that the IASB should be careful about such a list as everyone will ask about their own circumstance and whether that would be included.

It was discussed whether regulation by a related party would meet the definition of self-regulation. IASB members seemed to think that it would not. Many entities in the industry are government owned and with the government being the regulator these would otherwise be outside the scope of the new Standard. If guidance on related party regulators was included, related party should be defined as in IAS 24.

IASB decision

11 of the 12 IASB members supported the staff recommendation that the final Standard should include the existence of a regulator in the conditions that are necessary for a regulatory asset or regulatory liability to exist.

All IASB members supported that the final Standard should define a regulator as ‘a body that is empowered by law or regulation to determine the regulated rate or a range of regulated rates’.

All IASB members supported that self-regulation should be outside the scope of the new Standard, with a list that includes scenarios which are not automatically self-regulation.

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