Rate-regulated Activities
Cover note (Agenda Paper 9)
At this meeting, the IASB continued redeliberating the proposals in Exposure Draft ED/2021/1 Regulatory Assets and Regulatory Liabilities.
Features of different regulatory schemes (Agenda Paper 9A)
This paper was set up as a presentation and provided information about the main features of different regulatory schemes. Many respondents to the ED said the proposed guidance on total allowed compensation does not accommodate well incentive-based regulatory schemes.
The presentation gave detail on the project background, including all consultation documents published thus far. It then went on to illustrate the rate-setting process and types of regulatory schemes and explains that the main challenge of this project is to determine a set of principles that would require the recognition of regulatory assets and regulatory liabilities arising from a wide variety of regulatory schemes. To do so, the staff focused on differences in timing. This is because the existence of differences in timing is the feature that is common to the variety of regulatory schemes that will be in the scope of the final standard.
Stakeholders have previously highlighted two general types of regulatory schemes:
- cost-based (commonly known as ‘cost-of-service’ or ‘return-on-base rate’)
- incentive-based (including revenue-cap or price-cap regulation)
The staff then analysed how well the proposals accommodate those two schemes. Finally, the staff presented their findings from user outreach.
The IASB was not asked to make any decisions based on this presentation.
IASB discussion
After the staff led through the presentation, IASB members discussed the differences of cost-based vs. incentive-based schemes and how both could be appropriately addressed in the new standard. Especially, hybrid schemes seemed difficult to address and the IASB should be careful not to create a binary distinction in the standard (as with IAS 19) which will make the standard difficult to apply to hybrid schemes.
The Chairman highlighted that the main difference between the two schemes was that while the cost-based scheme was almost an automatism and therefore easily reflected in the accounting, the incentive-based scheme comes with existence and measurement uncertainty, which makes it more challenging to determine whether there is actually an asset or a liability and in which amount. The staff replied that preparers would have to carefully analyse the contract for that determination.
One IASB member challenged the staff’s use of ‘cash differences in timing’ and ‘non-cash differences in timing’ as it implied that the standard would apply cash accounting. She suggested to instead use implicit vs explicit differences in timing or similar. IASB members seemed to agree that a purely cash-based model would not work.
Consultative Group for Rate Regulation meetings (Agenda Paper 9B)
This paper included the summary notes for the two Consultative Group for Rate Regulation (CGRR) meetings held in March 2022.
In the meeting on 4 March 2022, the CGRR discussed how the IASB could respond to feedback on its proposals on regulatory returns on construction-work-in progress
In the meeting on 28 March 2022, the CGRR discussed how the IASB could respond to feedback on its proposals on the accounting for regulatory assets and regulatory liabilities arising from differences between the recovery pace of the regulatory asset base and the assets’ useful lives
This paper was for information only. The staff did not ask the IASB to make decisions on this paper.
Total allowed compensation—overview (Agenda Paper 9C)
At the December 2021 meeting, the IASB decided to prioritise the redeliberation of topics related to total allowed compensation. This paper provides an overview of the topics within the total allowed compensation workstream that the staff plan to discuss with the IASB.
The paper summarised the proposals on total allowed compensation in the ED, followed by a summary of t key messages received by stakeholders, including:
- Incentive-based schemes—respondents subject to incentive-based schemes said that the recognition of revenue for incentive-based schemes should be based on an entity’s regulatory agreement and not based on when related costs are recognised in accordance with IFRS Accounting Standards
- Regulatory assets and regulatory liabilities arising from differences between the regulatory recovery pace and assets’ useful lives—many respondents disagreed with the proposed guidance on depreciation expense
- Allowable expense definition—a few respondents disagreed with the definition of allowable expense proposed as ‘an expense, as defined in IFRS Accounting Standards, that a regulatory agreement entitles an entity to recover by adding an amount in determining a regulated rate’
- Regulatory returns other than returns on assets not yet available for use—most respondents agreed that regulatory returns applied to a base, such as the regulatory capital base, should form part of total allowed compensation for goods or services supplied in the same period that a regulatory agreement entitles an entity to add those returns in the regulated rates charged to customers. A few respondents said it was unclear how the proposals addressed inflation adjustments reflected in either the regulatory returns or the regulatory capital base.
- Regulatory returns on assets not yet available for use—some respondents agreed with the proposal for an entity to reflect returns on an asset not yet available for use in the period when the asset is being used to supply goods or services to customers. However, most respondents disagreed
- Performance incentives—most respondents agreed that performance incentives should form part of or reduce the total allowed compensation for goods or services supplied in the period in which an entity’s performance gives rise to the incentive
The paper provided a table that sets out the staff’s approach to redeliberation of each of these topics.
IASB discussion
IASB members signalled agreement with the staff’s approach to deliberation. IASB members touched on single messages received from respondents to the ED, for example, on inflation adjustments, one IASB member said to pause and think about whether the IASB wants to focus only on explicit adjustments or if the model should also address implicit adjustments.
Scope—customers (Agenda Paper 9D)
This paper set out staff analysis and recommendations about application questions raised by respondents relating to the term ‘customers’ in the ED.
A few respondents to the ED said that it can sometimes be difficult to determine whether a regulatory agreement is within the scope of the proposed standard because of a lack of clarity about how to interpret the term ‘customers’ in the definitions of ‘regulatory agreement’ and ‘regulated rate’ in certain situations.
For example, when an entity charges the regulated rate to customers indirectly through another party or when an entity recovers or returns differences in timing arising from goods or services supplied to a group of customers (for example, customers within an entity’s electricity interconnection services) through the rate charged for the goods or services supplied to a different group of customers (for example, customers within the entity’s electricity transmission services). The paper uses the expression ‘customers from different revenue streams’ to refer to these different groups of customers.
Staff recommendation
The staff recommended that the final Standard clarifies that for a regulatory asset or a regulatory liability to arise, it is necessary that differences in timing originate from, and reverse through, amounts included in the regulated rates that an entity accounts for as revenue applying IFRS 15. This is the case even when an entity charges the regulated rates to its customers indirectly through another party and the origination and reversal of differences in timing occur in different revenue streams through regulated rates charged to different groups of customers (that is, the customers of the different revenue streams).
IASB discussion
IASB members generally agreed with the staff recommendation to build on the link with IFRS 15. They discussed the example in the agenda paper and agreed with the outcome. One IASB member asked whether this could be applied to other, similar, circumstances, to which the staff replied that they had seen nothing contrary in the comment letters.
IASB decision
All IASB members voted in favour of the staff recommendation.
Scope—Financial instruments within the scope of IFRS 9 (Agenda Paper 9E)
This paper set out staff analysis and recommendations on whether the scope of the final Standard should exclude regulatory assets or regulatory liabilities related to differences in timing that may arise from financial instruments within the scope of IFRS 9.
Many respondents to the ED expressed concerns that 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 a regulatory agreement is in the scope of the ED in specific circumstances.
After the comment period ended, the staff spoke to one of the European banking associations and to four accounting firms. The objective of the outreach was to gather evidence about the existence of financial instruments within the scope of IFRS 9 that may give rise to regulatory assets and regulatory liabilities and how widespread these financial instruments might be and how material the regulatory assets or regulatory liabilities might be. The stakeholders involved have not identified financial instruments within the scope of IFRS 9 that are likely to be affected by the proposals in the ED.
Staff recommendation
The staff recommended that the final Standard does not exclude from its scope regulatory assets or regulatory liabilities related to financial instruments within the scope of IFRS 9 and that the Basis for Conclusions (BC) on the final standard should explain that regulation of interest rates is typically limited to the setting of a cap or floor on interest rates. This type of regulation is not expected to give rise to differences in timing.
IASB discussions
IASB members expressed support for the staff recommendation. One IASB member said that this was on the basis though that there were no examples of where this could be problematic. He asked the staff to be vigilant while doing outreach and drafting to see if they come across any example. He also said that he does not object to explaining that regulation of interest rates is typically limited to the setting of a cap or floor on interest rates in the BC, but he suggested to make this an illustrative example in the standard.
IASB decision
All IASB members voted in favour of the staff recommendation.