Cover note (Agenda Paper 9)

At this meeting, the IASB continued redeliberating the proposals in the Exposure Draft Regulatory Assets and Regulatory Liabilities (ED). The staff prepared two papers relating to total allowed compensation.

Capitalised borrowing costs (Agenda Paper 9A)

This paper included staff analysis and recommendations about the interaction between the IASB’s tentative decision on regulatory returns on an asset not yet available for use and an entity’s capitalisation of borrowing costs to construct that asset.

Staff recommendations

The staff recommended that the final Accounting Standard require that, when there is a direct relationship between an entity’s regulatory capital base and its property, plant and equipment and the regulatory agreement provides the entity with

• Both a debt and equity return on an asset not yet available for use, the entity shall reflect in the statement of financial performance during the construction period only those returns in excess of the entity’s capitalised borrowing costs
• Only a debt return on an asset not yet available for use, the entity shall not reflect the return in the statement of financial performance during the construction period if the entity capitalises its borrowing costs

IASB discussion

IASB members acknowledged that the previous decision (i.e. cost for debt funding during the construction phase is part of the allowable cost) works in most cases, but there are particular fact patterns in which it does not work. It was therefore acknowledged that the previous decision should be refined to address these fact patterns. However, most IASB members acknowledged that this should not be achieved by amending IAS 23. As a side note, some IASB members spoke in favour of retiring IAS 23. It was, however, acknowledged that this was not an appropriate discussion for this session.

One IASB member said that it seems that, given the decisions to date on allowable compensation, a direct relationship between an entity’s regulatory capital base and its property, plant and equipment is not desirable to have. The decision as to whether that direct relationship exists is therefore important. One IASB member replied that a direct relationship is a matter of fact and not a choice. The staff added that the decisions to date are in keeping with what entities already do, so the staff would not see that having a direct relationship is onerous. An IASB member confirmed that what the IASB decided so far is very close to US GAAP.

This discussion caused the Chair to pause and say that if entities are doing it already, does it need to be fixed for this small population of fact patterns where the previous IASB decision does not work. Educational material and communications could solve the issue with the same effect. One IASB member replied that the Consultative Group for Rate Regulations supports the fix, and it should therefore be made.

The Chair said that, in general, the IASB needs to think about how to order the requirements, i.e. whether an entity should apply all other IFRS Accounting Standards first, and then the Standard on rate regulation, or the other way around. One IASB member replied that often rate-regulated activities are just one activity of a group and they would therefore apply all other IFRS Accounting Standards anyway for their other activities. The Chair acknowledged this but said that many of the entities that have rate-regulated activities are SMEs.

IASB decision

All IASB members supported the staff recommendation.

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

This paper includes 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 are for information only and the staff are not asking the IASB to make decisions on this paper.

This paper was not discussed.