Cover note (Agenda Paper 9)

At this meeting, the IASB continued redeliberating the proposals in the Exposure Draft (ED) Regulatory Assets and Regulatory Liabilities. For that, the staff prepared two papers on long-term performance incentives and derecognition.

Long-term performance incentives (Agenda Paper 9A)

This paper set out the staff analysis and recommendations on the proposals relating to the recognition and measurement of regulatory assets and liabilities arising from performance incentives that test an entity’s performance over several periods.

The staff analysis considered, but did not recommend, the alternative approaches to recognition and measurement suggested by respondents including:

• Recognising regulatory assets and liabilities when specified conditions related to measurement uncertainty are met
• Constraining the measurement of regulatory assets and liabilities

The staff analysis also considered the costs and benefits of the proposed recognition and measurement requirements and the need for additional guidance.

Staff recommendation

The staff recommended that the final Accounting Standard retains the proposal that an entity is required to estimate the amount of a long-term performance incentive and determine the portion of that estimated amount that relates to the reporting period using a reasonable and supportable basis.

IASB discussion

The majority of the IASB agreed with the staff recommendation for a variety of reasons including that it was consistent with the general principle of recognising incentives in the period in which the goods or services are delivered. Additionally, in the majority of these schemes it is possible to make a reasonable estimate based on information the business has and past regulatory decisions.  

One IASB member would prefer if the new Standard remains aligned to the requirements of IFRS 15 as the new Standard was proposed to build on the requirements of IFRS 15. On this basis, the IASB member would prefer an approach to measurement of long-term incentives that included a constraint such as the variable consideration constraint in IFRS 15.

Another IASB member raised a concern that the proposal to estimate the amount of a long-term incentive on a reasonable and supportable basis was not consistent with the decision taken in relation to benchmark schemes by the IASB in February 2023.

The staff explained that the decision in relation to benchmark schemes, which would allow entities to not recognise income where it was too uncertain, was an exception to the general principle. The proposal for long term incentives is to apply the general principle. It was noted that benchmark schemes will be defined narrowly such that there would be limited circumstances where it could be applied such as where the benchmark was set based on information that is not within the control of the entity and was not known to the entity. This is considered by the staff to be a different scenario to the long-term incentives included within the proposal under discussion.

One IASB member highlighted the need to consider whether disclosure requirements would be needed, in addition to those in IAS 1, to explain the uncertainty around the estimates disclosed.

IASB decision

12 of 14 IASB members voted in favour of the staff recommendation.

Derecognition (Agenda Paper 9B)

The paper set out staff analysis and recommendations on the proposals relating to the derecognition of regulatory assets and liabilities.

Feedback from respondents suggested that guidance on derecognition, which was included within the Basis for Conclusions (BC) in the ED, should be included in the final standard. Additionally, feedback suggested that the threshold for recognition should be applied in subsequent accounting periods and, if not met, regulatory assets and liabilities should be derecognised.

Other suggestions in relation to derecognition included adding guidance for derecognition in cases other than cancellation of a regulatory agreement including where assets or liabilities are settled by a regulator or where these are recovered through the regulatory capital base.

Staff recommendation

The staff recommended that the final Accounting Standard:

• Explains that an entity typically derecognises a regulatory asset or liability as the entity recovers part or all of the regulatory asset or fulfils part or all of the regulatory liability, by adding or deducting amounts to or from future regulated rates charged to customers
• Explains that application of the recognition and measurement requirements at the end of each reporting period mean that an entity does not generally need to explicitly consider when and how regulatory assets and liabilities should be derecognised
• Clarifies that an entity derecognises a regulatory asset or liability if it ceases to meet the more likely than not recognition threshold
• Includes guidance on the derecognition of regulatory assets and liabilities due to their settlement by a regulator or another designated body (and require that an entity recognises the difference between the derecognised regulatory asset or liability and any new asset or liability in profit or loss)
• Specifies that if a regulatory asset or liability is added to, or deducted from, an entity’s regulatory capital base and the regulatory capital base has no direct relationship with the entity’s property, plant and equipment, an entity derecognises the regulatory asset or liability and recognises any associated regulatory income or regulatory expense in profit or loss

The staff also recommended that the final Accounting Standard does not include guidance on securitisation of regulatory assets.

IASB discussion

All of the IASB members agreed with the first recommendation subject to some drafting changes requested for the final Standard.

In relation to the second recommendation, some IASB members highlighted that this clarification only impacts existence and not measurement and this should be clear. One IASB member highlighted that additional disclosure may be required where assets or liabilities are derecognised to explain why this is the case and the impact on financial performance and position.

All IASB members agreed with the third recommendation. One IASB member highlighted a question around whether the difference recognised in profit or loss would be a regulatory income/expense or a finance income/expense.

The majority of IASB members agreed with the fourth recommendation. However, some IASB members expressed concern that the requirements were for a specific fact pattern that would be relatively rare, rather than the application of the general derecognition principles. Other IASB members highlighted that given the outcome of applying the proposed requirements could be counterintuitive the requirements were needed to ensure the expected outcome was reached by preparers.

One IASB member suggested that rather than derecognise, in this situation, it might be possible to amortise the asset over the recovery period. However, the staff clarified that in this example the disconnect between the regulatory capital base and the property, plant and equipment, would mean that this would not be possible.

In relation to the question on discontinuation of regulatory accounting, where staff have not identified guidance that should be included in the Standard, no significant comments were raised by IASB members.

In relation to the question on guidance on securitisation of regulatory assets, where staff have not identified guidance that should be included in the Standard, there was support for the staff proposal with some IASB members commenting that this subject is not in scope of the project. One IASB member also highlighted that in not providing guidance the final Standard should also not refer to only IFRS 9 as the appropriate standard as other standards may be relevant.

IASB decision

All IASB members voted in favour of the first three recommendations and the final question on securitisation as described above.

11 of 14 IASB members voted in favour of the fourth recommendation as described above.