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 three papers on recognition and one paper on total allowed compensation.

Recognition—Overview (Agenda Paper 9A)

This paper set out the topics that the staff recommend the IASB redeliberates within the recognition workstream.

A feedback summary provided in the paper considered comments received from respondents to the questions in the recognition section of the ‘invitation to comment’ and a question in the measurement section of the ‘Invitation to comment’ that had an interaction with the proposals on recognition.

After giving an overview of the comments received, the paper set out a table containing the topics relating to the recognition proposals that the staff propose to discuss with the IASB.

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 proposed recognition requirements.

IASB discussion

No significant comments were made by IASB members on this paper.

The recognition threshold (Agenda Paper 9B)

This paper set out the staff analysis and recommendations on the proposed threshold for the recognition of regulatory assets and regulatory liabilities.

Staff recommendation

The staff recommended that the final Accounting Standard:

• Retains the proposal that an entity should recognise a regulatory asset or a regulatory liability that is subject to existence uncertainty if it is more likely than not that the asset or liability exists (Recommendation 1)
• Retains the proposal not to set a recognition threshold based on the probability of a flow of economic benefits (Recommendation 2)
• Specifies that an entity should recognise all regulatory assets and all regulatory liabilities that exist regardless of the level of measurement uncertainty, except for regulatory assets and regulatory liabilities:
  • Whose measurement depends on benchmarks not known at year end
  • Arising from long-term performance incentives (this topic will be discussed at a future meeting) (Recommendation 3)
• Retains the proposed symmetric recognition threshold for regulatory assets and regulatory liabilities (Recommendation 4)
• Specifies that regulatory assets or regulatory liabilities whose measurement depends on benchmarks not known at year end should be recognised only when any uncertainty associated with their measurement is resolved (Recommendation 5)

IASB discussion

Recommendations 1-3

Some IASB members raised a concern that the exceptions identified for benchmarks not known and long-term performance incentives may not be the only examples of exceptions needed due to significant measurement uncertainty. It was suggested that a principles-based approach to exceptions may be more appropriate for future-proofing the standard.

Many IASB members expressed support for the threshold for recognition being ‘more likely than not’ given that a higher threshold may result in useful information being lost. The staff clarified that in developing the standard they had taken the approach of requiring recognition where possible and including disclosure around uncertainty. Thus, in relation to the exceptions, the recognition principle was still being explored and the proposal was not for there to be a general exception to recognition of regulatory assets and liabilities in these two scenarios.

Other IASB members commented that they commended the staff for grounding the proposals in the principles of IFRS 15 and the Conceptual Framework.

All IASB members voted in favour of the proposals.

Recommendation 4

No significant comments were made by the IASB on this recommendation. All IASB members voted in favour of the proposal

Recommendation 5

Some IASB members raised concerns about whether it was appropriate to allow non-recognition where there is ‘any’ uncertainty in the benchmark as those members would allow for an element of uncertainty in the benchmark if there were, for example, a provisional benchmark that could be used.

In response, an IASB member highlighted the requirements around royalties in IFRS 15 where it would be appropriate to recognise revenue based on provisional sales data and then true up at a later date.

The IASB and the staff discussed and concluded that the principle to be determined was whether it was appropriate to allow non-recognition where the benchmark is not known and that this should be clarified in the drafting of the Standard.

One IASB member raised a question in relation to timing of the resolution of uncertainty in the benchmark. They asked for clarification on whether a benchmark that was finalised after the end of the reporting period, but before the issuance of the financial statements, would result in recognition of the regulatory asset or liability at the period end.

The IASB and the staff discussed and concluded that the principle was that the additional information obtained reflected an adjusting post-balance sheet event and so would result in recognition at the period end. This is on the basis that the measurement uncertainty that led to the exception had been resolved prior to the issuance of the financial statements. It was agreed that this would be clarified in the drafting of the Standard.

All IASB members voted in favour of the proposal.

Enforceability and recognition (Agenda Paper 9C)

This paper set out staff analysis and recommendations on the interaction between the assessment of enforceability and the recognition of regulatory assets and regulatory liabilities.

Staff recommendation

The staff recommended:

• Enhancing the proposed requirements on enforceability in the final Accounting Standard (Recommendation 1)
• Retaining the proposed single assessment of the existence of enforceable present rights and enforceable present obligations at the level of the individual regulatory asset or regulatory liability in the final Accounting Standard (Recommendation 2)
• Clarifying in the final Accounting Standard that rights and obligations do not need to be certain for an entity to be able to conclude they would be enforceable (Recommendation 3)
• Incorporating the principles underlying an entity’s right to payment for performance completed to date in paragraph 35(c) of IFRS 15 into the requirements on enforceability in the final Accounting Standard. These principles would be used in establishing the requirements for regulatory returns on an asset not yet available for use and long-term performance incentives (Recommendation 4)

IASB discussion

Recommendation 1

Some IASB members raised concerns that the proposed enhancements could be interpreted as expanding the current view of enforceability of rights or creating differences to other standards such as IFRS 15 or IFRS 17 which also have this concept.

In particular, the proposal to clarify that “enforceability assessments are made at a point in time” (paragraph 34 (c) of the agenda paper) was highlighted as a concern given that it could imply that the other assessments required, for example the assessment of existence, would not be required at the end of each reporting period. Additionally, it was noted that this statement is not included in other Standards which may have unintended consequences.

Another proposal that was highlighted as an area of concern was the clarification that “enforceability refers to the ability of the parties to a regulatory agreement to enforce the rights and obligations arising from the regulatory agreement” (paragraph 34(a) of the agenda paper). Some IASB members stated that this proposal was circular and so did not need to be included.

One IASB member commented that they supported the proposals but that they did not consider enforceability to be high risk given that commercial enterprises do not ordinarily enter into an agreement that is not considered to be enforceable.

Some IASB members, including the Chair, noted that there was a risk that the proposals could lead to unintended consequences given the crossover in terminology with other Standards. It was agreed that this could be resolved at the drafting stage.

The IASB voted on four questions which were not laid out in the staff paper but were determined in the meeting:

• Does the IASB agree to enhancing the proposed requirements on enforceability?—All IASB members voted in favour of the proposal
• Does the IASB agree with the proposals in paragraph 34(b), (d) and (e) of Agenda Paper 9C?—All IASB members voted in favour of the proposal
• Does the IASB agree with the proposals in paragraph 34(a) of Agenda Paper 9C?—9 of the 12 IASB members voted in favour of the proposal
• Does the IASB agree with the proposals in paragraph 34 (c) of Agenda Paper 9C?—5 of the 12 IASB members voted in favour of the proposal

Recommendations 2-3

The IASB members who contributed to the discussion supported the proposals. One IASB member observed that the enforceability assessment should not be impacted by the level of uncertainty in the existence assessment, assuming the threshold of ‘more likely than not’ is met.

All IASB members voted in favour of the proposal

Recommendation 4

One IASB member identified that the requirement to apply IFRS 15:35(c) type considerations to long-term performance incentives was an additional requirement that was not included within the ED. It was clarified that this was in line with feedback received on this matter.

IASB members and the staff discussed that the IASB has agreed to expand the concept of goods and services, following the ED, to include the service of construction of an asset. As such, it is appropriate to include an additional principle for these assets under construction to ensure that there is an enforceable right to regulatory returns during the construction period and not only once construction is complete.

11 of the 12 IASB members voted in favour of the proposal.

Total allowed compensation–performance incentives (Agenda Paper 9D)

This paper set out staff analysis and recommendations on the proposals for accounting for performance incentives, except those that test entities’ performances across multiple periods (long-term performance incentives). The staff will analyse feedback received on the recognition and measurement of long-term performance incentives and make recommendations at a future meeting.

Staff recommendation

The staff recommended that the final Accounting Standard retains the proposals in paragraphs B16–B18 of the ED that amounts relating to a performance incentive, including those incentives that test only an entity’s performance of construction work, form part of or reduce the total allowed compensation for goods or services supplied in the period in which the entity’s performance gives rise to the incentive.

IASB discussion

No significant comments were made by the IASB on this paper. All IASB members voted in favour of the proposal.