Cover note (Agenda Paper 9)

At this meeting, the IASB redeliberated the proposals in the Exposure Draft Regulatory Assets and Regulatory Liabilities (ED). The staff prepared three papers on two topics:

• Credit and other risks:
  • Agenda Paper 9A on credit and other risks affecting the estimates of future cash flows arising from regulatory assets and regulatory liabilities
• Responses to a survey on the direct (no direct) relationship concept:
  • Agenda Paper 9B on the analysis of the responses and recommendations on the next steps
  • Agenda Paper 9C on the survey and the background information document, which is for information only

Measurement—credit and other risks (Agenda Paper 9A)

This paper set out the staff analysis and recommendations on the proposals in the Exposure Draft Regulatory Assets and Regulatory Liabilities (ED) on credit and other risks affecting the estimates of future cash flows arising from a regulatory asset or a regulatory liability.

Staff recommendation

The staff recommended that:

• The final Accounting Standard retains the proposal in paragraphs 37 and 38 of the ED to require that in estimating future cash flows arising from a regulatory asset or regulatory liability, an entity:
  • Reflects the uncertainty about the amount or timing of the future cash flows
  • Assesses whether the entity bears the uncertainty in the future cash flows or whether customers bear the uncertainty
• When an entity bears credit risk, the final Accounting Standard specifies that the entity:
  • Estimates the uncollectible amounts considering the net cash flows that will arise from the recovery of regulatory assets and the fulfilment of regulatory liabilities
  • Allocates the estimate of uncollectible amounts to regulatory assets only
• The final Accounting Standard retains the proposal in paragraph 43 of the ED to require that an entity’s estimates of future cash flows arising from a regulatory liability should not reflect the entity’s own non-performance risk

IASB discussion

Some IASB members commented on the term “net” cash flows used in the second recommendation that it should mean net cash flows within the same agreement. Some IASB members agreed that the ECL model in IFRS 9 is not applicable for rate-regulated assets but one could apply the principle as reference.

One IASB member agreed with the recommendation not to provide additional guidance on demand risk but requested for references to be made to guidance in the finalised standards.

IASB decisions

All 13 IASB members present voted in favour of the staff recommendations.

The direct (no direct) relationship concept—Report on findings from the survey (Agenda Paper 9B)

This paper set out:

• The staff’s analysis of the responses to a survey on the direct (no direct) relationship concept
• The staff’s recommendations on next steps

Staff recommendation

The staff recommended that the final Accounting Standard:

• Includes the direct (no direct) relationship concept to help an entity to identify differences in timing arising from the regulatory compensation the entity receives on its regulatory capital base
• Specifies that if an entity is able to trace differences between the regulatory capital base and the property, plant and equipment at an asset level, this is a strong indicator that there is a direct relationship
• Specifies that in the case of service concession arrangements, an entity determines whether there is a direct (no direct) relationship between the regulatory capital base and the intangible asset that arises from the service concession arrangement
• Includes examples to illustrate how an entity determines the direct (no direct) relationship using specific fact patterns

IASB discussion

IASB members commended the staff on the survey and said that it provided helpful guidance to respondents in considering a new concept that was not included in the ED. IASB members also acknowledged the extensive outreach and follow-up carried out by the staff with various stakeholders in different jurisdiction so that an all-encompassing view can be considered in drafting the Standard.

A few IASB members acknowledged that there will be circumstances in which stakeholders will have to exercise judgement to determine if they have a direct (no direct) relationship as the Standard will not capture all refinements because it is principle-based.

Some IASB members also commented that it would be helpful to provide illustrative example in the Standard to help stakeholders apply judgement when they have difficulty determining whether it has a direct (no direct) relationship.

IASB decisions

All 13 of the IASB members present voted in favour of the staff recommendation.

The direct (no direct) relationship concept—Survey and background information document (Agenda Paper 9C)

This paper included the survey used to gather input on the direct (no direct) relationship concept and the background information document accompanying the survey.

The survey and the background information document was provided for information only and was not discussed during the meeting.