Cover note (Agenda Paper 9)

In this session, the IASB continued to redeliberate the proposals in the exposure draft Regulatory Assets and Regulatory Liabilities (ED).

This paper was not discussed as it was an overview paper.

Discounting estimated future cash flows (Agenda Paper 9A)

This paper set out the staff analysis and recommendations on the proposals in the ED that concern discounting of estimated future cash flows arising from a regulatory asset or regulatory liability.

Staff recommendation

The staff recommended that the final standard:

• retains the proposal to discount estimates of future cash flows; (Recommendation 1)
• retains the proposal to use the regulatory interest rate for a regulatory asset or regulatory liability as the discount rate for that regulatory asset or regulatory liability; (Recommendation 2)
• retains the proposed definition of regulatory interest rate; (Recommendation 2)
• permits an entity not to discount the estimates of future cash flows that arise from a regulatory asset or regulatory liability, if the entity expects that the period between the recognition of that regulatory asset or regulatory liability and its recovery or fulfilment will be 12 months or less;  (Recommendation 3)
• requires an entity that has elected to apply that exemption from discounting to disclose this fact and the amount of regulatory assets and regulatory liabilities at the end of the reporting period to which the entity has applied the exemption; (Recommendation 3)
• not provide an exemption from discounting for a regulatory asset or regulatory liability for which the regulatory agreement does not specify a recovery or fulfilment timeframe; and (Recommendation 4)
• retains the proposal in paragraph 54 of the ED to compute a single discount rate when a regulatory agreement specifies at initial recognition different regulatory interest rates over the life of a regulatory asset or regulatory liability. The final Accounting Standard would: (Recommendation 5)
  • not provide further guidance on the computation of the single discount rate; (Recommendation 5)
  • permit an entity not to discount the estimates of future cash flows that arise from a regulatory asset or regulatory liability, if the entity expects that the period between recognition of that regulatory asset or regulatory liability and when regulatory interest starts to accrue will be 12 months or less (this exemption would cease to apply once regulatory interest starts to accrue); (Recommendation 6)
  • require an entity that has elected to apply that exemption from discounting to disclose this fact and the amount of regulatory assets and regulatory liabilities at the end of the reporting period to which the entity has applied the exemption; and (Recommendation 6)
  • clarifies that the proposal does not apply to a regulatory asset or regulatory liability that attracts regulatory interest rates that depend on an interest rate benchmark and not provide further guidance on the measurement of such a regulatory asset or regulatory liability. (Recommendation 7)

IASB discussion

Several IASB members agreed with Recommendations 1 and 2 for the following reasons:

• The recommendations are in line with the objective of the measurement and suggested that discounted estimated future cash flows would provide useful information to users.
• The recommendations were easy to apply and strike the right balance between cost and benefits.

However, one IASB member noticed some confusion in the definition of regulatory interest rate around the word “time-lag”. Furthermore, the paper mentioned that there is an “insufficient rate” if the rate does not compensate for the time value of money and uncertainty in amount and timing of cash flows. The IASB member suggested that consistency between the definition and when a rate is insufficient would help resolve the confusion. Another IASB member concurred on improving the language for the definition.

The staff responded to say that the uncertainty is not limited and the IASB member suggested that the definition should say “time-lag” including the time value of money and uncertainty but it should not be limited to those.

Several IASB members agreed with Recommendation 3. Some IASB members expressed that this proposal provides a practical solution for the challenge between auditors and management. Some IASB members had comments and concerns as follows:

• One IASB member suggested that together with the facts and amounts, preparers should also disclose the regulatory interest rate so that users are able to assess the effects of discounting. Another IASB member disagreed with this suggestion on the grounds that the amounts are immaterial and therefore further disclosure would not be necessary. However, that IASB member did not see the benefit of the suggestion in regions with hyperinflationary and high interest rates.
• The cost saving is not immediately evident from this exemption as a calculation would still be required.
• One IASB member questioned how the relief proposed would align with IFRS 15 and IAS 37 where there is a more general requirement which is not attached to a 12-month period but is actually performed on a principle basis where effects that are material must be discounted. The IASB member questioned whether simplification or a reflection on economic circumstances drove the proposal. If the latter, there was a preference to align with IAS 37. The staff confirmed that this recommendation is around simplification. Furthermore, IAS 37 is a “catch all” standard. Therefore, the nature of the liabilities is broader than with the regulatory assets and liabilities. Some IASB members mentioned that IFRS 15 principles and concepts would be more useful than IAS 37 in this context.

Several IASB members agreed with Recommendation 4. One IASB member mentioned that most regulatory agreements specify a timeframe and, if not, then discounting becomes key. Furthermore, most regulatory agreements include the regulatory interest rate which eliminates the need to perform complex calculations.

Another IASB member questioned how the discounting period would be determined in the absence of a timeframe being included in the regulatory agreement and whether guidance would be needed in this regard such as an estimated period based on reasonable and supportable information available at the end of the reporting period. Some IASB members mentioned that adding more to the proposal should be avoided.

One IASB member questioned whether further guidance and explanations need to be provided for certain jurisdictions with developing regulatory frameworks. The staff responded by saying that this is a matter of judgement, and facts and circumstances. There could be application guidance or an example but it would be constrained by a fact pattern and the help offered should be proportionate to the guidance already available. It was suggested that the discussion on why further examples were not added should be included in the basis for conclusions to the standard (BC).

Several IASB members agreed with Recommendation 5 on the basis that:

• It is consistent with the recognition of regulatory income on an accrual rather than a regulatory basis.
• It provides a simplification as it avoids multiple rates and calculations and is akin to the effective interest rate in IFRS 9.

Another IASB member noted mixed views on this recommendation and requested clarification on whether the single discount rate would be updated if changes were present in the regulatory interest rates. The staff confirmed this to be correct.

Several IASB members agreed with Recommendation 6 as this is seen as a simplification. Furthermore, many IASB members acknowledged Example 5 as being very beneficial and suggested to include Example 5, or an additional example in the BC to explain this recommendation would be useful.

One IASB member understood the simplification of Recommendation 6 for within a 12-month period but questioned the course of action if the rate after the 12 months was insufficient. Several IASB members agreed that this was a valid point and should be discussed at a later stage.

Several IASB members agreed with Recommendation 7 and agreed that the interest benchmark rate is not uneven and that it just changes. Therefore, if there is a time-lag between when the benchmark interest rate becomes applicable, para 54 applies.

IASB decision

All IASB members voted in favour of the staff recommendation.

Reduced disclosures for rate-regulated entities (Agenda Paper 9B)

This paper discussed whether to develop reduced disclosure requirements for entities applying the forthcoming IFRS Regulatory Assets and Regulatory Liabilities (RRA IFRS) that could be included in the forthcoming IFRS 19 once the RRA IFRS is issued.

Staff recommendation

The staff recommended:

• not developing reduced disclosures for the RRA IFRS at this time; and (Recommendation 1)
• including a question seeking views on the decision not to develop reduced disclosures in the ED that will amend the forthcoming IFRS 19. (Recommendation 2)

IASB discussion

Some IASB members disagreed with the staff recommendations for the following reasons:

• The analogy of IFRS 17 is not suitable from a user’s perspective as this is more related to a wholesale chain and the better analogy here would be around IFRS 15 as this is still a very important and successful standard. One IASB member considered IFRS 15 and rate-regulated activities as a package and questioned whether further disclosures, beyond what the staff have already proposed to be removed, should be discarded.
• Several IASB members agreed that the work around regulatory assets and liabilities will bring about meaningful change for those in scope. However, this is different to IFRS 17 for both investors and companies as the approach taken when forming IFRS 17 was an exception which ultimately becomes a precedent and disclosures are inherent which would not be the same for regulatory assets and liabilities. Thus, the disagreement is more around the approach and cost versus benefits rather than the value added from the disclosures.

Most IASB members supported the staff recommendation for the following reasons:

• There was agreement that there would still be a considerable amount of work that would go into group reporting and so preparation at the statutory level would be needed anyway. However, some investors did not see the value added at this level and therefore asking the question in the catch-up exposure draft would be useful.
• This idea was welcomed but it was suggested that the ED should include the appendix and should be a proposal for reduced disclosures rather than no reduced disclosures as better evidence would be gathered from user’s feedback. The staff responded that the ED that amends the forthcoming IFRS 19 would include an appendix, although not the same as the one included in this paper, and would give an indication of what full disclosures and principles would look like. It could highlight the objectives of the paragraphs.
• Some IASB members agreed that the approach of using IFRS 17 as an analogy for rate-regulated activities was appropriate. However, one IASB member mentioned that the difference is the definition of “public accountability”. However, it would be preferred to see how the proposal would work as there is a reduction in the application guidance and disclosure objectives which provides cost relief but ultimately the disclosure remains. Thus, a few IASB members could be swayed either way but ultimately agreed with the staff recommendation.
• Users of group financial statements are different from those of a subsidiary without public accountability and, while there was agreement, only a small number of entities would benefit from this as the world of monopolies is not large.

One IASB member wanted clarification on two areas. Firstly, the definition of “public accountability” has not been strictly implemented by each jurisdiction and there is uncertainty on what this means for this industry. Secondly, there is a difference in the entities that are adopting the standard, considering the history of this standard including IFRS 14, as the degree of change varies depending on where the entity is located which analogises with IFRS 17. The staff responded that the feedback on these areas is limited and the suggestion from a particular member’s jurisdiction mentioned that reduced disclosures would be prohibited due to the  views that they are publicly accountable. The staff agreed that changes would result based on the jurisdiction on where entities are coming from.

Some IASB members mentioned that there could either be a posting of the full scope and then a revisit of this recommendation at a later stage or there could be a reduced version and later identifying if this then needs to be updated to bring in more. The staff mentioned that there would be a timing issue given that there would be a review after the standard is implemented. Therefore, a rolling review might be sensible.

IASB decision

The vote was taken on the staff recommendation as drafted to move forward efficiently, but there was acknowledgement that the concerns raised in respect of the recommendation will have to be addressed at some point.

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