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FRC does not support the proposed interim standard on rate regulation

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09 Oct 2013

The Financial Reporting Council (FRC) has published its final comment letter on the International Accounting Standard Board’s (IASB’s) Exposure Draft ED2013/5 ‘Regulatory Deferral Accounts’. The FRC, consistent with the European Financial Reporting Advisory Group (EFRAG), has indicated that they do not support the proposed interim standard for rate regulation.

The Exposure Draft (ED) proposes an interim standard that will allow entities currently recognising regulatory assets and regulatory liabilities in accordance with their jurisdiction-specific GAAPs to continue to do so upon the initial adoption of International Financial Reporting Standards (IFRSs).  The ED also provides a number of specific disclosure requirements such as separate line item disclosure in the statement of financial position and movements in regulatory assets and regulatory liabilities as a separate line item in the statement of profit or loss and other comprehensive income. 

In July 2013, the FRC published a draft comment letter on ED/2013/5 and asked for its constituents to comment.  The views expressed by the FRC in their final comment letter are consistent to those in their draft comment letter. 

The FRC provide four main reasons as to why they do not support the proposed interim standard: 

  • It is not principles based;
  • It will not allow the objective of a single set of International Financial Reporting Standards (IFRSs) to be obtainable as “different jurisdictions will be permitted to carry forward previous practices”.  The FRC comment that this will result in there being “two or more versions of IASB sanctioned IFRSs”.  However the FRC do comment that although the interim standard may result in diversity in accounting policies within a particular jurisdiction it should mean that more entities are encouraged to adopt IFRS;
  • By permitting entities to maintain their existing accounting policies for recognition, measurement and impairment and hence introducing the potential for diversity, it will impact upon the confidence users of financial statements have in the IASB for producing high quality accounting standards; and
  • It is likely that the interim standard may be in place for a long time and hence will have a far greater impact than just in facilitating first time adoption of IFRS.  The FRC comment that they feel the interim standard could be applied until the Conceptual Framework project is completed as only then will the IASB be able to perform a comprehensive review of rate regulated regulation and whether regulatory assets and regulatory liabilities should be recognised as assets and liabilities. 

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