Rate-regulated Activities

Date recorded:

The purpose of this session was to set the scope of the project. The Board had added rate-regulated activities to its active agenda in December 2008. Further the staff informed the Board that at this meeting it will propose scope exemptions, provide illustrative examples for applying the scope and a comparison to the US guidance.



The staff identified two criteria for a rate regulation to be in scope of any future IFRS guidance:

  1. Rate-setting mechanism: rates must be set by an independent regulator; and
  2. Cost-of-service regulation: the rate mechanism must be designed to reimburse the regulated entity for costs incurred for the goods/services plus a specified return (similar to a guarantee).

Board members asked questions about specific designs of rate regulation, but agreed with the scope definition in principle.


Definition of an asset or liability

The staff continued to explain to the Board why it believed that rate regulation can create assets or liabilities. The analysis was mainly based on the definitions of an asset and a liability under the Framework.

Some Board members expressed their support for the analysis, while others were concerned over the possible interaction with other assets (for example, a licence - is the rate regulation part of the valuation of a licence?). The staff responded that they are different, because the licence granted the right to provide goods or services compared to the goods or services themselves, where the regulatory assets/liabilities are derived from. This could lead to a licence being impaired, but the regulatory asset actually increasing in value.

There seemed to be consensus around the table that the definition is met at this point.


Scope exclusions

The staff presented the Board with its thinking on scope exclusions. It proposed to exclude regulations that are not akin to a guarantee to recover incurred costs plus a specified return and situations where the definitions of a financial instrument would be met as this would be covered by IAS 32/39.


Illustrative examples

The Board was presented with some examples on the application of the scope. Some Board members highlighted a potential issue as they believed while the rate regulation set price for goods/services, those would still have to be consumed by customers (that is, they are contingent on events outside the control of the entity). The staff responded if one went down that route, none of the schemes within the scope would meet the definition of an asset/a liability.


Comparison to US GAAP

The Board was informed that while there were minor differences to SFAS 71 due to the interaction of other pronouncements under US GAAP vs. IFRS, the scope was broadly aligned with the US guidance.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.