Rate-regulated Activities

Date recorded:

Recognition and measurement

The Staff explained that the essential approach being adopted by the staff when drafting the Exposure Draft is that an entity subject to rate regulation should apply IFRS to its assets and liabilities first and, as a second step, determine whether the specific effects of rate regulation give rise to assets and liabilities not otherwise recognised. If such assets and liabilities are identified, these would be recognised in accordance with the proposed IFRS.


What kind of asset?

The staff explained that the proposed unit of account is the aggregate pool of customers of the rate-regulated activity, not individual customers.

In addition, the asset created by the effects of rate regulation is neither tangible nor financial; by elimination the staff concluded that it is an intangible asset. However, the asset involved has some but not all the attributes of an intangible asset, which means that IAS 38 cannot be used to recognise and measure these items. In reaching this conclusion, the Board agreed that assets arising from rate regulation meet the requirements of IAS 38 paragraph 9-17 in that they:

  • Arise from a contractual or other legal right. (IAS 38.12(b)
  • Are controlled by the entity-the entity has been granted the right by the rate regulator to increase future billings to the aggregate customer base (IAS 38.13); and
  • Are increased future billings that will result in future economic benefits in the form of increased cash receipts from customers (IAS 38.17)

The Board noted that while they can be identified separately, the effects of rate regulation are not 'separable' from the related activities, which is why the emphasis is on identifying the effects of rate regulation.

With these clarifications, the Board agreed that:

  • To the extent possible the requirements of the proposed IFRS would be consistent with the requirements of other standards addressing similar assets and liabilities.
  • Regulatory assets meet the definition of intangible assets in IAS 38.
  • IAS 37 provides guidance on the accounting for liabilities for which no specific standard exists. Consequently, once the standard resulting from this project is issued, regulatory liabilities will be within its scope rather than IAS 37.


What to recognise?

As a general principle, the Board agreed that an asset arising from the effects of rate regulation would reflect what the rate regulator permitted (sometimes called 'allowable costs'). This is not the measurement required by IAS 38, and this was the source of considerable concern to several Board members and much discussion among the Board generally. Board members noted that evidence that could support the recovery of costs includes:

  • statutes or regulations that specifically provide for the recovery of the cost in rates and cannot be overturned by future regulatory decisions;
  • rate orders from the regulator specifically authorising recovery of the cost in rates;
  • previous rate orders from the regulator allowing recovery for substantially similar costs (precedents) for a specific entity or other entities in the same jurisdiction;
  • written approval from the regulator (although not a formal rate order) approving future recovery in rates;
  • uniform regulatory accounting guidance providing for the accounting treatment of various costs that is typically followed by the regulator in setting rates;
  • written approval from the regulatory staff of the jurisdiction suggesting they will support rate recovery of the cost (but is not legally binding on the regulatory body that sets rates); and
  • analysis of recoverability from internal or external legal counsel.

This evidence serves two functions: to determine whether there is an asset to be recognised and, if so, what costs can be included in the initial measure of that asset. With this clarification, the Board agreed that a discussion of the evidence the entity considers in assessing whether costs will be allowed by the regulator be included as application guidance in the standard.

The Board considered a related issue: whether return on equity is an allowable cost. Treating return on equity as an allowable cost was inconsistent with the Board's conclusions in IAS 23R. Board members were uncomfortable with the staff rationale. They agreed that if the rate regulator permitted some measure of a return on equity to be layered on the allowable costs, then it was part of the measure: however, how that principle was articulated was the issue.

A Board member suggested that the correct rationale was that the 'cost of equity' represents a discount factor because the costs are incurred in one period while they will be recovered over a number of future periods. The Board seemed content to have this as the explanation.



The Board agreed that that assets arising from the effects of rate regulation should be measured, both on initial recognition and subsequently, on the basis of the probability-weighted average of all possible outcomes. This is consistent with the measure being developed in the amendments to IAS 37, which should be issued by the time this IFRS is finalised. There was more discussion of the appropriate discount rate to use in the measure: whether it should be the risk-free rate or the rate that the rate regulator allows (or would allow). The discussion was difficult to follow, and although the decision on the use of probability-weighted cash flows was approved, there was no consensus on the appropriate discount rate.


Presentation issues

The Board agreed that assets and liabilities arising from the effects of rate regulation should not be offset in the statement of financial position.

The Board agreed that current and non-current assets and liabilities be presented separately in the statement of financial position.

The Board debated a staff recommendation that the effect of rate regulation should be presented as a single line in the statement of comprehensive income, but did not approve the recommendation. Nor did they reach agreement on how it should be presented and the staff will return at a later date with alternative proposals.


Scope-additional considerations

The Board agreed to include illustrative examples of the type of rate regulated activities that are in the scope of the proposed IFRS. The examples wiuld be included in the ED to help constituents understand the Board's proposals, but may be removed to Education Guidance when the IFRS is finalised.

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