Recoverability of regulatory assets and impairment testing

The Board had previously determined that regulatory assets and regulatory liabilities should be measured at the present value of expected cash flows both on initial recognition and subsequently and therefore a discussion of recoverability and impairment was deemed unnecessary.

However, staff raised a concern about the combined effect on an entity's rates of all the regulator's decisions with respect to the recovery of individual costs.

In other words, the regulator may permit the entity to recover a variety of previously incurred costs without regard to their combined effect. However, when the total effect of those costs on future rates is considered, the entity might conclude that at the rates implied by the inclusion of those costs, its total revenue might still not cover the all the costs because of reduced demand.

The Board decided that:

• an entity should be required to consider the overall effect of regulatory assets on future rates and its ability to generate sufficient revenue to recover them;
• the cash-generating unit in which the regulatory assets are included should be tested for impairment in accordance with IAS 36 if recovery of the net regulatory assets and regulatory liabilities is not reasonably assured. Regulatory assets and liabilities must be tested for impairment as part of a CGU as they do not generate independent cash flows;
• any impairment loss should be allocated to individual regulatory assets based on the period and amount by which estimated future cash flows are affected; and
• in subsequent periods the amount and timing of the estimated cash flows used in determining the amount of the impairment loss should be used to measure the asset.

Presentation of regulatory assets associated with other assets

The Board concluded at its meeting in May that an entity should recognise a regulatory asset for amounts the regulator permits to be included in rates associated with self-constructed assets. Those amounts may relate to indirect overheads and financing costs that would not be recognised as part of property, plant and equipment in accordance with IAS 16. The issue is whether those amounts must be presented separately as regulatory assets or whether they may be included as part of the cost of the PP&E.

Some Board members and staff thought that on cost-benefit grounds it was reasonable to include these regulatory assets within the cost of the PP&E and therefore depreciate them over the same useful lives as the PP&E. Other Board members and staff argued that regulatory assets do not have the same characteristics as PP&E and therefore should be presented separately. Those Board members also questioned whether it was appropriate to depreciate the regulatory assets over the same period as the PP&E where the useful economic lives differed.

Overall, a majority of Board members agreed that an entity should include all the amounts the regulator permits to be included in the cost of self-constructed assets or internally generated intangible assets as part of the related asset. These costs would therefore not be re-measured at the present value of future cash flows but be treated as part of the total cost of the asset under IAS 16 or IAS 38. It was agreed that the basis for conclusions would explain that there is no conceptual basis for this decision; rather it is an exception that has been allowed on cost benefit grounds. For these reasons it would not be appropriate to analogise to this exception in other circumstances. Furthermore, the Standard would remind users of the requirements of IAS 16.57 that the useful economic life of an asset is defined in terms of the asset's expected utility to the entity and that the useful life of an asset may be shorter than its economic life.

Transition

The Board agreed that fully retrospective application would be too onerous and therefore decided that an entity should apply the requirements of the Standard to regulatory assets and liabilities existing from the beginning of the comparative period, that is, there would be an adjustment to opening retained earnings. In respect of the effective date, it was agreed that sufficient lead-time should be granted to allow entities to collate the required information for the comparative period.

First-time adoption

The Board agreed that a consequential amendment to IFRS 1 is required as part of this project. That amendment would permit entities not to restate PP&E to recognise separately amounts that would qualify for recognition as regulatory assets. There would no longer be a need for a definition of rate regulated operations in IFRS 1 or a separate impairment test.