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Rate-regulated activities: Interim IFRS

Date recorded:

The project manager gave an overview of the responses that were received in comment letters to the proposed interim IFRS.

She pointed out that there is a slight majority supporting the interim Standard, however there is a significant minority (over 25%) that disagrees with the issue of an interim IFRS. About 20% disagreed that the Standard should only be applicable for first-time adopters.

Scope and transition

The first question the project manager asked the Board is whether they want to proceed with finalising the proposals in the interim ED.

One Board member pointed out that the adoption of IFRS is prevented in some jurisdictions due to the lack of guidance on rate regulation. To issue an interim Standard could improve comparability as it would encourage certain jurisdictions to adopt IFRS.

One Board member inquired which jurisdictions currently have carve-outs pertaining to rate regulation and if these will be eliminated by the interim Standard.

The project manager said that the most problems are in Canada at the moment which is strictly speaking not a carve-out but a mixture of different workarounds. Part of the preparers with rate regulation use US-GAAP since US-GAAP has relevant guidance on rate-regulated activities. Some of the preparers still use Canadian GAAP, which more and more becomes a problem as Canadian GAAP is no longer maintained. And some of the preparers use IFRS with a carve-out which is replaced by US-GAAP requirements. The proposed interim IFRS might encourage those preparers to adopt IFRS.

According to the project manager, other jurisdictions who have serious problems with accounting for rate-regulated activities are India and Denmark, however it is uncertain if the interim Standard will solve their problems.

After taking a vote, 11 Board members supported to proceed with the interim Standard.

The project manager then asked, whether the Board agrees to clarify the criterion in paragraph 7(a) of the interim ED that prevents self-regulation from being captured in the scope but permits some flexibility in the prices established by the rate regulator and to delete the criterion in paragraph 7(b) of the interim ED that requires a qualitative judgement to be made about the cause-and-effect relationship between costs and revenue.

The vice-chairman asked whether the project manager would also be comfortable with deleting the criterion that the price needs to bind the customer. The project manager agreed.

There was a discussion if both a floor and a ceiling need to be present when agreeing that a range would be acceptable as regulation according to the interim IFRS. The majority agreed as otherwise too many schemes would fall under the interim Standard.

One Board member pointed out that schemes are getting more and more flexible and that he therefore disagrees to proceed with the interim Standard. He also raised the question what happens if the government grants a Board the right to regulate prices.

The project manager replied that these cases would be included as there would still be a rate regulation imposed by a government.

After taking a vote, 15 Board members agreed with the proposed amendments to the Exposure Draft.

The project manager asked if the Board agrees that the proposed guidance is optional for those who are eligible to apply them.

14 Board members agreed.

In the last question the project manager asked if the Board agrees that the guidance can only be applied if previous GAAP had allowed the application and the entity had actually applied it.

One Board member asked if it was acceptable if the entity changed its accounting policy on transition to IFRS.

The project manager said that it would be acceptable as long as it was in line with the guidance regarding changes in accounting policies under IAS 8.

One Board member pointed out that entities who have already adopted IFRS cannot apply the interim Standard, however, if they have applied IFRS with a carve-out, they would be eligible as they have not complied with IFRS fully.

On taking a vote on the question, 15 Board members agreed.

Interaction with other IFRSs

The project manager asked the Board if they agree with the staff’s recommendations to add further guidance for:

  • recognition and measurement of regulatory account balances in a business combination;
  • derecognition of regulatory account balances;
  • new regulatory account balances created by changes in the accounting policy when making the transition to IFRS.

She also asked the IASB if they agree with the staff’s recommendation not to add guidance for:

  • impairment;
  • interim financial statements;
  • the interaction with IFRIC12.

One Board member had concerns about paragraph 9 in the paper. This paragraph says that an acquirer who currently recognises regulatory balances and is permitted to continue to recognise them in accordance with the proposals in the interim ED, should recognise any regulatory balances in the acquiree at the date of acquisition. This should apply irrespective of whether the acquiree recognises those balances in its own financial statements.

The Board member said that this could lead to a competitive advantage and suggests as an alternative to apply a mixed model within the group.

Other Board members disagreed with this approach, saying there should only be one accounting policy within one group.

When taking a vote, 13 Board members agreed with the staff proposal.

Presentation and disclosure

The project manager asked the IASB if they agree with the staff recommendation to separate the net movement in regulatory balances between amounts related to profit or loss and amounts related to items included in other comprehensive income and to retain the presentation requirements proposed in paragraphs 18-21 of the interim ED.

The IASB agreed with the proposals.

The project manager then asked if the IASB agrees that the specific reference to materiality as a factor to consider in deciding the level of detail to provide to satisfy the disclosure requirements should be deleted.

The IASB agreed after discussing briefly that there is sufficient guidance on materiality in the Conceptual Framework and in IAS 1.

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