Rate-regulated activities

Date recorded:

The project manager opened the session by introducing the set of agenda papers for the discussions about the features of rate regulation.

Agenda paper 9A gives an overview of the discussions to date and the tentative decisions reached by the IASB. The project manager points out that the discussions should be seen as an iterative process to identify alternative views and approaches to the different aspects of rate regulation. The upcoming discussion paper (“DP”) will include those different approaches as well as proposals how the special economic conditions resulting from rate regulation will be faithfully represented in IFRS financial statements. This will be done by looking at the rights and obligations created by rate-regulated activities either from an asset/liability perspective or from a performance perspective.

The project manager asked the Board whether they wished to change of any the proposed contents of the DP and if they wanted to revisit any tentative decisions made so far.

One Board member supported the thought in the agenda paper that it should be explored whether regulatory assets for one party automatically created regulatory liabilities for the counterparty. He pointed out, however, that the result of the examination should be that symmetry was not required.

Another Board member welcomed the fact that the true-up mechanism and the rights and obligations were considered separately, but wondered whether rights and obligations could at all exist without a true-up mechanism, as it is the mechanism that creates rights and obligations.

Another Board member asked for the timeline of the project in order to answer the questions of the project manager. The project manager said that they wanted to issue the DP around mid-2014. The Board member then warned the project manager that they should not make the same mistake as they did with the leasing project where they started out with simple questions and then got lost in detail.

Another Board member thought that the project was in a better place now than it had been in 2009 when the IASB had looked only into cost-recovery schemes. When asked by the Chairman how this would be different from today, the Board member replied that the scope was much wider and also open to incentive-based schemes which might, he admitted, not lead to assets. However, even if responses to the DP should favour cost-recovery schemes only, other schemes would have been discussed in the process. The Director of Implementation Activities added that many schemes were a mixture of cost-based and incentive-based schemes whereas the project manager said that there also schemes that only take certain types of cost into consideration.

Another Board member asked if the change from “allowable cost” to “allowable revenue” was widening the scope. The project manager replied that the scope was not necessarily widened by this and that besides revenue there might be other bases to calculate the rate regulation items, e.g. return on investment, operational expenses, capital expenditure and even mixtures of those.


The project manager went on to agenda papers 9B and 9C that contain the latest description of the distinguishing features of rate regulation and the calculation method for the allowable revenue. She gave an overview of the contents in the paper and asked the Board whether they had any questions.

One Board member asked whether retroactive billing was still considered a feature of rate regulation. The project manager replied that it was still an important point and that she thought this was subsumed in paper 9B.

The Vice-Chairman said that fluctuations in demand should be taken into account. The project manager agreed that it needed to be reflected. He then stated that a discussion paper could only work when on accepted the notion that the amount of any under-invoicing could only be recovered through future sales.

One Board member said that his understanding of the discussion paper was that it only dealt with the parts of rate regulation that lead to a change in tariffs instead of all rate-regulated activities.

Another Board member asked what kinds of rights were meant by the rights and obligations in the paper. He asked whether those were enforceable rights. The project manager replied that one example was a sort of guarantee the regulator would issue to the supplier to ensure that the supplier would make a certain amount of earnings. Such a guarantee was enforceable by law. The Board member asked what would happen if the volume was not reached to make enough earnings. The Chairman replied that it would be deferred on and on. The Board member then suggested explaining the mechanism and the enforceability in the DP.

One Board member suggested that it should be clear from the DP that the IASB had a strategy, being to look at the strongest case characteristics first and make an assessment of those. After this, the DP should ask whether the characteristics were necessary for other types of rate regulation in the scope. She supported the view that there needed to be an agreement what a right was.

The chairman stated that it would be problematic to find an asset because the supplier would not have performed at that point. He said that he did not understand how the “catch-up asset” was different from the income guarantee the regulator issued at inception of the rate regulation. The Board discussed several details of this issue. In the end, the project manager said that this would be a major point in the DP.

One Board member explained that it was his understanding that the asset was carried forward each year, but if it was clear that the asset could not be recovered, it should be impaired. The project manager added that even in indefinite agreements, the regulatory period was usually broken down into shorter periods.


The project manager then introduced agenda paper 9D, dealing with a revenue recognition approach to rate regulation. She summarised the paper for the Board and asked whether there were any questions.

One Board member said that the approach had some flaws. On one hand, it was difficult to describe the relationship between the supplier and the government as a contract. On the other hand, it would be very complicated to allocate the “revenue” to the components of the contract.

Another Board member said that it was an interesting approach to explore but that the IASB should make clear in the DP that it had serious doubts about this approach. There should be no in-depth examination of the approach in the DP.

Another Board member said that he realised that the discussion in this session were all about the question what to account for. He found this to be similar to the revenue recognition problem. Therefore, in his opinion the approach should be explored.

This was supported by another Board member who said that the only problem with the approach was that there were too many parties (i.e. supplier, customer and regulator). He said that this problem would be solved if the regulator was seen as a catalyst. The amount of revenue could then be adjusted for the catalyst. This would be much simpler than creating assets and liabilities. He therefore strongly supported this approach.

The Vice-Chairman said that the discussion in the agenda paper to not recognise revenue for construction work did not fit the revenue model. The project manager replied that the main problem in this discussion was to identify what the performance (and therefore the performance obligation) was.

The inclusion of this approach in the DP was supported by another Board member.

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