The Board discussed an illustrative example presented by the staff to address the timing of revenue and cost recognition for rate regulated entities. There were no decisions made. The staff will continue to develop the proposal based on the comments raised by the Board.

[Note: To facilitate the understanding of this summary, please see the illustrative example discussed by the Board, available on the IASB's website.]

The Project manager introduced Agenda Paper 9: Rate-regulated Activities — Revenue requirement— Illustrative example. She explained the tripartite relationship in a rate regulated environment and referred to paragraph 11 of the agenda paper. She said that that in defined rate regulation, the regulatory agreement between the entity and the rate regulator obliged the entity to carry out specified activities in exchange for the right to receive a determinable amount of consideration. The revenue requirement reflected the determinable amount of consideration to which the entity was entitled. The amount of consideration included both a right to recover specified costs plus a right to make a return on the entity’s investments in the assets used to provide the regulated goods or services. The regulatory agreement would include a formula for the calculation of the revenue requirement.  She said that the role of the regulator was not just to protect the customer, but also to provide stability and quality, there were also wider political issues, including identifying what the customers could afford, then the regulator would  establish activities that an entity would need to do to achieve those objectives. In some cases there could be a mismatch between the timing of billing to the customer and the activities performed by the entity.

She said that in May the Board decided to work on an accounting model to reflect the relationship between the regulator and the entity.

She referred to the numerical example included in appendix 1 to be discussed by the Board. The staff did not propose any specific accounting treatment; rather, the staff suggested options for different accounting treatment (adjusting revenue or costs, adjusting both or no adjustments at all) to reflect the mismatch. She also said that the staff discussed the example with the Accounting Standards Advisory Forum “ASAF”; she noted mixed views regarding the alternative solutions although there was more support for deferring revenue recognition rather than advancing revenue recognition. She then opened the discussion to the Board.

There were mixed views expressed by the Board. Some Board members indicated that the main decision should be whether it was necessary or not to make adjustments. Some Board members expressed preferences for adjusting revenue because it would be more reasonable to explain deferral of revenue. There was no agreement for deferring recognition of cost.

In terms of presentation there was more support for presenting the adjustment separately from revenue or cost because it would be necessary to show that this adjustment reflects a situation derived from a regulatory relationship. There was also general support for the additional line item being presented on the face of the income statement with supplemental disclosure in the notes.

There were a few Board members who disagreed with the concept of adjusting revenue. One Board member said that a regulated entity should not have any special treatment compared to other entities. He said that banks, for example, were regulated and their equity would be different if there were no regulations; however, there were no accounting requirements for banks to adjust for the effects of their regulation. Another Board member responded that regulated entities were different because they made decisions about investments, billing etc. based on regulations and also indicated that the regulatory framework forced entities to transfer revenue from one period to another.

Some Board members pointed out that it would be necessary to have an appropriate framework to evaluate which accounting treatment would be appropriate. For example applying the Conceptual Framework to determine whether there were additional assets or liabilities created. One Board member indicated that it would also be important to determine who the primary users of the regulated entities financial statements were. He said that since those companies are capital intensive, it would be reasonably to believe that loan providers and equity holders were the main primary users.

In relation to the specific issue of revenue, one Board member indicated that it would be important to determine first whether this relationship had any bearing on the financial performance of the entity. He asked whether the regulatory framework forced an entity to transfer goods or services which went beyond the requirements of IFRS 15 Revenue from Contracts with Customers. Another Board member pointed out that it would be necessary to explore for each obligation that the entity was being required to perform whether the obligation was met over time or at a point in time. There were also concerns with using the concept of performance obligation which was very specific to IFRS 15 while the regulatory environment required entities to assume obligations which were not defined in IFRS 15.

The Chairman concluded that there was support for adjusting revenue and the staff would work on that assumption. The Project manager indicated that that they would also work with the recommendation to present the adjustment as a separate line item, and in the articulation of the concepts to avoid using concepts that were specific to IFRS 15.