Rate-regulated activities

Date recorded:

Rate-regulated Activities – Agenda paper 9

This was an education session.

The Board continued to discuss the proposed model for rate-regulated activities. The Staff presented the following papers in this meeting:

  • Developing the model – control and matching: AP 9A
  • Developing the model – recognition and uncertainty: AP 9B

Developing the model – control and matching - Agenda paper 9A


This paper summarises and refines the description of defined rate regulation. As requested by some Board members in the June 2017 meeting, the Staff also provided a deeper analysis on how a regulatory asset satisfies the control aspect of the asset definition, and clarify that the model is not merely trying to achieve ‘matching’ of regulatory income and expenses.

Staff analysis


The revised Conceptual Framework (CF) defines an asset as a present economic resource controlled by the entity as a result of past events. The CF also states that for an entity to control an economic resource, the entity must have the right to deploy that resource in its activities and the economic benefits from that resource must flow to the entity rather than to another party.

In terms of the rate regulation model, the economic resource the model seeks to account for is the right to exchange economic resources with customers on favourable terms as a result of past events (see the examples in AP 9B of the June 2017 Board meeting). The regulatory agreement entitles the entity to use that ‘right to exchange on favourable terms’ in its business. As the favourable rate is specific to the entity, the economic benefits flowing from the favourable rate will flow to the entity and not to another party.

The CF states further that an entity need not be certain that economic benefits will flow from the right in all circumstances in order for it to control the right. In other words, it is not necessary that the entity controls whether customers will buy the regulated goods or services in the future. The degree of certainty about the volume of future sales affects the measurement of the economic benefits expected to flow to the entity. It might also affect whether the economic resource should be recognised as an asset, but it does not affect the existence of the economic resource itself.

In light of the above, the Staff believe that the entity’s right to charge a favourable rate in the future meets the definition of an asset.


The revised CF states that the recognition of assets or liabilities may result in the simultaneous recognition of income and the related expenses. However, this matching of income and expenses is the incidental outcome of the accrual basis of accounting and recognising events and transactions in profit or loss in the period to which they relate, as opposed to being a driver of the recognition of assets or liabilities. The same is true for income and expenses recognised for movements in regulatory assets and liabilities.


There was not much discussion on this paper. A couple of Board members asked the Staff to simplify the application of the assets and liabilities definition to regulatory assets and liabilities. They also suggested that the Staff not use the terms ‘favourable’ and ‘unfavourable’ when describing the rights and obligations respectively because it is not clear what the comparable is against which the rate is favourable or unfavourable.

A few Board members re-iterated that defining the scope of the model appropriately would be key. The DP should also clearly distinguish rate-regulated activities from other activities and why regulatory assets and liabilities can be recognised for the former and not the latter.

Developing the model – recognition and uncertainty - Agenda paper 9B


In this paper, the Staff provided some initial thoughts on the types of uncertainty that are likely to exist in a rate-regulated environment which can affect the recognition and measurement of regulatory assets and liabilities. The Staff also indicated how they intend to address each type of uncertainty in developing the model.

Staff analysis

The Staff preliminarily identified three types of uncertainty in relation to a regulatory asset or liability:

1. Existence uncertainty

This relates to the uncertainty about whether a regulatory asset or liability exists.

A regulatory agreement typically does not specify every transaction or event that it is intended to cover. As such, judgement is often required to assess whether a particular event is captured within the rate-adjustment mechanism that would give the entity a right to charge a favourable rate, or an obligation to charge an unfavourable rate.

In light of this, the Staff will consider including a threshold for recognising regulatory assets and liabilities. Possible recognition thresholds include (a) virtually certain, (b) highly probable, (c) probable and (d) expected recovery of the asset or settlement of the liability. The Staff intend to look to the existing Standards, e.g. IAS 12, IFRIC 23 and IFRS 15 to develop their analysis. The Staff will also consider whether the recognition threshold should be the same for regulatory assets and regulatory liabilities.

2. Outcome uncertainty

This relates to the uncertainty about the amount and timing of cash flows that will ultimately arise from the regulatory asset or liability. This could arise from uncertainties around demand estimates and whether the rate regulator would renegotiate a previously approved rate before the entity has fully recovered the costs that the approved rate was intended to compensate.

The Staff believe that this type of uncertainty should be reflected in the measurement of the regulatory asset or liability. This will be addressed in a future meeting.

3. Measurement uncertainty

This relates to the uncertainty about the measurement of the regulatory asset or liability.

In the Staff’s view, they do not expect regulatory assets or liabilities to be subject to a significantly higher level of estimation uncertainty than other assets and liabilities. Accordingly, they do not intend to include specific requirements relating to the recognition of regulatory assets and liabilities in conditions of high measurement uncertainty.


Using a ‘probable’ threshold for recognition

The Board generally preferred having a ‘probable’ threshold for recognising regulatory assets and liabilities. They believe that regulatory assets and liabilities are not sufficiently different from other assets and liabilities to justify a departure from the general recognition criteria in the conceptual framework.

A Board member also noted that IFRS 15 generally requires revenue to be recognised if it is probable that the entity will collect the consideration. She noted that highly probable is an ‘unusual’ concept introduced to IFRS 15 solely for the recognition of variable consideration. This was done in response to comments received that a higher threshold is warranted to ensure that the revenue figure, which is regarded by many people as a core performance figure, is not distorted by constant adjustments due to re-estimation of future events. Although the rate adjustments could be regarded as a form of variable consideration, they are not revenue per se (because the proposed model is a revenue-supplementary model, revenue is recognised as P*Q with P being the contractual rate charged to the customer). Accordingly, the highly probable threshold would not be appropriate.

Moreover, a Board member observed that a rate regulator often works with a few regulated entities at the same time, so the entities in the industry have an idea of which adjustments are allowed or disallowed, which would help with reducing the estimation uncertainty.

However, one Board member believed that a ‘probable’ threshold may not sufficiently restrict the size and frequency of adjustments arising from re-estimations. Significant and/or frequent adjustments to the regulatory balances would undermine the objective of providing relevant and reliable information about the entity’s performance under the regulated regime. He believes that the Staff should gather more evidence about the scale of the adjustments in practice before the Board decides on the appropriate recognition threshold. This is also a point that could be explored further in the discussion paper.

Symmetrical threshold for assets and liabilities

The Board generally preferred a symmetrical recognition threshold for regulatory assets and regulatory liabilities. However, the Vice-Chair observed that asymmetry could arise depending on different facts and circumstances. For example, if an entity operates under a powerful regulator with a history of pushing down prices, the entity may more readily conclude that they should recognise a regulatory liability than a regulatory asset. The Staff acknowledged this and will consider using the same words when drafting the recognition threshold for regulatory assets and liabilities, and including factors that an entity should consider when applying the criterion.

Demand risk

A few Board members asked the Staff to consider how demand risk would affect recognition and measurement of the regulatory asset and liability. If the estimated level of demand is not reached, the entity would not be able to recover all of the costs previously incurred. How does that differ from an entity that is not subject to rate regulation? Why would recognising a regulatory asset be justified when such a demand risk exists? Even with a rate-adjustment mechanism in place, would a high level of demand risk effectively kick the entity out of the scope of the model?

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