Rate-regulated activities

Date recorded:

Rate-regulated Activities — Agenda paper 9

The purpose of this session was to inform the Board of the feedback received from the World Standard-Setters Conference held in late September 2017.

Feedback from participants

During the conference, participants discussed six examples of rate adjustments and were asked for their views on:

  1. whether recognising the rate adjustments in profit or loss would result in a more faithful representation of the entity’s performance for the year, and
  2. whether the corresponding adjustments on the balance sheet meet the definition of an asset or a liability per the forthcoming revised Conceptual Framework.

Generally, the participants were comfortable with recognising the rate adjustments in profit or loss but had reservations about whether the amounts recognised on the balance sheet meet the definition of an asset or a liability. They questioned whether the amounts recognised in profit or loss merely represent matching of income and the related expenses, and whether recognising income in the current period is justified when the amount will only be recoverable through the delivery of future services, i.e. future performance is required to ‘earn’ that rate adjustment amount.

The participants also questioned whether an asset really exists when the entity cannot control the future purchasing (consumption of services) behaviour of the customers. As for the liability, the participants struggled with understanding what the obligation associated with the liability is: is it an obligation to charge less, to accept a lower profit or to deliver a product in the future?

The participants were also concerned about the potential complexity of the model when dealing with measurement uncertainties, how to reflect time value of money, adjusting for multiple elements at one time and when to recognise profit if an excess profit element is included in the rate adjustment (as considered in AP 9B to the September 2017 Board meeting).

Things to consider for the Board

It is important that the Board provide clarity on the following points with regard to the proposed model:

  • Scope;
  • Why are rate regulated activities different from similar contracts?
  • Why does IFRS 15 not apply to the rate adjustment amount?
  • Why does the rate adjustment mechanism not establish a gross asset and a gross liability for the entity upfront, representing an obligation to incur costs on agreed activities and a right to recover those costs? Is this an executory contract?
  • What exactly are the regulatory asset and liability? Are they a right to charge more and an obligation to charge less, as opposed to the customer base being the ‘resource controlled by the entity’ and an onerous contract or an obligation to deliver a product?
  • Presentation considerations.

Next steps

The Consultative Group for Rate Regulation will meet in late October 2017 to discuss the following aspects:

  • Defining the scope of the model;
  • How entities identify rate-adjustment amounts and how individual rate-adjustment balances are tracked through to amounts billed to customers;
  • What the sources of uncertainty are and how such uncertainty is dealt with in practice;
  • Whether, and if so how, regulators compensate an entity for the time-lag between the transaction that originates a rate adjustment and billing of that adjustment; and
  • Whether it is feasible to disaggregate information about individual rate-adjustments and to track when the balances are billed to customers for presentation purposes.


There was no significant discussion in this session. One Board member shared his observations from the World Standard-Setters Conference and said that the participants in his group believed that the adjustments to the income statement were intuitively understandable and operational with a result that is appropriate for decision-making purposes. Even though the participants were not sure that the adjustments meet the definition of an asset or a liability under the revised Conceptual Framework, they were comfortable to trade off conceptual consistency for operational usefulness.

The Staff further noted that the participants in the World Standard-Setters Conference were not necessarily industry experts and their comments should be considered with this in mind, especially regarding their comments relating to the complexity of the model and the difficulty in tracking different rate adjustments.

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