Rate-regulated activities

Date recorded:

Cover Note (Agenda Paper 9)


The Board has been considering whether entities that operate in rate-reg­u­lated en­vi­ron­ments should recognise assets and li­a­bil­i­ties arising from the effects of rate reg­u­la­tion. As part of this project, the Board has been de­vel­op­ing an accounting model to provide information about those rights and obligations that are created by defined rate regulation.

The Board issued a Dis­cus­sion Paper in September 2014, but has yet to decide whether to issue a second Dis­cus­sion Paper or develop an Exposure Draft.

At this meeting the Board will discuss the staff’s recommendations for the measurement of regulatory assets that are recognised in the model.

Back­ground and summary of decisions to date (Agenda Paper 9A)

Staff analysis

This paper provides background information on the model and sum­marises the Board’s tentative decisions to date.

Measurement (Agenda Paper 9B)

Staff analysis

In this paper, the staff discusses aspects of the measurement of regulatory assets at initial recognition and subsequently.

The paper covers regulatory assets, however the staff thinks the same analysis would apply to regulatory liabilities.


The paper first discusses the measurement bases described in the Conceptual Framework (historical cost and current value) and the factors to be considered when selecting a measurement basis (relevance and faithful information in particular).

The papers then describes the ‘building block’ approach typically used by rate regulators to set the regulated rate(s). This approach identifies (i) the total expenditure that the entity is allowed to include within the regulated rate, and (ii) any incentive rewards earned or penalties incurred.

Regulatory assets

Regulatory assets are incremental rights and obligations that arise from the operation of the rate-adjustment mechanism contained in the basis for setting the rates established in the regulatory agreement. Each individual timing difference results in a separately identifiable regulatory asset that has a separate, identifiable and trackable cash flow stream.

In February 2018, the Board tentatively decided that the model will use as its unit of account the individual timing differences that cause those incremental rights and obligations to originate.

Regulatory assets do not fit neatly into any of the defined categories of assets accounted for using existing IFRS Standards and as a result the staff considered the Conceptual Framework guidance to consider the most useful measurement basis.

Measuring regulatory assets

The main features of the proposed measurement technique include:

  • The technique reflects estimates of future cash flows, updated if necessary. Although the cash flows arising from regulatory assets are fairly stable and predictable, they can be subject to variability arising from various risks (credit risk, demand risk and performance risk). As a result, updating estimates of future cash flows will contribute to provide relevant information.

    Since any changes in the measurement due to impairment would already be factored in, no separate impairment procedures would be required.
  • The technique reflects interests and returns granted by the regulator. Regulators typically compensate entities for the time-lag between the transaction or event that originates a timing difference and the reversal of that timing difference through amounts billed to customers.
  • Estimates of future cash flows should be discounted if there is any significant financing component. Regulatory assets form part of the same transaction cycle as trade receivables. These similarities should translate in their measurement basis being, to some extent, aligned.
  • The discount rate should be established at initial recognition and remain unchanged subsequently. On the basis of the feedback received from users, the staff concluded that the users will not benefit from changes in the measurement of regulatory assets due to mere changes in the discount rate. This is also aligned with the measurement of trade receivables with a significant financing component.

The staff think that this cash flow-based measurement technique provides useful information while limiting the need for judgement and the complexity that would arise if value changes that do not arise from changes in cash flows were taken into account.

The staff note that in particular the technique factors the variability of cash flows arising from regulatory assets, the value sensitivity to market factors and other risks as well as measurement inconsistency and uncertainty.

The paper includes illustrative examples of the proposed measurement technique.

Staff rec­om­men­da­tions

The staff rec­om­mend­ a measurement that reflects (i) estimates of future cash flows arising from the regulatory assets, updated if necessary, and (ii) discounting estimates of future cash flows, if there is any significant financing component.

The estimates of future cash flows would include (i) the costs of assets utilised and operating expenses incurred in providing goods or services, (ii) any margins on the operating expenses incurred in providing goods or services, and (iii) any interests on the operating expenses incurred or returns on the costs of assets utilised in provided goods or services.


One Board member noted that it was implicitly assumed that the measurement technique is appropriate because the cash flows arising from regulatory assets are fairly simple and the rate-regulated entity is going to hold the regulatory asset and collect the cash flows over time. Under IFRS 9 such assumptions are clearly stated and if they are not met, the entity cannot measure the financial asset at amortised cost. The Board member asked the staff to consider instances when rate-regulated entities securitise regulatory assets. Another Board member concurred and added that such assumptions should be explicit, as should be the accounting effect if these assumptions are not met.

The Board discussed whether credit risk and collectability of cash flows should be considered in the model. One Board member noted that the proposed approach is different from the approach taken in IFRS 9 and IFRS 15 where the variability of the contractual cash flows and their collectability are considered in turn.  Another Board member asked whether assessing separately credit impairment would be appropriate in circumstances where the rate regulator does not compensate the rate-regulated entity for credit losses.  A Board member disagreed and considered that regulatory assets are only subject to demand risk and credit risk should be considered under IFRS 15 once a trade receivable is recognised. The Board asked the staff to clarify whether the cash flows being measured are pre-credit risk (i.e. the cash flows measured are those to which the rate-regulated entity is contractually entitled) or post-credit risk. 

One Board member noted that many regulatory schemes are today hybrid in nature in that the rate-regulated entities are exposed to some element of downside and upside risk and asked whether this would call in question the assumptions and conclusions reached.  The Board member also asked the staff to ensure that all the components of a current value measurement in the Conceptual Framework are analysed against the proposed model.

Although not opposed to it, one Board member was concerned that the inclusion of margins on the operating expenses could be used by regulators, for example in inflationary environments, to incentivise entities to take on regulated operations by providing higher margins which would then be included in the measurement of the regulatory asset in the first year. 

All Board members supported the recommendation to update estimates of future cash flows if changes occur. It was clarified that the amount of the adjustment would be applied against the carrying amount of the existing regulatory asset or liability and taken to profit or loss. The presentation of such adjustments in the Income Statement will be discussed at a later date. 

Board members also supported the recommendation to keep the discount rate established at initial recognition unchanged on the basis that users of the financial statements are interested in the amounts of estimated cash flows rather than in changes in value due to changes in discount rates. 

One Board member asked the staff to consider circumstances when, in the absence of a significant financing component, the regulatory asset or liability was not originally discounted but circumstances later changed, for example because of demand risk or changes in the regulatory environment. The staff noted that changes in discount rates and how these would affect the cash flows would be discussed at the next Board meeting in June. It was also clarified that rate-regulated agreements would not be in scope if the rate regulator were not bound by the terms of the regulatory agreement.

Board decision

The Board approved the staff recommendations, noting that the staff should confirm whether the estimates of future cash flows should include or exclude credit risk.

Next steps

The Board will discuss at a later meeting in June additional measurement aspects of the model, including the estimation of expected cash flows, the identification of significant financing component, changes in discount rate and the measurement of regulatory liabilities.

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