Cover note (Agenda Paper 9)

Background

The purpose of this meeting was:

• (a) to provide additional analysis in response to the questions raised by the Board members in previous meetings (matters dealt with in Agenda Papers 9A and 9B) and on a matter subsequently identified by the staff (Agenda Paper 9C);
• (b) to ask the Board to publish an Exposure Draft (ED) rather than a second Discussion Paper (DP) to obtain feedback on the accounting model for regulatory assets and regulatory liabilities (the model); and
• (c) to ask Board members for permission to begin the balloting process for the consultation document.

Interaction with IFRS 3 Business Combinations (Agenda Paper 9A)

Background

In this session, the Board explored the interaction between the model and the requirements of IFRS 3, and to consider whether an exception to the recognition and measurement principles of IFRS 3 should be provided for regulatory assets and regulatory liabilities acquired in a business combination.

Staff analysis

The staff explore the differences between the model and fair value and conclude that the differences are such that an exception to IFRS 3 is required. Requiring fair value measurement for regulatory assets and liabilities would incur costs that are not outweighed by the benefits.

Staff recommendation

Staff recommend that, as an exception to the recognition and measurement principles of IFRS 3, an entity should recognise and measure a regulatory asset acquired or regulatory liability assumed in a business combination in accordance with the measurement principles in the accounting model for regulatory assets and regulatory liabilities.

Board discussion

Most of the Board members agreed with the staff recommendation. They found that there is a balance between the cost and the expected benefits that justifies the exception from IFRS 3.

Those who disagreed with the staff recommendation agreed with the alternative provided by the staff, which suggests that an exception to the recognition and measurement principles of IFRS 3 should be provided for those regulatory assets and regulatory liabilities that arise when an item of expense or income will be included in or deducted from future rates when cash is paid or received. They think the exceptions provided in IFRS 3 are different in nature, as they are very isolated areas of accounting.

There was also some discussion around whether the regulatory rate on initial recognition would be reset on acquisition.

Board decision

10 of the 14 Board members supported the staff recommendation.

The regulatory agreement period (Agenda Paper 9B)

Background

In this session the Board will discuss how the model would be applied if the term of the regulatory agreement is shorter than the period over which timing differences would reverse.

Staff analysis

The staff analyse relevant requirements in the Conceptual Framework as well as precedents IFRS 17, IFRS 16, IAS 38 and IFRS 15.

The staff conclude that, in applying the model, an entity would need to consider not only the legal form, but also the economic substance of the terms of the regulatory agreements in determining the period for which the agreement is binding and thus gives rise to enforceable rights or obligations which would result in the recognition of regulatory assets or regulatory liabilities. If items are due to be recovered or fulfilled outside of the regulatory agreement boundary, then they are not enforceable and thus would not be recognised as regulatory assets or regulatory liabilities.

As the Board is not asked to make any decisions in this part of the session, the staff did not give any recommendations.

Board discussion

The Board members discussed what an entity should consider when determining whether regulatory rights and obligations are recoverable. The discussion evolved around topics like ‘existence uncertainty’ and the concept of ‘more likely than not’. It was also noted that some cancellation rights might not be substantive as often, the business involves big infrastructural assets that are very difficult to transfer.

The Board members examined whether there should be explicit guidance in the Standard on this issue or whether it should be covered in the Basis for Conclusions. A majority of Board members thought that it needs to go into the Standard as Application Guidance, however there were mixed views as to whether it should be in the form of examples, or, for example, as a list of indicators. One Board member suggested to look to the Conceptual Framework to determine whether an asset or a liability exists.

The Board members welcomed that the staff reach out to other project teams with similar issues. There was some concern, however, that words from other Standards might not be directly transferrable. The staff should therefore cautiously choose the best wording, without causing any unforeseen consequences.

The Board suggested that this topic be brought back as a sweep issue at a future meeting.

Incentive schemes (Agenda Paper 9C)

Background

A regulatory agreement may provide an entity with performance incentives for achieving (or failing to achieve) indicated performance criteria (e.g. targeted levels of service quality or reliability, customer satisfaction, etc.). Once an entity becomes entitled to such a bonus or penalty, these amounts will generally be included as an adjustment to the rates charged to customers in the same or a subsequent period. The terms and conditions of the regulatory agreement covering such performance incentives are referred to as ‘incentive schemes’ by the staff.

The Board will discuss in this part of the session how the model would apply when, at the financial reporting date, it is not yet certain whether an entity will become entitled to such a bonus (or liable for such a penalty).

Staff analysis

The staff analysed the issues that arise when uncertainty is present and concludes that the principles of the model are sufficient to enable entities to account for the uncertainties arising from incentive schemes.

As this part of the session is for information only, there are no staff recommendations and no decisions are asked of the Board.

Board discussion

The Board members discussed the examples in the agenda paper. Board members struggled with the post-balance sheet example. One Board member suggested an Illustrative Example on the issue without the post-balance sheet discussion. The Vice-Chair suggested the staff only refer to IAS 10 when drafting.

The consultation document—an Exposure Draft or a Discussion Paper (Agenda Paper 9D)

Background

In this session, the Board will be asked whether it plans to publish an ED or a DP as the next consultation document to obtain feedback on the model.

Staff analysis

After the last consultation document (the 2014 DP) the Board was informed that there were complexities in the interaction between the project and the Conceptual Framework and IFRS 15. Based on this, the Board tentatively decided that the next step should be a second DP. However, the staff think that the Board should now move directly to an ED as it has now gathered sufficient information from previous consultation documents and outreach with stakeholders, duly considered alternative approaches and developed specific requirements for accounting for activities that are subject to defined rate regulation.

Staff recommendation

The staff recommend that the Board publish an ED rather than a DP.

Board decision

There was no significant discussion on this issue. All of the 13 Board members present voted in favour of the staff recommendation and also voted that IFRS 14 should be replaced with the new Standard.

Effect analysis (Agenda Paper 9E)

Background

In this session, the Board will be presented with an initial assessment of the likely effects the Board has been considering as it has been making tentative decisions about the model.

The staff will touch on the requirements of an effects analysis in the Due Process Handbook, the problem the Board is trying to solve (i.e. unrecognised present rights and obligations), the purpose of the model, assessing how the financial statements are likely to change and the likely effects of the proposals.

As this part of the session is for information only, there are no staff recommendations and no decisions are asked of the Board.

Board discussion

There was no significant discussion on this paper.

Due process and permission to begin the balloting process (Agenda Paper 9F)

Questions for the Board

In this session, the Board will be asked whether:

• it agrees with the staff recommendation to allow 120 days for comment on the ED.
• it is satisfied that the staff has complied with the applicable due process steps.
• the staff should initiate the balloting process for the ED.
• any Board member intends to dissent from the publication of the ED.

Board discussion

With regard to dissents, two Board members touched on the issue. Both Board members thought that the proposed Standard goes beyond the objective that the Board had when it started the project. Both of those Board members cited the exceptions to the model as the main issue (including the IFRS 3 exception above). On Board member said that from a current standpoint, he would not dissent, but this could change based on the drafting of the ED. The other Board member would dissent based on the current state of discussions.

As regards the boundary issue (see above), one Board member said that her permission to ballot would be subject to a re-discussion of the issue. The Vice-Chair said that the permission to ballot should be given, however, the issue around boundary should be resolved before signing the ballot form.

There was also some discussion around whether 120 days would be enough, given that it is a completely new concept and the intricacies could only be understood after dedicating some time to them. Some Board members, however, thought that 120 days would be enough as it worked with other complex EDs as well.

Board decision

All of the 13 Board members present agreed to grant permission to ballot with the caveat that the boundary issue should be re-discussed. With regards to the comment period, 10 of the 13 Board members present agreed with a comment period of 120 days.