Rate-regulated activities

Date recorded:

Further analysis of the regulatory agreement boundary (Agenda Paper 9A)


The Board is currently developing a new accounting model to give users of financial statements better information about a company's incremental rights and obligations arising from its rate-regulated activities. In this paper, the staff provided analysis requested by the Board at its July 2019 meeting on the determination of the boundary of a regulatory agreement in the accounting model for regulatory assets and regulatory liabilities (model).

Staff recommendation

The staff recommended that:

  • a) in determining the regulatory agreement boundary, an entity should consider all options that could affect that boundary, but:
    • i) should disregard those options that the holder will not have the practical ability to exercise in any circumstances; and
    • ii) should not consider the likelihood of exercise or either party’s intentions in respect of any option.
  • b) application guidance is developed on the factors that an entity considers in determining the boundary of the regulatory agreement, being the existing term of the regulatory agreement, any options impacting the boundary that the entity or the regulator has the practical ability to exercise, make-whole mechanisms, and consistency with judgements made in applying other IFRS Standards.
  • c) rights or obligations first meeting the definition of a regulatory asset or regulatory liability as a result of a change in the regulatory agreement boundary should be recognised at the date of the change and disclosed separately from other regulatory asset or regulatory liability originations.

Board discussion

There was some discussion about the notion in the agenda paper that in rare cases it may be uncertain whether an option exists. One Board member said that there will always be judgement on whether an option exists and that should not influence the accounting. The staff confirmed that a rare case would be when the regulatory agreement is unclear about whether an option exists. Board members struggled with the “more likely than not” threshold proposed by staff that would apply if it is uncertain either whether an option exists or whether there are any circumstances in which the entity or a regulator has the practical ability to exercise it. The staff acknowledged the concern and decided not to use “more likely than not” in drafting.

Board members debated what ‘practical ability to exercise’ meant. One Board member said that ‘economic compulsion’ should not be included in the assessment, i.e. in cases where the entity is economically compelled to forfeit the option, it would still have the practical ability to exercise it. Another Board member said that a monopoly alone does not mean the boundary is indefinite. It should be considered how long it would take to remove the entity from its monopoly position and replace with another operator.

Board members discussed the impact of significant investments an operator makes to the regulatory infrastructure. Staff concluded that they would have to be considered in the boundary assessment and in the useful life considerations of the infrastructure. However, a significant investment does not necessarily imply a long boundary or a long useful life. In that regard, make-whole systems play a role as well. A new operator would be likely to pay to take over the existing infrastructure.

One Board member said that the ‘consistency with judgements made in other IFRS Standards’ in staff recommendation (b) was wrongly placed as it did not fit with the other three factors. The staff acknowledged that and suggested to remove that factor from the staff recommendation, so the focus would be more on practical ability. 

Board decision

All Board members voted in favour of the staff recommendation modified as indicated above.

Amendments to other IFRS Standards (Agenda Paper 9B)


This paper analysed the relationship between the requirements of the model and the requirements of other IFRS Standards.

Staff conclusion

The staff have concluded that no further amendments to other Standards or additional application guidance are needed, beyond those which the Board has already tentatively decided to propose.

Board discussion

One Board member asked whether the interaction with IAS 36 should be explained in the Application Guidance, for example, what is the requirement if the cost of an asset is higher than the regulator permits? Other Board member comments included a question on whether the ED should include explanations on how IAS 7 is affected by the proposals and whether regulatory assets should be scoped out of IAS 38. The staff confirmed that those issues would be considered when drafting.

Board decision

13 of the 14 Board members agreed with the staff conclusion.

Transition (Agenda Paper 9C)


This paper assessed the transition requirements.

Staff recommendation

The staff recommended that the following entities should apply the model retrospectively to each prior reporting period presented applying IAS 8 (‘full retrospective approach’):

  • a) entities that currently apply IFRS Standards and do not recognise regulatory balances; and
  • b) entities that currently apply IFRS Standards, possibly including IFRS 14, and recognise regulatory balances.

For first-time adopters of IFRS Standards, the staff recommended:

  • a) that these entities should apply the model at the date of transition to IFRS Standards as defined in IFRS 1;
  • b) retaining the deemed cost exemption in IFRS 1.

The staff will align the drafting of that exemption with the descriptions used for the model.

For entities that currently apply IFRS Standards, the staff recommended that they should be permitted to elect not to apply the model retrospectively to past business combinations. If an entity uses that election, it should recognise and measure, using the model, only those regulatory assets and regulatory liabilities arising from all past business combinations that still exist at the date of initial application of the model. Any resulting change should adjust the carrying amount of goodwill. If that adjustment reduces the carrying amount of goodwill to zero, any remaining adjustment should be recognised in retained earnings or, if appropriate, another category of equity.

In some jurisdictions where entities currently recognise regulatory balances, some regulators consider goodwill an allowable cost for inclusion in the rates charged to customers. This paper refers to those balances as ‘goodwill-related regulatory assets’. Both for entities that currently apply IFRS Standards and for first-time adopters of IFRS Standards, the staff recommend that they should reclassify goodwill-related regulatory assets to goodwill. Amounts of such regulatory assets that have already been derecognised prior to application of the model would not be reclassified.

Board discussion

The only discussion points concerned business combinations. One Board member disagreed with giving preparers an option to not apply the model retrospectively to business combinations. In his view, this would overstate goodwill and make the figure less meaningful. One Board member asked whether the staff meant ‘retrospectively’ as in ‘before the date of transition’, which would mean that the model does apply to business combinations in the comparative period. The staff confirmed that.

Board decisions

On the questions with regard to business combinations, 12 of the 14 Board members supported the staff recommendation. On all other points, Board members supported the staff recommendations unanimously.

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