Cover paper (Agenda Paper 9)

At its October 2021 meeting, the Board discussed the feedback from comment letters and outreach events on most of the proposals in the Exposure Draft (ED) Regulatory Assets and Regulatory Liabilities. The purpose of this meeting was for the Board to discuss the feedback from comment letters and outreach events on the remaining proposals.

The Board was not asked to make decisions during this meeting. However, in each paper, the staff ask Board members to comment on any feedback that was unclear, that provides new information, or that needs further research.

Feedback summary—Presentation (Agenda Paper 9A)

This paper analysed the feedback from comment letters and outreach events on the proposed presentation requirements and the proposed amendments to IAS 1 set out in the ED.

Most respondents agreed with the proposals to present all regulatory income minus all regulatory expense, including regulatory interest income and regulatory interest expense, as a separate line item immediately below revenue. Some respondents suggested the Board permit, or instead require, an entity to classify all regulatory income minus all regulatory expense as revenue. A few respondents said that regulatory interest income and regulatory interest expense should be included within finance income and finance expenses, respectively.

Although the Board did not ask an explicit question on the proposal to present line items for regulatory assets and regulatory liabilities in the statement of financial position, a few respondents explicitly agreed with the proposal. A few respondents disagreed with, or raised questions about, the proposed conditions for offsetting regulatory assets and regulatory liabilities.

At its October 2021 meeting, the Board discussed the feedback from outreach events with users of financial statements. All respondents who commented agreed with the proposed presentation requirements.

Board discussion

Board members mainly focused on the interaction of the proposed new Standard and IFRS 15. They agreed that the IFRS 15 revenue should not be combined with the regulatory income. While similar in nature, IFRS 15 addresses revenue from contracts with customers and a regulatory agreement is not a contract with a customer. However, it was seen as permissible to add a subtotal after both line items. It should then be clear that it is revenue but adjusted for regulatory income. One Board member said that the Board should be careful as prohibiting combining might not meet the objective of the Standard.

One Board member said that he agreed with including interest income in regulatory income, but only if it was part of the main activity of the entity. If interest income purely arises from the passage of time, it should be finance income.

With regard to offsetting regulatory assets and liabilities one Board member suggested that instead of permitting offsetting, the Board should require it if the entity has a legally enforceable right to offset. This would be consistent with IAS 12 and IAS 32.

On the interaction with IAS 1, Board members expressed a preference for including relevant requirements in the new Standard rather than referring to IAS 1 or amending IAS 1 to accommodate regulatory activity. The new Standard should be a single resource.

Feedback summary—Disclosure (Agenda Paper 9B)

This paper analysed the feedback from comment letters and outreach events on the proposed disclosure requirements.

Most respondents who commented agreed with the focus of the proposed overall disclosure objective on information about an entity’s regulatory income, regulatory expense, regulatory assets and regulatory liabilities. However, some respondents across all jurisdictions and across stakeholder types suggested the Board develop a broader overall objective of providing users of financial statements with information about the nature of the regulatory agreement, the risks associated with it and its effects on an entity’s financial performance, financial position or cash flows. These respondents also suggested some pieces of information that the Board may consider requiring entities to disclose.

Some respondents across all stakeholder types explicitly agreed with the proposed specific disclosure objectives and the disclosure requirements. A few respondents said that the Board’s redeliberation of the disclosure proposals should be informed by its decisions on the project Disclosure Initiative—Targeted Standards-level Review of Disclosures. Some respondents raised concerns that the cost of providing the components of regulatory income or regulatory expense and the expected timing of recovery of regulatory assets and fulfilment of regulatory liabilities could outweigh the benefits to the users of financial statements.

A few respondents across stakeholder types suggested the Board explicitly require an entity to disclose significant judgments made in applying specified proposed requirements. A few respondents raised concerns about, or asked for further guidance on, determining the appropriate level of aggregation and disaggregation for some disclosures that require significant judgements.

At its October 2021 meeting, the Board discussed the feedback from outreach events with, and a comment letter received from, users of financial statements. All the users of financial statements who commented agreed with the proposed overall and specific disclosure objectives and the proposed disclosure requirements.

Board discussion

The Board members discussed respondents’ feedback about having to include information that is commercially sensitive. One Board member said that some jurisdictions might have legal requirements that prohibit entities from giving information about contracts with governments and the feedback from respondents should therefore not be easily dismissed.

One Board member said that she would reject the feedback from some respondents that the topic of rate-regulated activities could be addressed by disclosures only. The intricacies of the industry are too complex to solve by disclosure only.

Another Board member said that disclosures should not be allowed to be met by cross-referring to a regulatory filing. The annual report should have all information on a stand-alone basis. She also rejected the idea to include specific requirements on significant judgements, which are addressed by IAS 1. In her view, illustrating the requirements of IAS 1 on and example from the industry would be more helpful.

Some Board members suggested to require disclosure of time bands illustrating when the regulatory income is expected, similar to the time bands required by IFRS 15. In their view they add much value and the cost to provide these is relatively small.

It was also noted that some feedback received on disclosures may be driven by a disagreement with the model and the staff was asked to consider this appropriately.

Feedback summary—Effective date and transition (Agenda Paper 9C)

This paper analysed the feedback from comment letters and outreach events on the proposed transition requirements and the proposed amendments to IFRS 1 in the ED.

Most respondents did not support the proposed requirement to apply the Standard retrospectively in accordance with IAS 8. Respondents were particularly concerned about the cost and complexity of full retrospective application for some regulatory assets and regulatory liabilities. Some respondents suggested the Board permit a modified retrospective application that does not involve restatement of comparative information.

At its October 2021 meeting, the Board discussed the feedback on the proposed amendments to IFRS Standards other than IAS 1 and IFRS 1. Many respondents who commented agreed with the proposals relating to the simpler approach for past business combinations. A few respondents suggested recognising the net amount of adjustments in equity, instead of adjusting goodwill. Most respondents who commented asked for a longer transition period, such as a transition period of at least 24-36 months after the date of publication, with earlier application permitted.

Board discussion

The Board discussion focused on the retrospective application and the transition period for the new Standard. On retrospective application, Board members acknowledged respondents’ plea for a prospective application, however that would mean that much information would be lost. Contracts in the industry are often long-term and it is valuable to have the information going back. One Board member noted that a modified retrospective approach could be considered as is allowed by IFRS 15 to reduce the costs associated with the transition to the new Standard.

On the transition period, Board members acknowledged that entities are currently accounting for regulatory assets and liabilities based on various requirements, e.g. IFRS 14, local GAAPs or regulatory requirements. The transition to the new Standard is therefore complex and sufficient time should be allowed for implementation.

It was further noted that similar to the previous topic the lack of support for the transition proposals could be rooted in a disagreement with the model itself, and the staff should be wary of this.

Feedback summary—Likely effects and other comments (Agenda Paper 9D)

This paper analyses the feedback from comment letters and outreach events on the Board’s analysis of the likely effects of the proposals and other comments from comment letters and outreach events.

The Board’s overall assessment is that the benefits of more useful information to users of financial statements would outweigh the costs to users and preparers of implementing the proposals. The effects of the proposals are likely to be more significant for companies that currently do not recognise regulatory balances. For companies that currently recognise regulatory balances, the effects would depend on how they currently account for such balances.

Overall, most respondents believed that the benefits the proposals would bring to the users of financial statements would exceed the costs of implementing the proposals for preparers. Most respondents agreed with the analysis of the likely effects of implementing the proposals on information reported in the financial statements and on the quality of financial reporting. A few respondents said that applying some of the proposals would not improve the quality of financial reporting because these proposals do not reflect the economic substance of regulatory agreements.

Many respondents agreed with the Board’s analysis of the likely costs of implementing the proposals. However, some respondents disagreed with the Board’s analysis. The main reason for disagreement is that entities would need to incur significant costs to develop systems to track regulatory assets and regulatory liabilities. Some of these respondents said that these costs would be passed onto customers through increased future regulated rates.

Board discussion

There was not much discussion on this topic. One Board member noted that some respondents had criticised the discounting requirement as cost intensive. He said that discounting is very important, especially for jurisdictions that have a high interest rate environment. This was echoed by another Board member who said it would be a fatal flaw to issue a Standard that recognises nominal amounts.