Cover note (Agenda Paper 9)

At this meeting, the IASB continued to redeliberate the proposals in the Exposure Draft Regulatory Assets and Regulatory Liabilities (ED).

Unit of account and offsetting (Agenda Paper 9A)

This paper set out the staff analysis and recommendations on the proposals in the ED on the unit of account and on offsetting of regulatory assets and regulatory liabilities for presentation purposes.

Staff recommendation

The staff recommended that the final Accounting Standard:

• Clarifies that the unit of account is the right or obligation arising from a difference in timing or from a group of differences in timing when the differences in timing included in that group are created by the same regulatory agreement, have similar expiry patterns and are subject to similar risks (Recommendation 1)
• Excludes the proposal on permitting an entity to offset regulatory assets and regulatory liabilities for presentation purposes in paragraph 71 of the ED (Recommendation 2)

IASB discussion

Several IASB members agreed with recommendation 1 and one IASB member mentioned that the proposed inclusion of the example, although not part of the standard, would be a good addition to the illustrative examples.

One IASB member challenged the concept of similar expiry patterns subject to similar risks for the unit of account and whether this could raise questions from users in terms of what similar means and if this could be applied consistently. This had been considered by the staff and the wording aligns with aggregation principles considered elsewhere in the standard. Another IASB member asked for clarification on the checking requirement in the basis of conclusion note and whether this should be interpreted as a requirement or condition. The staff had considered this and mentioned that the example to be included will make this clear.

Some IASB members mentioned that Recommendation 2 on offsetting was considered from an IAS 12 perspective and initially caused reluctance to remove paragraph 71 but the main difference noticed was that items in IAS 12 are all timing differences and this is not the case for rate-regulated activities. Thus, they supported the staff’s recommendation.

IASB decision

All 14 IASB members present voted in favour of the staff recommendations.

Presentation (Agenda Paper 9B)

This paper set out the staff’s analysis and recommendations on:

• The presentation proposals in paragraphs 67-68 and 70 of the ED
• The proposed amendments to IAS 1

Staff recommendation

The staff recommended that the final Accounting Standard:

• Specifies that all regulatory income minus all regulatory expense should be classified as revenue (Recommendation 1)
• Requires disclosure of all regulatory income minus all regulatory expense separately from an entity’s other sources of revenue, unless that amount is presented as a separate line item in the statement(s) of financial performance (Recommendation 2)
• Excludes the proposed amendment to paragraph 82 of IAS 1 requiring regulatory income or regulatory expense to be presented as a separate line item below revenue (Recommendation 3)
• Retains the proposals to include regulatory interest income within regulatory income and regulatory interest expense within regulatory expense (Recommendation 4)
• Amends the forthcoming IFRS 18 Presentation and Disclosure in Financial Statements to specify that regulatory interest is excluded from the financing category and is classified in the operating category (Recommendation 5)
• Retains the proposal to present line items for regulatory assets and regulatory liabilities in the statement of financial position, including the requirement to classify those regulatory assets and regulatory liabilities as current or non-current applying paragraphs 66 and 69 of IAS 1, except when the entity presents all assets and liabilities in order of liquidity (Recommendation 6)

IASB discussion

Several IASB members agreed with Recommendation 1. However, an IASB member endorsed that the standard should state that for presentational purposes the net regulatory income and expenses are presented as revenue and not gross.

Several IASB members had differing views relating to Recommendation 1. Some members disagreed with the recommendation due to the following reasons:

• Not including the revenue in the income statement as a separate line item sets a bad precedent to not do the same for the balance sheet, considering the principle of the IFRS 18 useful structure summary going forward. The staff confirmed on this point that the difference in the treatment of the balance sheet and income statement is due to using current presentation guidance within IAS 1 but it was discussed by IASB members that IFRS 18 behavioural principles also have to be considered as that standard will be published before this project is concluded and cannot be contradictory.
• It fails to meet one of the criteria of what primary financial statements do in relation to signalling information to users.
• There is real concern that a precedent will be set by saying that a general principle (the useful structure summary) should be applied to a very specific area when there is a lack of a specified line item.
• There was no initial disagreement on the ED which stated that the regulatory revenue would be a separate line item on the face as this is an important area to users based on feedback. Thus, some IASB members considered that this should be the starting point subject to the IFRS 18 useful structure summary principles.

Some IASB members agreed with the Recommendation 2 based on the following reasons:

• It provides consistency with IFRS 15 and if there was inclusion as a separate line item on the face of the income statement, there would need to be consideration about inclusion for all upcoming projects that have a revenue aspect.
• One IASB member mentioned that the IFRS 18 useful structure summary is a solution to the recommendation as the principle would lead a company to disaggregate the revenue anyway.
• IFRS 18 is an overriding principle, that is entity specific and will apply to everything. There are two principles which are looked at: firstly, something must be material to get into the financial statements, and secondly, is it necessary to provide a useful structure summary and if so, it will be presented on the face. Therefore the useful structure summary cannot be illustrated in an example because it depends on the behavioural judgement.

Some IASB members mentioned that the differing views are about signalling in the financial statements and what is important to users. These IASB members mentioned that if the IASB took a principle-based, IFRS 18, approach, it would have to be explicit in the standard application guidance and not just in the basis for conclusions. However, consistency across standards is key.

An IASB member was in agreement with Recommendations 3 and 4 as this aligns with IFRS 18 and is seen to be part of the main business of an entity. However, the IASB member raised a question on whether IFRS 18 needs to be amended to clarify whether regulated interest income or expense is part of the main business or not.

IASB decisions

All 14 IASB members voted in favour of the Recommendations 1 and 3-6.

A preference vote was taken for Recommendation 2:

• On the staff recommendation, which does not include explicit presentation requirements, 5 of the 14 IASB members voted in favour
• On being explicit on separate presentation, 9 of the 14 IASB members voted in favour

Items affecting regulated rates only when related cash is paid or received—Overview (Agenda Paper 9C)

This paper included the staff’s recommended approach to the redeliberation of the proposals in the ED relating to items affecting regulated rates on a cash basis.

The survey and the background information document are for information only and some IASB members highlighted the support for the staff’s proposal.

Items affecting regulated rates on a cash basis (Agenda Paper 9D)

This paper set out the staff analysis and recommendations on the proposals in the ED relating to the measurement and presentation of items affecting regulated rates only when the related cash is paid or received.

This paper did not discuss requests to extend the proposed measurement and presentation of items affecting regulated rates on a cash basis to other items, this will be discussed at a future meeting.

Staff recommendation

The staff recommended that the final Accounting Standard:

• Continues to state that differences in timing that arises from differences between the regulatory and accounting criteria represents enforceable present rights or enforceable present obligations that meet the proposed definitions of regulatory assets and regulatory liabilities (Recommendation 1)
• Retains the proposed measurement requirements in paragraph 61 of the ED for items that affect regulated rates only when the related cash is paid or received (Recommendation 2)
• Retains the proposed requirements in paragraph 69 of the ED to present specified regulatory income and regulatory expense in other comprehensive income (OCI) (Recommendation 3)
• Clarifies that an entity reclassifies regulatory income or regulatory expense presented in OCI to profit or loss when, and to the extent that, IFRS Accounting Standards require the reclassification of the related expense or income to profit or loss (Recommendation 4)
• Does not include additional presentation requirements for OCI and instead relies on the requirements in IAS 1 or IFRS 18 (once effective) (Recommendation 5)

IASB discussion

Several IASB members agreed with Recommendation 1 as disagreement would mean changing the model. One IASB member questioned whether there will be an enforceable right if no cash is paid. The staff commented that it is important to note that an entity would accrue costs based on services provided and if the costs are recoverable then the entity does have a right to record an asset or liability in line with the Conceptual Framework. Other IASB members agreed and understood this concept by assuming certainty when it comes to receipt or payment of cash flows as the only element unknown in this instance is the timing thereof.

For Recommendation 2, one IASB member disagreed with the staff recommendation but was particularly concerned with the rationale behind the recommendation, i.e. matching and indemnification. Some IASB members agreed with this staff recommendation in the context of what is included in the ED.

Some IASB members disagreed with the Recommendations 3-5 on the basis that regulatory income and expenses meet the definition of revenue and are not an offset to an expense or a contra-expense etc. Therefore, the justification that a cash basis trigger would cause the regulatory revenue to go into OCI is not understood. One IASB member considered that there is inconsistency with the staff recommendations in agenda papers 9B and 9D.

Some IASB members agree with the Recommendations 3-5 on the basis that there is no inconsistency. It is understood that there is a principle or rule in agenda paper 9B and agenda paper 9D discusses an exception to the principle or rule.

IASB decisions

13 of the 14 IASB members voted in favour of Recommendation 1.

11 of the 14 IASB members voted in favour of Recommendation 2.

12 of the 14 IASB members voted in favour of Recommendations 3-5.