Cover note (Agenda Paper 9)

At this meeting, the IASB continued redeliberating the proposals in the Exposure Draft Regulatory Assets and Regulatory Liabilities (ED). The staff prepared two papers on the proposals on the measurement basis, cash-flow-based measurement technique and estimating uncertain future cash flows.

Measurement (estimating future cash flows) and unit of account—Overview (Agenda Paper 9A)

The measurement workstream includes the analysis of comments arising from the following questions in the Invitation to Comment on the ED:

• Questions 5(a)–(c) concerning:
  • The proposed measurement basis
  • The proposed cash-flow-based measurement technique
  • The proposals for estimating uncertain future cash flows
• Questions 6(a)–(d) concerning the proposals on the discount rate

This paper set out the staff’s recommended approach to redeliberating the proposals on the measurement basis, cash-flow-based measurement technique and estimating uncertain future cash flows. As part of these redeliberations, the IASB will also discuss feedback received on the proposals relating to the unit of account and the boundary of the regulatory agreement.

The staff presented their recommended approach to redeliberating the proposals on the discount rate at a future meeting.

Feedback on the proposals relating to the measurement of items affecting regulated rates only when related cash is paid or received will be considered as part of a separate work stream.

The staff did not ask the IASB to make decisions on this paper. However, the IASB was requested to comment on any additional matters that the staff may need to consider.

IASB discussion

One IASB member suggested that the name of the measurement basis – ‘Modified historical cost’ – should be redeliberated at a future meeting given that it could cause confusion for stakeholders as ‘historical cost’ is only defined in the conceptual framework.

One IASB member requested that any redeliberation of the term should be concise given previous lengthy discussions. Another IASB member suggested that the measurement basis could be explained in the standard without it being labelled.

Estimating uncertain future cash flows (Agenda Paper 9B)

This paper set out staff analysis and recommendations on the proposals in the ED concerning estimating uncertain future cash flows.

Staff recommendation

The staff recommended that the final Accounting Standard:

• Retains the proposal to require that an entity estimates uncertain future cash flows using whichever of two methods—the ‘most likely amount’ method or the ‘expected value’ method—the entity expects to better predict the cash flows
• States that the most likely amount method may better predict the cash flows only if the most likely amount is highly probable and is expected to remain highly probable
• Requires an entity to reassess the method of estimating uncertain future cash flows if and only if there is a significant change in facts and circumstances such that the entity no longer expects that the method will better predict the cash flows
• Clarifies that when an entity uses the expected value method to estimate uncertain future cash flows, the entity should consider the entire range of outcomes, including those outcomes in which a regulatory asset or a regulatory liability does not exist or exists but will result in no future cash flows
• Retains the proposal not to require a separate impairment test for regulatory assets

IASB discussion

No significant comments were made in relation to the first proposal.

A number of IASB members did not support the second proposal to state that the most likely amount method may better predict the cash flows only if the most likely amount is highly probable and is expected to remain highly probable. These IASB members noted that there is judgement in determining the best method and adding the additional threshold of ‘highly probable’ adds to the complexity of the judgement. Additionally, these are well understood methods that are already used in practice in IAS 37, IFRS 15 and IFRIC 23 and this addition may impact the way this is already applied in practice.

One IASB member highlighted that few respondents had provided comments on the selection of the method to be used and that it would be best to keep this simple.

A couple of IASB members supported the proposal on the basis that the additional threshold of ‘highly probable’ would be helpful for preparers in determining the most appropriate method to use.

The IASB agreed that the decision taken should be reflected in the basis of conclusion along with references to other Standards that include the same judgement and illustrative guidance.

In relation to the third proposal, to require an entity to reassess the method of estimating uncertain future cash flows if and only if there is a significant change, some IASB members stated that they did not object to the proposal but would prefer to simply remove the paragraph in the ED that prohibited a change in method. This would allow entities to follow the principle each period of using the method that resulted in the best estimates of uncertain cash flows. Some IASB members agreed with removing the paragraph highlighting that this would reduce cost by not requiring entities to reassess the method used at each reporting date which would be the result if the paragraph was simply removed.

The majority of IASB members expressed support for the fourth proposal, to clarify that all outcomes should be considered for the expected value method including those outcomes where a regulatory asset or liability does not exist. One IASB member expressed a preference for separating the two questions of existence and measurement such that once it is determined that the asset or liability exists, the measurement should only include the outcomes that may occur if it exists. The staff and other IASB members acknowledged that this could be an approach to measurement but that it might not result in information that is useful to users because it would not incorporate the probability of the outcome being nil. Another IASB member suggested that a clarification would be useful but that it could be limited to clarifying that all possible outcomes should be considered. To address concerns of stakeholders it was suggested that an illustrative example could be included, similar to an example in IFRIC 23, which included existence uncertainty, to demonstrate the application of the expected value method.

On the final proposal not to require a separate impairment test for regulatory assets, all IASB members were supportive. One IASB member noted a preference for including a different articulation for the rationale for this decision compared to that in the paper. The IASB member proposed that the rationale in the paper would not be required as the mechanics of the method used would have the same outcome as impairment models in other standards including IFRS 9 and IAS 36.

IASB decisions

All IASB members voted in favour of the first recommendation.

12 IASB members voted against the second recommendation, with 2 voting in favour.

13 IASB members voted in favour of the third recommendation. Only 4 IASB members voted in favour of only deleting the paragraph prohibiting a change in method used.

13 IASB members voted in favour of the fourth recommendation,

All IASB members voted in favour of the fifth recommendation.