Cover note (Agenda Paper 9)

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

This paper was not discussed as it was an overview paper.

Discounting of future cash flows—Minimum interest rate (Agenda Paper 9A)

This paper set out the staff analysis and recommendations on the proposals in the ED on the minimum interest rate.

Staff recommendation

The staff recommended that the final standard:

• retains the proposals in paragraphs 50-52 of the ED that requires an entity to assess whether there is any indication that the regulatory interest rate for a regulatory asset may be insufficient and to use the minimum interest rate as the discount rate if it is higher than that regulatory interest rate (Recommendation 1);
• clarifies in the application guidance that an entity performing the assessment in Recommendation 1 need not calculate the minimum interest rate for that regulatory asset or undertake an exhaustive search for indications (Recommendation 2);
• retains the proposal in paragraph 53 of the ED that requires an entity to use the regulatory interest rate as the discount rate for a regulatory liability in all circumstances (Recommendation 3);
• provides guidance on the estimation of the minimum interest rate that incorporates the principles used in other IFRS standards (Recommendation 4);
• exempts an entity from applying the proposed requirements on minimum interest rate to a regulatory asset that arises from variances between estimated and actual costs or volume—the entity would apply the proposals once the regulator determines the final variance balance to be included in future regulated rates (Recommendation 5); and
• requires an entity that elects to apply the exemption in Recommendation 5 to disclose this fact and the carrying amount of regulatory assets at the end of the reporting period to which the entity has applied this exemption (Recommendation 6).

IASB discussion

Several IASB members expressed concern on Recommendations 1-3 and were reluctant to agree with the proposals for the following reasons:

• The majority of the comments received on the proposals both from users and from consultative groups suggest that the proposals do not work. It is not just the complexity for preparers but also the fact that users mentioned this will not be useful information.
• The feedback suggests that there is a small population affected and occurrence is infrequent, yet there is much complexity that would be added by the proposals.
• There is an asymmetry that is related to the regulatory asset and the regulatory liability having different discount rates despite arising from the same agreement.
• On the assumption that these are arms-length market transactions, if there is no compensation for the interest rate, compensation will be factored in somewhere else.
• This assessment is going to be judgemental, and preparers will spend large amounts of time on this, especially with auditors and regulators.
• One IASB member considered the consequences if the minimum interest rate was not retained, and concluded that this could be an issue in countries with high inflationary pressures. However, the regulatory agreements would usually cover this. This could also be an issue when the rate is zero in countries that are still developing a regulation. However, there is still significant uncertainty related to the cash flows regardless. Therefore, precision in the discount rate does not counter this fact.

Several IASB members suggested not to use the minimum interest rate and one IASB member suggested to rather use the regulatory rate across the board. That IASB member also suggested to add disclosure requirements on the rate if some parties believe this is not a fair rate. However, if this area becomes an issue going forward, the IASB could come back to this at that stage.

Several IASB members, on balance, agreed with the proposal based on the following reasons:

• In most standards it is understood what the appropriate discount rate is, and that rate is used to discount cash flows on a conceptual basis. The proposal is a practical expedient, and while difficult in some cases, if there was a long-term rate regulated activity, there would be a large difference which is important to consider.
• If the regulatory interest rate did not provide sufficient compensation, then regulatory assets and income would be overstated. Therefore, the minimum interest rate is agreed with. If there is no minimum interest rate and the regulatory asset is overstated, there is a question as to whether there will be an immediate impairment.

One IASB member asked the staff what an entity would do if there was no regulatory rate. The staff responded that where the entity knows that the regulatory rate is not provided in the faithful representation of the measurement of the asset there might be accounting policies in place to prevent this.

For Recommendation 4, one IASB member mentioned that if the proposal started with a conceptual discount rate and then moved on to a practical expedient for small cases, the answer might be different. However, here, a practical expedient exists except for a few cases. Thus, there was non-agreement to both paragraphs 56 and 58 of the paper, as paragraph 58 is a very conceptual answer and if there is only a small set of circumstances where the interest rate is a minimum, it was suggested to keep it simple and look to the guidance in paragraph 58.

Another IASB member asked the staff which existing accounting guidance is referred to in paragraph 56. Furthermore, paragraph 58 refers to the incremental borrowing costs and whether this was the same as the minimum interest rate was questioned. The staff mentioned that they thought the methodology used in IFRS 16 in arriving at the incremental borrowing rate was something that could be used as guidance for this proposal to get to the estimation. The staff did not believe that paragraphs 56 and 58 were contradictory. Some IASB members thought that IFRS 15 better analogised to this situation than IFRS 16.

Some IASB members agreed with Recommendations 5 and 6 as the period would not be long in certain circumstances and the exemption would be helpful together with disclosure. One IASB member mentioned that this would fix the complexity of swings between assets and liabilities. However, it was suggested not to disclose the amount of assets as there seems to be no use to the investor.

IASB decision

7 of 14 IASB members voted in favour of Recommendations 1-3. The Chair used his casting vote in favour of the recommendations.

All IASB members voted in favour of Recommendations 4-6.

Scope—Interaction with IFRS 17 (Agenda Paper 9B)

This paper set out the staff’s analysis and recommendations on whether the scope of the final standard should exclude regulatory assets and regulatory liabilities that might arise when premiums charged in insurance contracts within the scope of IFRS 17 are regulated.

Staff recommendation

The staff recommended that the final standard excludes regulatory assets and regulatory liabilities that might arise when premiums charged in insurance contracts within the scope of IFRS 17 are regulated.

IASB discussion

Several IASB members supported the staff recommendation for the following reasons:

• Conceptually, IFRS 15 and IFRS 17 are achieving the same outcome. However, based on the feedback received there is no problem to be solved in this area and adding IFRS 17 would add complexity.
• The guidance already provided is useful and there is significant overlap between IFRS 17 and the rate regulated model. However, ultimately, this additional layer of complexity is not needed.
• This exclusion makes it clear that the new standard is different to IFRS 9. Furthermore, an entity applies IFRS 15 and then the new standard is used as the supplementary standard.
• There are significant differences between IFRS 17 and the new standard, so it is sensible to exclude.

IASB decision

All IASB members voted in favour of the staff recommendation.

Amendments to IFRS 3 and IFRS 5 (Agenda Paper 9C)

This paper included the staff’s analysis and recommendations in relation to the amendments to IFRS 3 and IFRS 5 proposed in the ED.

Staff recommendation

The staff recommended that the final standard retains the proposal to:

• create an exception to the recognition and measurement principles in IFRS 3 for regulatory assets acquired and regulatory liabilities assumed; and
• exclude regulatory assets from the scope of IFRS 5.

IASB discussion

An IASB member agreed with the staff recommendation but conveyed that it was difficult as there are inconsistencies on decisions. This is because IFRS 3 creates an exception from fair value when the regulatory assets and regulatory liability are akin to a contract asset and liability. When determining the fair value, estimated cash flows would be used, which is already done in the measurement model. Therefore, the only difference in the fair value is the discount rate. Another IASB member mentioned that the new standard is a supplementary standard to IFRS 15 so that IASB member could not understand why there was no consistency. The staff responded that using the regulatory interest rate as the discount rate prevents post-combination gains and losses arising from subsequent remeasurement of the assets and liabilities and that was an important consideration.

IASB decision

All IASB members voted in favour of the staff recommendation.