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).

Boundary of a regulatory agreement (Agenda Paper 9A)

This paper set out the staff analysis and recommendations on the proposals on how the final standard could articulate the guidance on the boundary of a regulatory agreement, acknowledging the possibility of both finite and indefinite rights to supply goods or services (rights to operate).

Staff recommendation

The staff recommended that the final standard:

• acknowledges that rights to operate may be indefinite (Recommendation 1)
• requires that an entity that has an enforceable right to operate, should include all the unrecovered cash flows in the measurement of the regulatory asset or regulatory liability if the entity has an enforceable right on the following conditions:
  • Condition 1—to recover or obligation to fulfil all or substantially all of the regulatory asset or regulatory liability by adding amounts to or deducting amounts from future regulated rates charged over its life; or
  • Condition 2—on termination of the agreement, to receive or obligation to pay compensation for all or substantially all of the unrecovered regulatory asset or unfulfilled regulatory liability; and (Recommendation 2)
• requires that the entity, in cases where it has an enforceable right to operate but does not meet Conditions 1 or 2, determine the set of unrecovered or unfulfilled cash flows for which its legislative or regulatory frameworks provide sufficient assurance for recovery or fulfilment and include those cash flows in the measurement of a regulatory asset or regulatory liability (Recommendation 3)

IASB discussion

Several IASB members conveyed difficulty in understanding the concept of the indefinite right described in Recommendation 1 for the following reasons:

• It was mentioned that the term indefinite is not as intuitive as the phrase “non-cancellable” and “if cancellable then there will be compensation”.
• The split between identifying the boundary as a time band and identifying cash flows within a boundary is slightly artificial. The focus should be on the cash flows within the boundary combined with the enforceable right principle. Furthermore, the entity should consider the facts in paragraph 27 of the ED for distinguishment between indefinite and finite regardless of whether this term is included. Paragraphs 34 and B28 of the ED already explain that this as the latest future date. Consequently, a judgement must be made by the entity.
• It was questioned whether the accounting treatment should build on whether or not a contract is indefinite, as other accounting standards do not have a similar requirement. Ultimately, the outcome would be the same, but the concept should focus on whether the entity has the right to operate which is the basic principle.
• It is not necessary to bring this level of detail into the standard.

Some IASB members agreed with the staff that mentioning ‘indefinite’ is required but should not be the leading term and a holistic view should be taken.

None of the IASB members objected to Recommendation 1 but some IASB members were concerned about whether this phrase would be the best way to articulate the concept and also whether this wording should be in the body of the standard or in the application guidance.

The staff responded that defining the ‘indefinite’ notion helps to compare and acknowledge that there are different arrangements.

For Recommendations 2 and 3, IASB members suggested that the staff set out the recommendations in a diagram.

Most IASB members agreed with the overall concepts but had the following concerns:

• Recommendation 3 is not needed as this would lead to a two-layer assessment which adds complexity. It was mentioned that the cash flows included in the boundary should be those for which there is an enforceable right to recover or an enforceable obligation to pay. Therefore, distinguishment on whether it is substantially all or not would not matter.
• The addition of the wording around high-level assurance and sufficient assurance may not be appropriate. Some IASB members commented on the high level of assurance as an interpretation on what an enforceable right to collect might be. It was mentioned that there would be a risk of having this as interpretation guidance in the standard and it being perceived as an entity now having an enforceable right to collect when enforceability is by law, it was suggested that this phrase would work better as application guidance.
• One IASB member mentioned that the time value of money varies between Conditions 1 and 2 in Recommendation 2.
• The inclusion of new language weakens the concepts already explained in the ED and different words being used to describe the same thing causes confusion.

One IASB member agreed with the staff recommendations and mentioned that some level of guidance is critical. However, that IASB member was open to changes in the wording of the recommendations.

The staff responded that they agreed with all comments made by the IASB members in terms of combining Recommendations 2 and 3 and removing any wording that could add confusion.

Ultimately, the standard needs to include the enforceable right to the cash flows within the boundary.

IASB decisions

All IASB members voted in favour of the staff recommendations with the following amendments:

For Recommendation 1, the vote has been taken on the concept that contracts may be indefinite, and that wording will be provided in the application guidance on how to express this.  

For Recommendations 2 and 3, the vote has been taken based on paragraph 50 in the ED, however without the term “all or substantially all”.

Amendments to IAS 36 (Agenda Paper 9B)

This paper sets out the staff’s analysis and recommendations in relation to the amendments to IAS 36 proposed in the ED.

Staff recommendation

The staff recommended that the final standard:

• retains the proposal to exclude regulatory assets from the scope of IAS 36 (Recommendation 1)
• omits the amendments to IAS 36:43 and 79 (Recommendation 2)
• amends the basis for conclusions to IAS 36 to explain that, although regulatory assets are excluded from the scope of IAS 36, an entity would have to consider the cash flows arising from regulatory assets and regulatory liabilities when applying IAS 36:43 and 79 (to avoid double-counting future cash flows and to ensure consistency between the recoverable amount and the carrying amount of a cash-generating unit); and (Recommendation 3)
• should not provide any further guidance on the application of IAS 36. (Recommendation 4)

IASB discussion

Several IASB members agreed with the staff recommendations. Many IASB members welcomed the clarification by the staff that Recommendation 3 is an explanation and not guidance and did not think it was necessary to vote on the basis of conclusions. However, one IASB member mentioned that it was necessary to vote as this would confirm that no guidance is being added to the standard.

IASB decisions

All IASB members voted in favour of the staff recommendations.

Disclosures proposed in ED (Agenda Paper 9C)

This paper outlined the staff’s analysis and detailed recommendations on the disclosure requirements proposed in the ED.

IASB discussion

The staff outlined the proposed disclosures in six sections as follows:

• The overall disclosure objective (Recommendation 1)
• Level of aggregation and disaggregation (Recommendation 2)
• Disclosures about financial performance (Recommendation 3)
• Disclosures about financial position—maturity analysis, risk, uncertainty and discount rate (Recommendation 4)
• Reconciliation (Recommendation 5)
• Regulatory assets and regulatory liabilities measured applying paragraph 61 of the ED (Recommendation 6)

Two IASB members agreed with Recommendation 2 but expressed concern around the wording describing the level of aggregation used in other information provided to users. The concern is that information provided may be too detailed or too aggregated because it is intended for a different audience. Two IASB members suggested that the examples and wording used on the level of aggregation and disaggregation should align to the principles set out in IFRS 18 to ensure that both standards are consistent with each other. One IASB member mentioned that examples demonstrating consistency with the level of disaggregation across all areas of the financial statements would be useful.

Several IASB members expressed difficulty in separating Recommendations 3-5 as these are merely different ways of presenting the same information. The reconciliation covers all components of the recommendations and could be the way that users present information without having a disclosure overload and overlap. The staff conceded that there could be a better way of drafting these disclosure requirements.

Some IASB members commented on Recommendation 3, specifically on paragraph 50 (c) and (d) as drafted in the ED. In the IASB member’s view the disclosure requirement does not need to explicitly permit the aggregation of amounts and users should have the discretion to apply the general principles in IFRS 18 in this regard.

One IASB member mentioned that the reconciliation is incremental to Recommendation 3 but not the same and did not agree with paragraph 85(d) as drafted in the ED. Another IASB member expressed that keeping the requirements in is key.

One IASB member raised a question around the disclosure requirements proposed being disproportionate in terms of the volume of requirements which could become quite burdensome to the preparers of financial statements. Other members agreed while some thought that the disclosure was necessary especially if rate-regulated activities are key. However, this needs to be commensurate with the cost.

IASB decisions

All IASB members voted in favour of the Recommendations 1 and 2.

For Recommendation 3:

• 13 of the 14 IASB members present voted in favour of paragraph 50(a)-(b) in the ED.
• All IASB members voted against paragraph 50(c)-(d) in the ED.
• 8 IASB members present voted in favour of paragraph 50(e) in the ED.

13 IASB members voted in favour of the Recommendations 4-6.

New disclosures (Agenda Paper 9D)

This paper set out the staff analysis and detailed recommendations on new disclosure requirements arising from the IASB’s redeliberation’s on the ED.

IASB discussion

The staff outlined the proposed disclosures in four sections as follows:

• Direct (no direct) relationship concept (Recommendation 1)
• Unrecognised regulatory assets and unrecognised regulatory liabilities (Recommendation 2)
• Long-term performance incentives (Recommendation 3)
• Regulatory returns on an asset not yet available for use (Recommendation 4)

One IASB member expressed concern that the concept is too broad, which means that for those with an indirect relationship additional disclosures would be required beyond what the specific disclosure would entail.

One IASB member had difficulties with the requirement for entities not to disclose their regulatory capital base as it would be difficult to explain the direct/indirect relationship with property, plant and equipment if this is not disclosed. The staff responded that entities will make a judgement to decide whether they have a direct/indirect relationship. This was not covered in the ED. Therefore, the staff recommended the new specific disclosure requirement, which is qualitative in nature.

One IASB member agreed with paragraph 19(a) but not with paragraph 19(b) in the ED. Several other IASB members disagreed with this opinion because determining whether there is a direct/indirect relationship is pivotal to the accounting treatment and what ends up in the financial statements. Paragraph 19(b) simply explains this further. Some IASB members had concerns with how paragraphs 19(a)-(b) were drafted as these could be interpreted differently. Namely, the term “relationship” in the disclosure objective in paragraph 19(a) could be interpreted broadly to cover both direct and indirect relationships which was not intended. The staff agreed to reconsider the drafting.

Several IASB members raised the following concerns in relation to Recommendation 2, specifically on paragraph 29(a)-(c):

• The cost is higher than the benefit of these requirements.
• It is unclear how the requirements would be used to assist users.
• Users who are interested in this information have other ways of accessing this information. Therefore, there is no risk of an information gap if these are not included in the financial statements.

The staff summarised these comments as a general concern with the specificity of information. However, they saw a consensus on having some level of qualitative disclosure on the nature of unrecognised regulatory assets and liabilities.  IASB members instructed the staff to draft the standard to encompass this.

Some IASB members expressed concerns around the cost versus benefit aspect for Recommendation 4. One IASB member responded by saying that paragraph 56(a) of the ED is similar to nominal versus real and would be needed, paragraph 56(c) could be captured by the reconciliation in Agenda Paper 9C and is not required, and paragraph 56(b) did not seem relevant.

IASB decision

The vote on Recommendation 1 was taken based on agreement in principle with the recommendations pertaining to paragraph 19 and that the drafting of the specific disclosure objective would be revisited.  

• All IASB members voted in favour of paragraph 19(a)-(b) in the ED.
• 13 of the 14 IASB members voted in favour of paragraph 20 in the ED.

11 IASB members voted in favour of paragraph 29(d) in the ED, relating to Recommendation 2.

12 IASB members voted in favour of paragraph 29(a)-(c) in the ED with the condition of being redrafted as discussed, relating to Recommendation 2.

All IASB members voted in favour of Recommendation 3.

For Recommendation 4, the vote was separated as follows:

• 13 IASB members voted in favour of paragraph 56(a) in the ED

• All IASB members voted against paragraph 56(b)-(c) in the ED

Disclosures—drafting (Agenda Paper 9E)

This paper included illustrative drafting for the disclosure requirements suggested in Agenda Paper 9C and Agenda Paper 9D. The drafting was for illustration only and it may not coincide with the drafting of the disclosure section in the final standard. The staff did not seek detailed feedback on the drafting at this stage.