Background

The IASB is developing an accounting model that will require rate-regulated companies to provide information about their incremental rights to add amounts, and incremental obligations to deduct amounts, in determining the future rates to be charged to customers as a result of goods or services already supplied.

Currently, there is no specific guidance in IFRSs addressing the accounting for rate‑regulated activities and companies use different accounting models to report the effects of rate regulation. Consequently, comparing and understanding the effects of rate regulation across different countries and companies is difficult.

The exposure draft published today follows a discussion paper DP/2014/2 Reporting the Financial Effects of Rate Regulation that was published in September 2014 and examined a certain type of rate regulation where customers have little or no choice but to purchase the rate‑regulated goods or services from the entity.

Previous to the publication of DP/2014/2, the IASB published the limited‑scope standard IFRS 14 Regulatory Deferral Accounts in January 2014 to provide a short‑term, interim solution for rate‑regulated entities that have not yet adopted IFRSs but that recognise regulatory deferral balances under their previous GAAP. This was to address the concern that the lack of guidance may be a barrier to the adoption of IFRS Standards of for such entities. Once the exposure draft is finalised, IFRS 14 will be withdrawn.

Key proposals

The main proposals in ED/2021/1 Regulatory Assets and Regulatory Liabilities are the following:

• Objective: The new standard would replace IFRS 14 Regulatory Deferral Accounts by introducing a new comprehensive accounting model for regulatory assets and liabilities.
• Scope: The standard would apply when the entity is party to a regulatory agreement that determines the regulated rate the entity can charge for the goods or services it supplies to customers.
• Recognition: Regulatory assets and liabilities arise when the regulated rate is determined in such a way that some or all of the total allowed compensation for goods or services supplied in one period is charged to customers in a different past or future period. Recognising regulatory assets and liabilities leads to regulatory income and expense.
• Measurement: Regulatory assets and liabilities would be measured at historical cost, modified for subsequent measurement by using updated estimates of the amount and timing of future cash flows. The estimated future cash flows of a regulatory asset or liability would be discounted to their present value by using the regulatory interest rate. After initial recognition, the carrying amount of the regulatory asset or liability would be updated at the end of each reporting period to reflect conditions existing at that date.
• Presentation: In the statement(s) of financial performance, an entity would present all regulatory income and expense as a separate line item immediately below revenue. In the statement of financial position, an entity would present line items for regulatory assets and liabilities.
• Disclosure. The exposure draft includes several proposed disclosure objectives and detailed requirements to achieve these objectives.

The deadline for submitting comments is 30 July 2021.

Alternative view

The basis for conclusions on the exposure draft includes an alternative view by Board member Mary Tokar. Ms Tokar voted against publication of the exposure draft because of the focus on understanding the relationship between an entity’s revenue and expenses and the related proposals to present particular items of regulatory income and regulatory expense in other comprehensive income, and to measure some regulatory assets and regulatory liabilities by reference to the measurement under IFRSs of the related liabilities and related assets. She also disagrees with the proposed scope of the standard.

Effective date and transition

The exposure draft does not contain a proposed effective date as the IASB will decide on the effective date only upon completion of its redeliberations. The expectation is currently that the standard will become effective approximately 18-24 months after being published in its finalised form.

The standard would be applied retrospectively with one transitional provision and early adoption would be permitted.

Additional information

The following additional information is available on the IASB website and on IAS Plus:

• IASB press release (includes a short Debrief introduction)
• Access to the exposure draft
• Access to the basis for inclusions (includes alternative view)
• Access to the illustrative examples
• IASB Snapshot document summarising the proposals
• Deloitte's IFRS in Focus newsletter
• Our IAS Plus Project page on Rate-regulated activities — Comprehensive project