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Rate-regulated activities - IASB Comprehensive Project

Description

What is the problem with rate-regulated activities?

Existing IFRS Standards do not provide guidance on the recognition and measurement of regulatory assets and regulatory liabilities. In most instances, companies do not recognise regulatory rights and obligations arising from rate-regulated activities.

Over the years, stakeholders have argued that this makes the statement of financial performance and the balance sheet of rate-regulated companies incomplete and distorts the performance of entities subject to rate regulation. National GAAP (like US GAAP) provide specific guidance on this matter, but there is no equivalent guidance in IFRS. 

Project history and EFRAG developments

In March 2009, the IASB published an Exposure Draft to address the accounting for rate-regulated activities.  However, given the number of concerns reported by stakeholders on the proposals, the IASB decided not to develop the propsoals further.

The issue to be addressed by this project is whether IFRSs should require entities operating in rate-regulated environments to recognise assets and liabilities arising from the effects of rate regulation. Some national GAAP provides specific guidance on this matter, but there is no equivalent guidance in IFRSs.

The IASB reactivated this project as part of its response to the Agenda Consultation 2011.

To respond to concerns by IFRS first-time adopters, the IASB published in January 2014 an interim Standard IFRS 14 Regulatory Deferral Accounts - that would allow entities adopting IFRS to continue using their local GAAP requirements for rate-regulated activities until the comprehensive project is completed.

In March 2013, the IASB launched a Request for Information to obtain a high-level overview of the types of rate regulation regimes across different jurisdictions.  EFRAG responded the IASB's request and reported the results of the outcome conducted with stakeholders.

In September 2015, the IASB published a Discussion Paper ('the DP') that explored whether rate regulation has distinguishing features that create rights and obligations. EFRAG published its draft comment letter on the DP in October 2014 and its final comment letter in January 2015. This was followed by a feedback statement published in February 2015.

EFRAG also supported the IASB's decision to initially focus the debate on accounting for rate-regulated activities on a particular type of rate regulation referred to as defined rate regulation.

During the years 2015-2020 the IASB discussed several aspects of the project and developed its preliminary views on the accounting for regulatory assets and regulatory liabilities.

In September 2019, the IASB completed its discussions on the project. 

EFRAG held regular discussions with the EFRAG RRAWG, the EFRAG Board and EFRAG TEG to follow developments and engage in discussions and updates on the IASB project.

Exposure Draft published in January 2021

On 30 January 2021, the IASB published its Exposure Draft on ED/2021/1 Regulatory Assets and Regulatory Liabilities ('the ED') and seeks constituents' views on the proposals by 30 July 2021.  The ED sets proposals on how an entity should account for regulatory assets and regulatory liabilities. The proposed accounting model covers the following aspects:

  1. scope and definition of regulatory assets and liabilities; 
  2. what is total allowed compensation and treatment of regulatory returns for capital work-in-progress (CWIP);
  3. recognition and derecognition (including regulatory agreement boundary); 
  4. measurement of regulatory assets and regulatory liabilities; 
  5. interaction with other IFRS Standards; 
  6. presentation and disclosures; and 
  7. transition requirements.

The EFRAG Rate-regulated Accounting Working Group discussed the IASB proposals at three separate meetings in February and March 2021. EFRAG RRAWG members were generally supportive of the proposals, although they expressed concerns with the proposed accounting for CWIP, with requiring a minimum interest rate for discounting when the rate is considered to be insufficient and with the level of detailed disclosure requirements.

EFRAG Draft Comment Letter

In April 2021, EFRAG published its Draft Comment Letter ('DCL') on the ED. In its DCL, EFRAG welcomed the IASB's efforts to address the accounting for regulatory assets and regulatory liabilities.

Overall, EFRAG agrees with the IASB proposals and considers that the benefits would outweigh the costs for both users and preparers. EFRAG is seeking views from constituents on the possible unintended consequences of the impact of the scope outside the utility sector. Furthermore, EFRAG did not reach a final view on the proposals relating to CWIP, discounting and application of the IFRS 3 exception, and seeks further feedback from constituents on these three proposals.

Outreach

Since November 2020, EFRAG has been undertaking extensive outreach, including an early-stage analysis of the proposals together with preparers and users of financial statements (that commenced in November 2020), online webinars, online closed meetings and telephone calls with stakeholders. 

Early-stage effects analysis

A separate early-stage effects analysis survey for preparers and users was published in November and December 2020 respectively.  The objective was to test the implications of the IASB tentative decisions - feedback would be used to develop the EFRAG draft comment letter once the was published. A follow-up survey for both preparers and users was published in May 2021. The results were published in August/September 2021 as part of the consultations to approve the final comment letter. 

Outreach events and webinars

Several outreach events have taken place during 2021. EFRAG consulted preparers and users in several meetings in June 2021 and presented the status quo of the results to EFRAG TEG/CFSS. EFRAG also held several meetings with EFRAG working groups in July 2021 to present the outreach feedback and receive feedback on the IASB's proposals. In July EFRAG held a closed webniar with users ("Improving reporting for rate-regulated entities: user perspective") to obtain user views of the main proposals of the ED.

EFRAG Secretariat Briefing Paper on Scope

In June 2021, EFRAG published an EFRAG Secretariat Paper on Scope. 

Final comment letter

EFRAG published its Final Comment Letter on the IASB Exposure Draft ED/2021/1 Regulatory Assets and Regulatory Liabilities in September 2021 after consulting with EFRAG TEG and EFRAG Board. In the Final Comment Letter EFRAG takes the following positions.

Objective, Scope and Definitions

EF​RAG supports the IASB’s overall objective to develop an accounting model for regulatory assets and regulatory liabilities. ​​EFRAG considers that there is clarity on the scope of the proposed Standard within the utilities sector, but acknowledges that there might be less clarity for other sectors which may unknowingly fall within the proposed scope. EFRAG notes several aspects of scope where there is a need for further clarification on entities’ scope eligibility. EFRAG recommends the IASB to consider specific scope exclusions (e.g., for self-regulation). ​EFRAG considers that some of the terms used in the ED, such as customers and the regulator, need clarification. EFRAG generally supports the proposed definitions of regulatory assets and regulatory liabilities and generally agrees that these meet the definitions of assets and liabilities under the Conceptual Framework. However, EFRAG notes some instances where the recognised regulatory assets and regulatory liabilities might not meet the definitions provided in the ED.


Tot​al Allowed Compe​nsation

EFRAG generally supports the proposed elements of total allowed compensation. However, EFRAG disagrees with paragraph B15 of the ED that states that regulatory returns earned on assets not yet available for use would not form part of total allowed compensation during construction and hence would require the recognition of a regulatory liability. ​EFRAG recommends that the accounting for these regulatory returns should depend on the economic substance of the regulatory agreement. EFRAG is aware of situations where the proposed requirements on total allowed compensation under paragraphs B3-B9 related to allowable expenses will not reflect the economic substance of the regulatory agreement (e.g., recoverable costs are based on regulatory accounting and not IFRS expenses). EFRAG recommends that the IASB further analyses whether the requirements of paragraphs B3-B9 can be applied across diverse regulatory regimes.


Recognition and Measurement

EFRAG agrees that an entity should recognise all its regulatory assets and regulatory liabilities and generally supports the proposed recognition criteria. However, some of EFRAG’s stakeholders have noted concerns with high levels of uncertainty and recommended that the IASB considers a higher recognition threshold for cases of high existence uncertainty, similar to that in IFRS 15 (constraining estimates of variable consideration). EFRAG supports the proposed cash-flow measurement technique, but disagrees with the proposed new concept of a minimum adequate rate as the discount rate for regulatory assets, when the regulatory interest rate provided is insufficient. Should the IASB decide to maintain this concept, EFRAG recommends that the IASB develop a rebuttable presumption. EFRAG also disagrees with having different discounting approaches for regulatory assets and regulatory liabilities.


Presentation and Disc​losure

EFRAG agrees an entity should present all regulatory income minus all regulatory expense as a separate line item immediately below revenue and to include regulatory interest income and regulatory interest expense within this line item. EFRAG generally agrees with the proposed overall disclosure objectives. However, EFRAG recommends the IASB to focus more on the usefulness of information provided and adopt a more balanced disclosure approach by considering a prioritisation based on cost-benefit considerations and undertaking further outreach to users.​


Tran​sition​ and Effective date

EFRAG recommends modified retrospective application with exemptions or practical expedients for assets with long useful lives and where backdated CWIP regulatory returns will need to be deferred (should the IASB decide to retain ​this proposal). EFRAG recommends that the effective date should be 24-36 months after the publication of the final standard to allow effective implementation.


Other matters

EFRAG supports the remaining proposals and overall expects a positive cost-benefit relationship from implementing the proposed Standard. In order to address the concerns on several key aspects of the ED, EFRAG recommends the formation of a transition resource group to help with the  implementation of the proposed Standard.

EFRAG has pusblished a feedback statement in September 2021 after publishing the final comment letter.


Further development

The IASB held several meetings in the last quarter of 2021 to discuss the results of the comment letters and to find a way forward to address the identified weaknesses of the proposals. The IASB published a agenda paper in December 2021 to present a roadmap for further activities to be undertaken to get further insights into the issues that were adressed.


Next steps

EFRAG observes the current deliberations of the IASB.

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