Rate-regulated activities - IASB standard setting project
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. There is guidance on this matter in the local GAAP of some jurisdictions.
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 proposals 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 IFRS Accounting Standards.
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 to 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.
In 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.
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 sought constituents' views on the proposals by 30 July 2021. The ED covered the following aspects:
- scope and definition of regulatory assets and liabilities;
- total allowed compensation and treatment of regulatory returns for capital work-in-progress (CWIP);
- recognition and derecognition (including regulatory agreement boundary);
- measurement of regulatory assets and regulatory liabilities;
- interaction with other IFRS Standards;
- presentation and disclosures; and
- transition 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 agreed with the IASB proposals and considered that the benefits would outweigh the costs for both users and preparers. EFRAG sought 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 construction work in progress, discounting, and the application of the IFRS 3 exception. The draft comment letter sought further feedback from constituents on these areas where EFRAG did not express a preliminary view.
Outreach
Before the finalisation of EFRAG's comment letter, from October 2020 to August 2021, EFRAG's outreach activities included early-stage analysis surveys to preparers and users, online webinars, online closed meetings, and interviews with stakeholders.
In June 2021, EFRAG published an EFRAG Secretariat Paper on Scope.
Final comment letter and feedback statement
In its final comment letter response, EFRAG supported the IASB's overall project objective and called for further clarification on entities' scope eligibility. EFRAG was mostly supportive of the ED's definitions and proposals for the recognition, measurement, and presentation of regulatory assets and regulatory liabilities. EFRAG called for a more balanced disclosure approach with prioritisation based on cost-benefit considerations and undertaking further outreach to users.
EFRAG disagreed with the ED's proposed treatment of regulatory returns earned on assets not yet available for use; and with the possible application of a minimum interest rate (instead of only the regulatory interest rate) to discount regulatory assets.
EFRAG published a feedback statement in September 2021 after publishing the final comment letter.
Monitoring of IASB's redeliberations on the Exposure Draft
The IASB's redeliberations commenced in early 2022 and are expected to be finalised in H2 2024. EFRAG has been actively monitoring the IASB redeliberations and consulting the EFRAG RRAWG, FR TEG, CFSS and FRB on the IASB's tentative decisions. In addition, EFRAG facilitated the IASB's staff outreach on the direct (no direct) relationship concept that was introduced as part of the IASB's tentative decisions.
Next steps
A final Standard is expected in 2025 and EFRAG has initiated and will further focus on preparatory work for endorsement advice.