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IASB Exposure Draft - Regulatory Deferral Accounts

Wednesday 15 May 2013

This edition of the newsletter gives an overview of the latest Exposure Draft issued by the IASB in April 2013: ED/2013/5 Regulatory Deferral Accounts. The ED is intended to lead to an interim standard, as part of the IASB's project on Rate-regulated Activities.

Rate regulation involves restricting prices that can be charged by an entity to its customers. An example might be a power generator with a monopoly position in its region whose price setting is regulated by government. It is permitted to charge prices to recover specified agreed costs incurred plus a margin of 10% over a three year period: if it earns more than 10%, it must reduce prices in future (it has a 'regulatory liability') and if it earns below 10%, it can increase future prices ('regulatory asset'). The accounting issue is whether these regulatory assets and liabilities meet the definitions and recognition criteria of accounting assets and liabilities. At present, IFRS has no specific guidance and, in accordance with IAS 8, entities must develop policies that do not conflict with the Conceptual Framework.

While Canada was in the process of adopting IFRSs, the IASB added an agenda project on Rate-regulated Activities and published an ED in 2009 but subsequently suspended the project, given the fundamental difficulties raised. As a result of feedback from its subsequent Agenda Consultation, the IASB began a revised project in September 2012, split into two phases:

  • An interim IFRS considering the feedback that the Board will receive on the ED Regulatory Deferral Accounts, which is the subject of this newsletter.
  • A comprehensive IFRS specifying the appropriate accounting treatment of rate-regulated activities in accordance with the IASB's Conceptual Framework. The Board issued a Request for Information on rate regulation in March 2013, with a closing date for responses of 30 May 2013. The aim is to issue a Discussion Paper in the fourth quarter of this year.

The proposed interim standard will only apply to first-time adopters of IFRS. Existing IFRS preparers will therefore not be able to apply the interim standard. Not all forms of rate-regulation qualify for the ED's proposed treatment: there has to be a rate regulator, i.e. an authorised body that restricts the price that the entity can charge to its customers, and the price established by regulation is designed to recover the entity's specific costs of providing the regulated goods or services. Consequently the interim standard would not apply if prices were set by reference to movements in an index of general prices/inflation.

The ED allows entities that adopt IFRS to continue to use their previous GAAP as accepted in their jurisdictions for the recognition, measurement and impairment of regulatory deferral account balances. The latter are the balance of any expense or income deferral or variance account which is included in the setting of the future rates by the rate regulator and that would not otherwise be recognised as an asset or a liability in accordance with other IFRSs. The term "regulatory deferral account balances" has been chosen as a neutral descriptor, instead of "regulatory assets" or "regulatory liabilities". The IASB will clarify whether regulatory deferral account balances represent assets or liabilities in the more comprehensive project phase on rate-regulated activities.

The ED requires the presentation of regulatory deferral account balances as separate line items in the statement of financial position. More precisely, entities will first have to present total assets (and/or liabilities) before regulatory balances, followed by regulatory deferral account balances and finally present total assets (and/or liabilities) including regulatory deferral account balances. Moreover, movements in regulatory deferral account balances will have to be presented as a separate line item in the statement of comprehensive income. Consequently, it will be necessary to present a subtotal of profit or loss prior to the net movement in all regulatory deferral accounts.

The ED includes additional rules for entities presenting earnings per share in accordance with IAS 33 Earnings per Share. Such entities have to disclose for each earnings per share amount presented according to IAS 33, additional basic and diluted earnings per share amounts that are calculated in the same way, except that they exclude the net movement in the regulatory deferral account balances. All earnings per share amounts have to be presented with equal prominence for all periods presented.

The IASB also proposes to require specific disclosures that enable users of financial statements to evaluate:

  • the nature of, and the risks associated with, the rate regulation that restricts the price that the entity can charge to its customers for the goods and services it provides; and
  • the effects of the rate regulation on the entity's financial position, financial performance and cash flows.

Finally, the Board also proposes guidance on how other standards (e.g. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and IAS 36 Impairment of Assets) should be applied to regulatory deferral account balances.

The Exposure Draft can be commented until 4 September 2013. The IASB plans to redeliberate the feedback received on the ED in the fourth quarter of this year.

For more information about this important topic, note that IASeminars offers the following events:

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