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IFRS Technical Update
Will we get an IFRS standard to enable us to recognise regulatory assets and liabilities?
By Richard McCabe
IASeminars Faculty Member
The short answer is YES!
But first, let’s look at the history of this topic. Before we transitioned to IFRS in Canada in 2011, we all used the same accounting rules to record regulatory assets and liabilities, i.e. Canadian GAAP. As Canadian GAAP did not provide detailed guidance, we tended to default to US GAAP, which was referred to previously as FAS 71, now known as ASC 980 – the Topic on Regulated Operations. So, we had consistency in presentation, and financial statements of regulated entities were comparable.
However, with the implementation of IFRS in Canada, all of that changed. And this change was due to a decision made in Europe when the European Union mandated the use of IFRS to replace national GAAPs in 2005. At that time, European entities faced some significant questions, one of which affected the recognition of regulatory assets and liabilities. A decision was made, for a number of reasons, to move from using the accrual principle to the cash principle for recognising these items. This decision led to major consequences for Canadian utilities when they made the transition to IFRS, as their regulatory assets and liabilities, which could be significant, could no longer be recognised, except in very narrow circumstances.
As a result, utilities moved to use various GAAPs that allowed them to continue to recognise regulatory assets and liabilities in their general purpose financial statements. Some utilities made the transition to IFRS, while others used US GAAP and still others used government-mandated accounting rules. Consequently, there was a wide disparity in accounting practices and we no longer had consistency in presentation in Canada, and financial statements of regulated entities were not comparable.
Canadian utilities, along with the Canadian Accounting Standards Board and some members of the “Big Four” accounting firms, brought this outcome to the attention of the International Accounting Standards Board. They were also supported by US and international utility companies and various US and other regulatory bodies. As a result, the IASB was persuaded to revisit the decision that was made in 2005 not to recognise regulatory assets and liabilities.
The IASB created a Consultative Group to provide them with an expert perspective, including information and advice on the issues associated with the recognition of regulatory assets and liabilities. Canada had the largest representation on this Group, with four out of twenty members. Working with IASB Board members and staff, the Group has been successful in getting an interim standard, IFRS 14, issued to recognise regulatory assets and liabilities.
The Group has continued to work with IASB Board members and staff, and the end is now in sight!
At its most recent meeting on February 22, 2018, the IASB decided unanimously that:
- Regulatory assets (in their definition, “the present regulatory right to charge a rate increased by an amount as a result of past events”) “meet the definition of an asset in the Conceptual Framework.” And
- Regulatory liabilities (in their definition, “the present regulatory obligation to provide goods or services at a rate reduced by an amount as a result of past events”) “meet the definition of a liability in the Conceptual Framework.”
This is great news for all utilities who have felt and continue to feel that these regulatory items have economic substance that can be enforced in law, and should be recognised in their general purpose financial statements.
So where do we go from here to get a final standard in place?
The IASB will discuss proposals for the scope and recognition requirements of the accounting model to be used to recognise regulatory assets and liabilities. They will also decide whether to move immediately to publish an Exposure Draft or take the interim step of releasing a Discussion Paper as the next consultation document for the project. These decisions are expected to be made this year, and a final standard could be issued within in the next two years.
How can we help you in the meantime?
We have developed a course to provide guidance on the use of ASC 980 for any Canadian utilities that are using US GAAP currently to recognise their regulatory assets and liabilities.
We have also developed a course to provide guidance on the use of IFRS, including IFRS 14, for any Canadian utilities that are using or planning to transition to IFRS currently, to recognise their regulatory assets and liabilities.
These courses will be presented by Richard McCabe in Toronto this May and Calgary this October.
These courses will be beneficial to:
- Accountants or finance professionals who seek to refresh their knowledge of accounting for utility companies;
- Accounting staff who would like to have a wider understanding of the regulatory framework for utilities and how their individual component fits into the broader picture; and
- Senior and executive accounting personnel who have not been exposed to the detailed accounting entries for some time and would like to refresh their knowledge.
Richard McCabe is a recently retired accounting executive with experience in the utility and energy marketing industries. Richard led his company’s transition from Canadian GAAP to IFRS and provided dual reporting in IFRS and US GAAP, following his company’s recent acquisition by a major US-based conglomerate. His company was the only Canadian electricity utility that was able to recognise its regulatory assets and liabilities fully under IFRS. Richard was a participant in witness panels before his company’s regulator to support their biennial rate applications. He was an active member and later the Chair of the Finance and Accounting Committee of the Canadian Electricity Association and was actively involved in the initiative to gain full recognition of a utility’s regulatory assets and liabilities under IFRS. As a result of his experience, he was appointed as a member of the Consultative Group to the International Accounting Standards Board on the potential recognition of regulatory assets and liabilities under IFRS. The group has been partially successful to date with the implementation of IFRS 14 and is continuing to work with the IASB towards full recognition. Richard is a Chartered Accountant, Scottish and Canadian, and an MBA. During his career, Richard has been a Controller and an Internal Audit Director and has held senior positions with the utility regulator in Alberta, the predecessor to the Alberta Utilities Commission, and in the Office of the Auditor General of Alberta.
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