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Rate-regulated activities - Comprehensive Project



Rate regulation typically results in a restriction in the setting of prices that can be charged to customers for services or products. Generally, it is imposed by regulatory bodies or governments when an entity has a monopoly or a dominant market position that gives it excessive market power towards customers.

The objective of the IASB's Rate-regulated Activities project is to determine whether IFRSs should be amended to require rate-regulated activities to be recognised as assets or liabilities arising from the effects of price regulation and/ or to require specific disclosures that help financial statement users to understand the regulatory environment in which the entity operates.

The IASB 2009 Exposure Draft

In 2009, an IASB Exposure Draft was published to address the issues related to rate-regulated activities. However, both respondents and IASB members expressed very divergent views. Therefore at its September 2010 meeting, the IASB decided to suspend the project pending the outcome of the IASB agenda consultation.

In May 2012 the IASB discussed its strategy for developing its technical programme, and it unanimously supported giving priority to developing standards-level proposals for rate-regulated activities.

In March 2013, the IASB launched a request to obtain a high-level overview of the types of rate regulation regimes currently in force and to collect factual evidence to use in developing a Discussion Paper that would identify: (a) the common features of rate regulation; (b) whether these common features create economic resources for, or claims against, a rate-regulated entity that should be recognised in IFRS financial statements; and (c) the information about the consequences of rate regulation that would be most relevant to users of IFRS financial statements.

EFRAG Rate-regulated Activities Working Group

Furthermore, in March 2013, EFRAG decided to establish a Rate-regulated Activities Working Group to advise and provide input to EFRAG TEG and EFRAG Consultative Forum of Standard Setters (EFRAG CFSS) discussions in developing positions on Rate-regulated Activities specific matters and their application within Europe through technical analysis and consultation. The Working Group's primary focus will be on the IASB's long-term comprehensive project on rate-regulated activities reporting.

IFRS 14 Regulatory Deferral Accounts

In April 2013, the IASB published the exposure draft on Regulatory Deferral Accounts and in January 2014 a temporary Standard on IFRS 14 Regulatory Deferral Accounts was issued.

IASB Discussion Paper (DP) on 'defined rate regulation'

At its September 2013 meeting, the IASB acknowledged that rate-regulated regimes are widespread and different. Therefore, the IASB decided to develop a Discussion Paper in order to explore whether rate regulation has distinguishing features that create rights and obligations.

In November 2013, the IASB considered an analysis of the rights and obligations arising from a particular rate-setting mechanism that requires a 'true-up' adjustment to be made to the rate: (a) for differences between estimated and actual amounts of cost and/or revenue for previous periods; and/or (b) to award a bonus or impose a penalty for meeting or failing to meet a performance target.

At its February 2014 meeting, the IASB discussed the distinguishing features of rate regulation that should form the focus of the Discussion Paper. The IASB considered (a) a refined description of the distinguishing features of rate regulation, including a description of the type of mechanism that is typically used to calculate the amount of revenue that a rate-regulated entity is entitled to charge to customers during the regulatory period; and (b) an initial analysis of whether the revenue model contained in IFRS 15 Revenue from Contracts with Customers could be tailored in order to provide the basis of a model for rate-regulated activities.

The IASB published the Discussion Paper on 17 September 2014 and requested for comments by 15 January 2015.

EFRAG draft comment letter on the IASB DP

On 27 October 2014, EFRAG published its draft comment letter and requested for comments by 31 December 2014. In its draft comment letter, EFRAG welcomed the IASB's comprehensive project on rate-regulated activities and the publication of the Discussion Paper Reporting the Financial Effects of Rate Regulation (DP).

EFRAG supported the IASB's decision to focus the debate initially on accounting for a particular type of rate regulation described in the DP as 'defined rate regulation'.

However EFRAG believed the DP represents only a starting point in the discussion. As the project progresses, EFRAG believed the IASB will need to consider in which circumstances an entity's right to recover an agreed amount of revenue and obligations to perform certain activities creates enforceable rights and obligations that should be recognised in financial statements. Whilst EFRAG broadly supported the description of 'defined rate regulation', it believes that any enforceable rights and obligations that stem from the rate-regulation mechanism are the most important elements for distinguishing the types of rate regulation that require recognition in the financial statements. In its view, the other features listed in the DP should be used as 'indicators' to assess whether an entity operates within 'defined rate regulation'.

The IASB may also need to consider whether it should widen the scope of a potential future Standard to require disclosures of the effects of rate regulation other than those where assets and liabilities are recognised.

EFRAG generally supported the accounting approach in the DP that considers deferring or accelerating the recognition of a combination of costs and revenue. EFRAG noted that the 'revenue approach' has an important role to play when an entity has 'performed' to its customers. EFRAG remained open to the 'cost deferral approach' described in the DP, and recommends the IASB to explore in more detail cases where it might produce relevant information.

After having issued its draft comment letter, EFRAG continued its outreach with users and organised a user event in Brussels in coordination with the IASB, the EFFAS and the BVFA. Furthermore, two meetings were held with EFRAG's working group to gather input to draft a final comment letter. At its conference call on 7 January 2015, EFRAG TEG discussed all these inputs and a comment letter analysis. At the conference call, EFRAG TEG formed also its advice to the EFRAG Board.

The EFRAG Board then discussed and approved the EFRAG comment letter at the meeting on 14 January 2015. In its letter, EFRAG welcomes the IASB's comprehensive project on rate-regulated activities and the publication of the Discussion Paper Reporting the Financial Effects of Rate Regulation (DP), and believed that the DP represents a good starting point in this project. EFRAG also supports 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.

Whilst broadly supporting the description of defined rate regulation, EFRAG believes that the existence of a rate-setting framework that creates enforceable rights and obligations and includes an adjusting mechanism based on the revenue requirement has a pivotal role to play in the scoping of the Rate-regulated Activities project. In EFRAG's view, it is the enforceable rights and obligations that stem from the rate-setting framework which should be considered for recognition in the IFRS financial statements and therefore EFRAG saw the main purpose of the features described in the DP as ensuring enforceability of those rights and obligations.

Regarding the accounting approaches proposed in the DP, in EFRAG's view, the revenue approach has an important role to play in any future accounting guidance. EFRAG remained open to considering the cost deferral approach described in the DP, and recommends the IASB to explore in more detail cases where such an approach might produce relevant information.

In February 2015, EFRAG published a feedback statement and a summary report that summarised the feedback received during the outreach activities it held with European users on rate regulation.

On 2 April 2015, EFRAG published a feedback statement following the publication of its final comment letter on the IASB's DP. This feedback statement describes the main comments received by EFRAG in response to its draft comment letter and how these comments were considered by EFRAG in finalising its comment letter to the IASB.

EFRAG Rate-regulated Working Group

In March 2017, the EFRAG TEG approved the new composition of the Rate-regulated Activities Working Group (EFRAG RRA WG) (EFRAG RRAWG).  Phil Aspin will be the new Chairman of the Working Group.

The EFRAG RRA WG plays a very important role in contributing accounting and industry expertise regarding the specific circumstances of European rate-regulated industry sectors to the EFRAG TEG.

Recent developments

During the course of 2015, 2016 and 2017, the project was discussed at several IASB meetings as well as other organisations such as the ASAF. EFRAG has also closely monitored the IASB and ASAF discussions. The IASB expects to issue a second Discussion Paper in early 2018 that will focus on how to account for the financial effects of defined rate regulation as described in its first DP. At its April 2017 meeting, the IASB considered the underlying principles and general approach of a proposed accounting model for rate-regulated activities. So far no IASB decisions have been taken.

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