Rate-regulated activities
- Active
- Monitoring
- Isabel Batista, Vincent Papa
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.
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;
- what is 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 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 construction work in progress, discounting and application of the IFRS 3 exception, and sought further feedback from constituents on these areas where EFRAG did not express a preliminary view.
Outreach
Prior to 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, EF RAG 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 by considering a 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 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 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.
Documents
Project news
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11/10/2021 - EFRAG's Feedback Statement on Regulatory Assets and Regulatory Liabilities
The Feedback Statement summarises the main comments received by EFRAG on its Draft Comment Letter and effects analysis outreach on the IASB Exposure Draft 2021/01 Regulatory Assets and Regulatory Liabilities and explains how EFRAG considered the comments during its technical discussions leading to its Final Comment Letter. The Feedback Statement is available here.
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10/09/2021 - EFRAG Final Comment Letter on Regulatory Assets and Regulatory Liabilities
EFRAG has published its Final Comment Letter on the IASB Exposure Draft ED/2021/1 Regulatory Assets and Regulatory Liabilities. EFRAG welcomes the IASB’s efforts to address a long-standing gap in current IFRS reporting for entities subject to rate regulation.
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20/07/2021 - REMINDER - EFRAG requests comments on its end-of-July-deadline consultation documents.
EFRAG kindly requests constituents’ comments to its consultation documents on IASB projects on rate-regulated activities and business combination under common control and EFRAG research project on crypto-assets. These documents have forthcoming end-of-July deadlines.
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16/07/2021 - Reminder - Effects Analysis: EFRAG seeks input of users that analyse rate-regulated entities - please provide input by 30 July 2021
EFRAG is inviting users that analyse the financial statements of rate-regulated entities to participate in an effects analysis of the proposed Standard in the IASB Exposure Draft Regulatory Assets and Regulatory Liabilities published in January 2021. Users are asked to complete an online survey by 30 July 2021.
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16/07/2021 - Reminder - Effects analysis: EFRAG seeks input of rate-regulated entities preparers - please provide input by 30 July 2021
EFRAG is inviting preparers of financial statements of rate-regulated entities to participate in an effects analysis of the proposed Standard in the IASB Exposure Draft Regulatory Assets and Regulatory Liabilities published in January 2021. Preparers are asked to complete an online survey by 30 July 2021.
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11/06/2021 - Effects analysis: EFRAG seeks participation of rate-regulated entities preparers
EFRAG is inviting preparers of financial statements of rate-regulated entities to participate in an effects analysis of the proposed Standard in the IASB Exposure Draft Regulatory Assets and Regulatory Liabilities published in January 2021. Preparers are asked to complete an online survey by 30 July 2021.
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11/06/2021 - Effects Analysis: EFRAG seeks participation of users that analyse rate-regulated entities
EFRAG is inviting users that analyse the financial statements of rate-regulated entities to participate in an effects analysis of the proposed Standard in the IASB Exposure Draft Regulatory Assets and Regulatory Liabilities published in January 2021. Users are asked to complete an online survey by 30 July 2021.
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02/06/2021 - EFRAG Secretariat Briefing: Regulatory Assets and Regulatory Liabilities
EFRAG Secretariat has issued a Briefing to stimulate debate on the outcome of the proposed requirements on scope included in the IASB's exposure draft Regulatory Assets and Regulatory Liabilities. The views expressed in this Briefing are tentative and reflect the EFRAG Secretariat’s understanding of how the proposals on scope of the exposure draft might be applied.
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12/04/2021 - EFRAG draft comment letter on Rate-regulated Activities
EFRAG has published its draft comment letter on the IASB Exposure Draft ED/2021/1 Regulatory Assets and Regulatory Liabilities and seeks constituents' views on the proposals. Comments on the draft comment letter are requested by 28 July 2021.
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08/12/2020 - EXTENSION - Views of users of financial statements of rate-regulated entities - Please provide input by 8 January 2021
EFRAG is inviting users that undertake the fundamental analysis of rate-regulated entities to participate in an early-stage analysis of the likely impacts of possible changes to IFRS requirements. This will enable a better understanding of users' information needs. Users are asked to complete a survey by filling in a questionnaire by close of business 8 January 2021.
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02/12/2020 - REMINDER - Views of preparers of financial statements of rate-regulated entities - Please provide input by 8 January 2021
EFRAG is inviting preparers of financial statements of rate-regulated entities to participate in an early-stage analysis through a survey questionnaire which will take approximately 30-45 minutes to complete of likely impacts of the possible changes to IFRS requirements. Preparers are asked to complete a survey by filling in a questionnaire by close of business 8 January 2021.
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30/11/2020 - REMINDER - Views of users of financial statements of rate-regulated entities - Please provide input by 7 December 2020
EFRAG is inviting users that undertake the fundamental analysis of rate-regulated entities to participate in an early-stage analysis of the likely impacts of possible changes to IFRS requirements. This will enable a better understanding of users' information needs. Users are asked to complete a survey by filling in a questionnaire by close of business 7 December 2020.
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10/11/2020 - EFRAG seeks input from preparers of financial statements of rate-regulated entities by 18 December 2020
The IASB has an active project on the accounting for regulatory assets and regulatory liabilities. The objective is to improve the information that is available to users covering rate-regulated entities. These entities may have incremental rights and obligations arising from their regulatory agreements. The IASB will be issuing an exposure draft in early 2021.
EFRAG is inviting preparers of financial statements of rate-regulated entities to participate in an early-stage analysis through a survey questionnaire which will take approximately 30-45 minutes to complete of likely impacts of the possible changes to IFRS requirements. Expressions of interest in participating in this outreach are requested by close of business 18 December 2020.
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28/10/2020 - EFRAG seeks views of users of the financial statements of rate-regulated entities by 7 December 2020
The IASB has an active project on the accounting for regulatory assets and regulatory liabilities. The objective is to improve the information that is available to users covering rate-regulated entities. These entities may have incremental rights and obligations arising from their regulatory agreements. The IASB will be issuing an exposure draft in early 2021.
EFRAG is inviting users that undertake the fundamental analysis of rate-regulated entities to participate in an early-stage analysis of the likely impacts of possible changes to IFRS requirements. This will enable a better understanding of users' information needs. Expressions of interest in participating in this outreach are requested by close of business 7 December 2020.
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01/04/2015 - Feedback statement on the IASB's Discussion Paper DP/2014/2 Reporting the Financial Effects of Rate Regulation
EFRAG has published a feedback statement following the publication of its final comment letter on Reporting the Financial Effects of Rate Regulation
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23/02/2015 - Summary report of EFRAG - EFFAS/ABAF - IASB Joint User Event on Rate-regulated Activities
EFRAG, EFFAS/ABAF and the IASB are pleased to publish a summary report of their fourth user event held on 18 December 2014. The joint user event discussed the IASB Discussion Paper Reporting the Financial Effects of Rate Regulation.
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11/02/2015 - EFRAG has published a feedback statement on input received during outreach activities conducted with European users on the IASB's Discussion Paper Reporting the Financial Effects of Rate Regulation
EFRAG has issued a feedback statement that summarises the views expressed by European users during the outreach activities on the IASB's Discussion Paper Reporting the Financial Effects of Rate Regulation.
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15/01/2015 - EFRAG's comment letter on the IASB's Discussion Paper Reporting the Financial Effects of Rate Regulation
EFRAG has published its comment letter in response to the IASB's Discussion Paper Reporting the Financial Effects of Rate Regulation.
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06/11/2014 - EFRAG - EFFAS/ABAF - IASB User Event: Rate-regulated activities: is there anything missing from the balance sheet?
EFRAG, EFFAS/ABAF and the IASB announce a new joint event for the User Community, taking place on 18 December in Brussels.
