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Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard :  This Basis for Conclusions summarises the considerations of the International Accounting Standards Board (IASB) in reaching the conclusions in IFRS 14 Regulatory Deferral Accounts. Individual IASB members gave greater weight to some factors than to others.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard : Many rate-regulated entities think that recognising regulatory deferral account balances as assets and liabilities would provide more relevant information and would provide a more faithful representation of their rate-regulated activities than the established practice in IFRS currently. They suggest that rate regulation creates special conditions that support the recognition of regulatory deferral account balances, even when those balances consist of deferred costs that other Standards require to be recognised as an expense in the period in which they are incurred. The 2009 ED, which proposed that regulatory deferral account balances should be recognised when arising from activities that are subject to a specific type of rate regulation (referred to in the 2009 ED as “cost-of-service rate regulation”), raised expectations that the IASB had agreed that there was merit to the arguments used to support recognition of such balances as assets and liabilities.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard : Consequently, some respondents have noted that, although the case has not been made conclusively for amending IFRS to permit or require the recognition
of regulatory deferral account balances as assets and liabilities, neither has it been made conclusively for an approach that eliminates such balances and changes existing accounting policies. These policies are being widely applied in accordance with some national GAAPs, and are familiar to many users of financial statements in jurisdictions that currently permit or require the recognition of rate-regulated items.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard : The IASB recognises that discontinuing the recognition of regulatory deferral account balances in advance of the conclusion of the comprehensive Rate-regulated Activities project could be a significant barrier to the adoption of IFRS for entities for which regulatory deferral account balances represent a significant proportion of net assets. This has led to an industry-specific ‘carve-out’ from the application of IFRS in at least one jurisdiction that has otherwise adopted IFRS, to allow rate-regulated entities to continue to use local GAAP (or, in some cases, US GAAP). In addition, there are examples of ‘carve-ins’being created that introduce specific guidance for rate-regulated activities that overlies IFRS requirements as issued by the IASB. However, the interaction of such guidance when it is in conflict with the requirements of IFRS can create diversity of application in practice.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard : During outreach, some respondents told the IASB that, in many jurisdictions, the accounting policies developed for regulatory deferral account balances are based on US GAAP or local GAAP that provides similar guidance. This is understood to provide a reasonable level of comparability for regulatory deferral account balances across jurisdictions. However, different approaches to accommodating existing practice for such balances have reduced comparability for users of financial statements in these jurisdictions, because the rest of the items in the financial statements are now accounted for using different accounting frameworks (for example, IFRS, US GAAP or local GAAP), depending on which approach has been adopted. In some cases, the development of these carve-in or carve-out options has been in direct response to the publication of the 2009 ED.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard : The IASB acknowledges the difficult practice problems related to this issue. The IASB has, therefore, decided to issue this Standard, which allows entities that currently recognise regulatory deferral account balances in accordance with their previous GAAP to continue to do so when making the transition to IFRS. In accordance with paragraph 5, an entity is only eligible to apply this Standard if it:
(a) is subject to oversight and/or approval from an authorised body (the rate regulator);
(b) recognised regulatory deferral account balances in its financial statements in accordance with its previous GAAP; and
(c) elected to apply the requirements of this Standard in its first IFRS financial statements.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard :  Consequently, an entity that does not recognise regulatory deferral account balances in accordance with its previous GAAP in the period immediately preceding its first IFRS financial statements is not eligible to apply this Standard in order to start recognising such balances. An entity would not, therefore, be eligible if, for example:
(a) the entity did not have any relevant rate-regulated activities in the period before it made the transition to IFRS but then acquires or commences rate-regulated activities after the date that it adopts IFRS; or
(b) the entity is a newly formed business and adopts IFRS in its first IFRS financial statements.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard :The IASB thinks that this restriction balances the needs of preparers and users in jurisdictions that currently recognise regulatory deferral account balances in accordance with previous GAAP, and those that already prepare IFRS financial
statements and do not recognise such balances.

A Standard that permits first-time adopters of IFRS to continue to apply their existing policies for the recognition, measurement, impairment and derecognition of regulatory deferral account balances will help those entities avoid having to make a major change to their accounting policies for regulatory deferral account balances until the comprehensive Rate-regulated Activities project is completed. The related presentation and disclosure requirements should help to reduce the disruption to information available for trend analyses for these entities on transition to IFRS, until the IASB can consider these issues in its comprehensive project. This would enable rate-regulated entities to overcome the barrier noted in paragraph BC13 and, consequently, to make the transition to IFRS.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard : Although comparability will be improved overall by having more entities applying IFRS, the IASB acknowledges that permitting only a limited population of entities to recognise regulatory deferral account balances will introduce some inconsistency and diversity into IFRS practice for the treatment of regulatory deferral account balances, when it does not currently exist. In order to improve comparability between IFRS preparers that are subject to rate regulation but that do not recognise regulatory deferral account balances and entities that are permitted to recognise such balances in accordance with this Standard, the IASB decided to require segregated presentation of these balances. The IASB thinks that the resulting presentation and disclosure requirements in this Standard will help to minimise the impact of introducing this inconsistency, and that the benefits to users and preparers of financial statements outweigh the costs.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard :The IASB thinks that the following benefits of this Standard justify introducing this diversity:
(a) it is likely to remove a major barrier to the adoption of IFRS for entities for which regulatory deferral account balances represent a significant proportion of net assets;
(b) it should reduce the risk of entities adopting locally developed carve-ins or carve-outs that would otherwise create greater diversity of accounting treatment and greater confusion for users of financial statements. Having more entities applying IFRS would ensure that their other activities are reported in accordance with IFRS, thereby increasing comparability for those other assets and liabilities; and
(c) it is likely to improve transparency and consistency in the way that regulatory deferral account balances and movements in those balances are presented, thereby highlighting the impact of recognising such items and improving comparability between those entities that recognise such balances in accordance with the Standard.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard : However, the IASB noted that, by issuing this Standard, it is not anticipating the outcome of the comprehensive Rate-regulated Activities project referred to in paragraph BC10. Consequently, regulatory deferral account balances are not described as regulatory assets or regulatory liabilities in this Standard because the IASB has yet to decide whether they meet the definitions of assets or liabilities in the Conceptual Framework. The separation of these balances from the amounts that are recognised as assets and liabilities in accordance with other Standards is designed to maintain the integrity of the application of existing
Standards.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard :This Standard does not allow entities to recognise regulatory deferral account balances if those entities have a dominant position in a market and decide to self-regulate to avoid the potential government intervention that might occur if it were perceived to be abusing its dominant position. Instead, it requires there to be a formal rate regulator involved to ensure that the rate-regulatory mechanism in place is supported by statute or regulation and that the regulatory mechanism binds the entity.

However, the IASB does not intend to exclude entities that are regulated by their own governing body in cases in which:
(a) the governing body sets prices both in the interests of the customers and to ensure the financial viability of the entity within a specified framework; and
(b) the framework is subject to oversight and/or approval by an authorised body that is empowered by statute or regulation.

This situation could arise, for example, when the entity conducts previously state-run activities and the government delegates regulatory powers to an entity (that may be state-controlled) within a statutory framework that is overseen by
an authorised body of the government. Another example is a co-operative that may be subject to some form of regulatory oversight in order to obtain preferential loans, tax relief or other incentives to maintain the supply of goods or services that the government consider to be essential or near essential.

This Standard does not address an entity’s accounting for reporting to rate regulators (regulatory accounting). Rate regulators may require a regulated entity to maintain its accounts in a form that permits the rate regulator to obtain the information that is needed for regulatory purposes. Rate regulators’ actions are based on many considerations. This Standard neither limits nor endorses a rate regulator’s actions.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard : Although rate regulators can affect the timing of the recovery of the costs or the reversal of over-recoveries through future increases and decreases in rates, they cannot change the characteristics of assets and liabilities that exist and that are accounted for in accordance with IFRS. The IASB has not, therefore, introduced any changes to the accounting for assets or liabilities that are already addressed in other Standards. Those items should be accounted for in accordance with those Standards, irrespective of whether the entity is subject to rate regulation or not.

Consequently, the IASB decided that the scope of the Standard should be limited to specifying how an entity reports the differences that arise between the regulatory accounting requirements of rate regulators and the accounting that would otherwise be required in financial statements that are prepared in accordance with IFRS, in the absence of this Standard.

Basis For Conclusions On IFRS 14 Reasons For Issuing The Standard

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