IFRS 14 Regulatory Deferral Accounts

IFRS 14 Regulatory Deferral Accounts : The IFRS Interpretations Committee (the ‘Interpretations Committee’) received several requests for guidance on whether rate-regulated entities can or should recognise, in their IFRS financial statements, a regulatory deferral or variance account debit or credit balance as a result of price or rate regulation by regulatory bodies or governments. Some national accounting standard-setting bodies permit or require such balances to be recognised as assets and liabilities under some circumstances, depending on the type of rate regulation in force. In such cases, these regulatory deferral account balances are often referred to as ‘regulatory assets’ and ‘regulatory liabilities’. However, as explained in this Basis for Conclusions (see paragraphs BC11–BC12 and BC21), the term ‘regulatory deferral account balances’ has been chosen as a neutral descriptor for these items for the purpose of this Standard.

US generally accepted accounting principles (US GAAP) have recognised the economic effect of certain types of rate regulation since at least 1962. In 1982, the US national standard-setter, the Financial Accounting Standards Board (FASB) issued SFAS 71 Accounting for the Effects of Certain Types of Regulation.1 SFAS 71
formalised many of those principles. In the absence of specific national guidance, practice in many other jurisdictions followed SFAS 71. In the financial statements of rate-regulated entities that apply such guidance, regulatory deferral account balances are often incorporated into the carrying amount of items such as property, plant and equipment and intangible assets, or are recognised as separate items in the financial statements.

IFRS 14 Regulatory Deferral Accounts

IFRS 14 Regulatory Deferral Accounts : In June 2005, the Interpretations Committee received a request about SFAS 71. The request asked whether an entity could apply SFAS 71 in accordance with the hierarchy in paragraphs 10–12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors when selecting an accounting policy in the absence of specific guidance in IFRS.

The Interpretations Committee concluded that the recognition criteria in SFAS 71 were not fully consistent with the recognition criteria in IFRS. Applying the guidance in SFAS 71 would result in the recognition of regulatory deferral account balances under certain circumstances that would not meet the recognition criteria of relevant Standards. Consequently, the requirements of SFAS 71 were not indicative of the requirements of IFRS. The Interpretations Committee decided not to add a project on regulatory assets to its agenda.

In January 2008, the Interpretations Committee received a second request to consider whether rate-regulated entities could or should recognise a regulatory liability (or a regulatory asset) as a result of rate regulation by regulatory bodies or governments. The Interpretations Committee again decided not to add the
issue to its agenda for several reasons. Importantly, it concluded that divergence did not seem to be significant in practice for entities that were applying IFRS. The established practice of almost all entities is to eliminate regulatory deferral account balances when IFRS is adopted and not to recognise such balances in
IFRS financial statements. However, the Interpretations Committee also noted that rate regulation is widespread and significantly affects the economic environment of many entities.

The IASB noted the ongoing requests for guidance on this issue. It also considered the comments that had been received on the Interpretations Committee’s tentative agenda decisions. Those comments pointed out that although divergence in IFRS practice did not exist, several jurisdictions whose local accounting principles permitted or required the recognition of regulatory deferral account balances would be adopting IFRS in the near future. This would increase pressure for definitive guidance on the recognition of regulatory
deferral account balances as assets or liabilities.

IFRS 14 Regulatory Deferral Accounts

IFRS 14 Regulatory Deferral Accounts : 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.

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.

IFRS 14 Regulatory Deferral Accounts

IFRS 14 Regulatory Deferral Accounts : 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 comparabilityfor 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.

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.

IFRS 14 Regulatory Deferral Accounts

IFRS 14 Regulatory Deferral Accounts : 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.

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.

IFRS 14 Regulatory Deferral Accounts

IFRS 14 Regulatory Deferral Accounts : 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.

IFRS 14 Regulatory Deferral Accounts

IFRS 14 Regulatory Deferral Accounts : 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.

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.

IFRS 14 Regulatory Deferral Accounts

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