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Reasons for issuing the IFRS standards 14

Reasons for issuing the IFRS standards 14

Reasons for issuing the IFRS standards 14: The International Accounting Standards Board (IASB) has developed this International Financial Reporting Standard for regulatory deferral accounts because:

  1. the requirements of some national accounting standard-setting bodies permit or require entities that are subject to rate regulation to capitalise and defer expenditures that non-rate-regulated entities would recognise as expenses. Similarly, these rate-regulated entities are permitted or required to defer income that non-rate-regulated entities would recognise in the statement of profit or loss and other comprehensive income. The resulting regulatory deferral account balances are presented in a variety of ways. They are often described as ‘regulatory assets’ and ‘regulatory liabilities’ but are sometimes incorporated within other line items in the financial statements, such as property, plant and equipment;
  2. there is currently no Standard in IFRS that specifically addresses the accounting for rate-regulated activities. Consequently, an entity is required to determine its accounting policy for the financial effects of rate regulation in accordance with paragraphs 10–12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The IASB has not seen evidence of significant diversity in practice within jurisdictions that are  applying IFRS because almost all entities have eliminated regulatory deferral account balances when making the transition to IFRS and thus do not recognise them in IFRS financial statements. However, despite this consistency of treatment within IFRS financial statements, there are different views within jurisdictions that have not yet adopted IFRS, and also within some others that have adopted IFRS, on how the effects of rate regulation should be accounted for. This has resulted in several requests to the IASB for guidance, which have asked whether regulatory deferral account balances might meet the definitions of assets and liabilities in the Conceptual Framework for Financial Reporting (the Conceptual Framework), depending on the terms of the rate regulation;
  3. the lack of specific guidance in IFRS has resulted in various jurisdictions that have not yet fully adopted IFRS taking different approaches to reporting the effects of rate regulation, which could reduce comparability and transparency for users of financial statements; and
  4. income and expenses that are subject to rate regulation are significant to entities that are engaged in rate-regulated activities, such as those in the utilities, telecommunications and transport industries. Consequently, the lack of guidance could be a significant barrier to the adoption of IFRS for those entities.

Reasons for issuing the IFRS standards 14

Reasons for issuing the IFRS standards 14 :The objective of IFRS 14 is to specify the financial reporting requirements for ‘regulatory deferral account balances’ that arise when an entity provides good or services to customers at a price or rate that is subject to rate regulation.

IFRS 14 is designed as a limited scope Standard to provide an interim, short-term solution for rate-regulated entities that have not yet adopted International Financial Reporting Standards (IFRS). Its purpose is to allow rate-regulated entities adopting IFRS for the first-time to avoid changes in accounting policies in respect of regulatory deferral accounts until such time as the International Accounting Standards Board (IASB) can complete its comprehensive project on rate regulated activities.

The International Financial Reporting Standards, usually called the IFRS Standards, are standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB) to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. They are the rules to be followed by accountants to maintain books of accounts which are comparable, understandable, reliable and relevant as per the users internal or external. IFRS, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies and IFRIC 7 Applying the Restatement Approach under IAS 29, are authorized in terms of the historical cost paradigm. IAS 29 and IFRIC 7 are authorized in terms of the units of constant purchasing power paradigm.

IFRS began as an attempt to harmonize accounting across the European Union but the value of harmonization quickly made the concept attractive around the world. However, it has been debated whether or not de facto harmonization has occurred. Standards that were issued by IASC (the predecessor of IASB) are still within use today and go by the name International Accounting Standards (IAS), while standards issued by IASB are called IFRS. IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new International Accounting Standards Board (IASB) took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards “International Financial Reporting Standards”.

Reasons for issuing the IFRS standards 14: Scope

IFRS 14 is permitted, but not required, to be applied where an entity conducts rate-regulated activities and has recognised amounts in its previous GAAP financial statements that meet the definition of ‘regulatory deferral account balances’ (sometimes referred to ‘regulatory assets’ and ‘regulatory liabilities’). [IFRS 14.5]

Entities which are eligible to apply IFRS 14 are not required to do so, and so can chose to apply only the requirements of IFRS 1 First-time Adoption of International Financial Reporting Standards when first applying IFRSs. The election to adopt IFRS 14 is only available on the initial adoption of IFRSs, meaning an entity cannot apply IFRS 14 for the first time in financial statements subsequent to those prepared on the initial adoption of IFRSs.  However, an entity that elects to apply IFRS 14 in its first IFRS financial statements must continue to apply it in subsequent financial statements.

Reasons for issuing the IFRS standards 14: Accounting policies for regulatory deferral account balances

IFRS 14 provides an exemption from paragraph 11 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors when an entity determines its accounting policies for regulatory deferral account balances. [IFRS 14.9] Paragraph 11 of IAS 8 requires an entity to consider the requirements of IFRSs dealing with similar matters and the requirements of the Conceptual Framework when setting its accounting policies.

The effect of the exemption is that eligible entities can continue to apply the accounting policies used for regulatory deferral account balances under the basis of accounting used immediately before adopting IFRS (‘previous GAAP’) when applying IFRSs, subject to the presentation requirements of IFRS 14 .

Entities are permitted to change their accounting policies for regulatory deferral account balances in accordance with IAS 8, but only if the change makes the financial statements more relevant and no less reliable, or more reliable and not less relevant, to the economic decision-making needs of users of the entity’s financial statements. However, an entity is not permitted to change accounting policies to start to recognise regulatory deferral account balances.

Reasons for issuing the IFRS standards 14: Interaction with other Standards

The requirements of other IFRSs are required to be applied to regulatory deferral account balances, subject to specific exceptions, exemptions and additional requirements contained in IFRS 14.

Reasons for issuing the IFRS standards 14: Presentation in financial statements

The impact of regulatory deferral account balances are separately presented in an entity’s financial statements. This requirements applies regardless of the entity’s previous presentation policies in respect of regulatory deferral balance accounts under its previous GAAP. Accordingly:

  • Separate line items are presented in the statement of financial position for the total of all regulatory deferral account debit balances, and all regulatory deferral account credit balances
  • Regulatory deferral account balances are not classified between current and non-current, but are separately disclosed using subtotals
  • The net movement in regulatory deferral account balances are separately presented in the statement of profit or loss and other comprehensive income using subtotals

The Illustrative examples accompanying IFRS 14 set out an illustrative presentation of financial statements by an entity applying the Standard.

Reasons for issuing the IFRS standards 14: Disclosures

IFRS 14 sets out disclosure objectives to allow users to assess:

  • the nature of, and risks associated with, the rate regulation that establishes the price(s) the entity can charge customers for the goods or services it provides – including information about the entity’s rate-regulated activities and the rate-setting process, the identity of the rate regulator(s), and the impacts of risks and uncertainties on the recovery or reversal of regulatory deferral balance accounts
  • the effects of rate regulation on the entity’s financial statements – including the basis on which regulatory deferral account balances are recognised, how they are assessed for recovery, a reconciliation of the carrying amount at the beginning and end of the reporting period, discount rates applicable, income tax impacts and details of balances that are no longer considered recoverable or reversible.

Reasons for issuing the IFRS standards 14: Effective date

Where an entity elects to apply it, IFRS 14 is effective for an entity’s first annual IFRS financial statements that are for a period beginning on or after 1 January 2016. The standard can be applied earlier, but the entity must disclose when it has done so.

Reasons for issuing the IFRS standards 14

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