IASB publishes discussion paper on rate regulation

• The IASB has issued a discussion paper entitled Reporting the Financial Effects of Rate Regulation as part of its comprehensive project to develop guidance for rate‑regulated entities.
• The IASB examines a certain type of rate regulation where customers have little or no choice but to purchase the rate‑regulated goods or services from the entity. Under this scheme, the entity shall recover a determinable amount of consideration (‘revenue requirement’). This type of rate regulation is called ‘defined rate regulation’ in the discussion paper.
• The discussion paper distinguishes between cost‑based schemes and incentive‑based schemes. Cost‑based schemes allow the entity to recover their cost plus a reasonable rate of return while incentive‑based schemes typically have a profit target.
• The differences between the amounts billed to customers and the amounts accrued under the revenue requirement could be seen as a combination of rights and obligations. These differences are eliminated by a future adjustment of the rates. This rate adjustment is considered a distinguishing feature of defined rate regulation.
• Rate regulation creates implicit and explicit rights and obligations. While explicit rights and obligations do not need special accounting requirements, the following accounting alternatives are discussed for implicit rights:

– regulatory deferral accounts as assets or liabilities;
– rights and obligations as one intangible asset;
– application of regulatory accounting requirements;
– development of specific IFRS requirements; or
– prohibiting the recognition of regulatory deferral account balances.

• The discussion paper revisits the presentation and disclosure requirements of IFRS 14 as a potential basis for the development of such requirements under the comprehensive project. It also considers other issues as ‘self‑regulated’ co‑operatives and interactions with other Standards.
• The IASB invites comments on all matters in the discussion paper.
• The comment period ends on 15 January 2015.

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