Saturday, July 13, 2024

IFRS Draft Relating to Rate-Regulated Activities

Regulatory bodies or governments may set the prices for services or products which are charged to customers if an organisation has a monopoly or is dominant in the market. Where market competition would usually regulate prices naturally, if one business controls or dominates supply of a particular product or service, without regulation that business could charge any amount for those goods or services.

A good example of this is water. Unlike energy such as gas and electricity, residential customers do not have the opportunity to choose the supplier of their water in order to reduce the price. Each area has a water board which supplies the water and drainage services to households in that area. The prices charged by the water board in England and Wales. are regulated by the Water Services Regulation Authority (Ofwat). Ofwat is a non-ministerial government department.

The International Accounting Standards Board (IASB) is proposing changes to the way in which regulated companies provide information about their financial performance to make it easier for investors to assess cash flows. In accounting terms, rate regulation states how much a company can charge customers for goods or services during an financial accounting period and when the company can include compensation in the regulated rates they have charged.

In some instances, a timing difference will occur as compensation shown in the financial accounts of one period will relate to goods sold or services supplied in a different period.

When there are timing differences, the revenue reported by a business for the year and the assets and liabilities shown on its statement of financial position may not give an accurate reflection of the compensation that the company is entitled to charge for goods sold or services provided during the period.

Under current IFRS standards, businesses are not required to show these differences in timing and the financial statements will give an incomplete picture on the financial performance. This incomplete information makes it difficult for investors to consider cash flows effectively since they cannot assess future revenues and expenses which result from these differences in timing.

The discussion around rate regulation has been taking place for some time. An initial project which focussed on one type of rate regulation was suspended in September 2010 after responses to the exposure draft showed divergent views as to how rate regulation should be reflected in financial statements. The comments highlighted that there are many types of rate regulation and that the scope of the project should be expanded to look at a more general view.

In order to address this, the IASB has developed proposals for a requirement to be introduced whereby companies must show regulatory assets and regulatory liabilities on their statement of financial position as well as regulatory income and regulatory expenses on their statement of financial performance. This would allow investors, or anyone reviewing the company’s accounts, to see where timing differences cause fluctuations in the relationship between the company’s revenue and expenses and make judgements about the future cash flows of the company.

The IASB met in September 2020 to discuss issues identified in drafting the exposure draft titled Regulatory Assets and Regulatory Liabilities. The issues discussed were:

  • definitions of regulatory assets and liabilities
  • regulatory returns on assets not yet available for use
  • effective date
  • comment period

Some tentative decisions were made around these issues and in January 2021, the IASB published the exposure draft. Comments on the exposure draft are invited and the deadline for this is 30 July 2021. Any feedback given through comments on the Exposure Draft will be considered by the IASB when developing the final requirements. If approved as a new IFRS standard, the proposals will replace IFRS 14 Regulatory Deferral Accounts.

Sam Allcock
Sam Allcock
Sam heads up Cheshire-based PR Fire, an online platform that has already helped over 10,000 businesses to grab widespread media coverage on their news at an extremely accessible price point.

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