The IASB has issued IFRS 14 Regulatory Deferral Accounts, effective for annual periods beginning on or after January 1, 2016.
For those who aren’t familiar with the area, IFRS 14 brings into IFRS for the first time a practice long-established elsewhere, that entities subject to rate-regulation (power suppliers and suchlike) can justify recognizing assets and liabilities that wouldn’t be allowed of other entities. For instance, in broad terms, whereas a retail entity’s customers might respond to a price increase by taking their business elsewhere, a rate-regulated entity’s customers have little choice but to pay up; this captive audience might be regarded as constituting a source of benefit to which access can be controlled, thus conforming to concepts of an asset.
A temporary exemption
IFRS 14 doesn’t specifically conclude on that matter though, basing itself on a “temporary exemption” from the normal mechanisms of developing accounting policies (similar to that underlying IFRS 6, which I wrote about here); there’s a more comprehensive project under way that may bring in more specific requirements later. In the meantime, the IASB has concluded: “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.”
IFRS 14 defines a rate-regulator as “An authorized body that is empowered by statute or regulation to establish the rate or a range of rates that bind an entity” and in turn defines a regulatory deferral account balance as “The balance of any expense (or income) account that would not be recognized as an asset or a liability in accordance with other Standards, but that qualifies for deferral because it is included, or is expected to be included, by the rate regulator in establishing the rate(s) that can be charged to customers.” The standard allows an entity that adopts IFRS to continue to use, in its first and subsequent IFRS financial statements, its previous GAAP accounting policies for recognizing and measuring regulatory deferral account balances. Such an entity presents these balances as separate line items in the statement of financial position and presents movements in the balances as separate line items in the income statements, along with accompanying disclosure. In all other respects, a rate-regulated entity reporting under IFRS would follow the same accounting principles as any other entity (IFRS 14 contains some guidance on areas of interaction with other standards).
No more deferrals?
The IASB notes that the absence within IFRS to this point of any form of rate-regulated accounting “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).” This seems to be a reference to Canada, where the effective date of adopting IFRS has indeed been deferred several times, most recently to the end of 2014. Late last year, the Canadian Accounting Standards Board issued the following: “Subject to the expected interim standard being issued early in 2014, the AcSB decided against further extending its deferral of the mandatory date for first-time adoption of IFRSs by rate-regulated entities.” As far as I can tell, that’s the last word on the issue, and so Canadian rate-regulated entities will be making the transition in 2015, presumably by applying IFRS 14 a year in advance of its general mandatory effective date in 2016.
Canadian practice in this area has certainly become rather fragmented; in addition to the divide between those using old Canadian GAAP and US GAAP, I believe there’s at least one example of a partially rate-regulated entity that did adopt IFRS, thus preparing its financial statements without any such deferral accounts, but that places its main emphasis in its communications on supplementary financial information that does include them. Adopting IFRS based on the interim standard’s “temporary exemption” approach will at least allow Canada’s rate-regulated entities to make the transition on a consistent basis, but won’t deliver the broader IFRS vision of international comparability; on the contrary, for now at least it embeds different approaches based on differences in previous GAAP (for this reason and others, plenty of commentators opposed the standard).
Still, if you had to pick one category of entity in which you could safely sacrifice some comparability, this would likely be the one: the economic opportunity represented by any given rate-regulated enterprise is so specific that it’s hard to imagine a comparison to other entities would be that relevant to assessing and quantifying it. The importance of bringing this area into IFRS seems to me then more symbolic than actual, but I suppose when you commit to IFRS it’s in for a penny in for a pound. And we’re already in for much more than a penny…
The opinions expressed are solely those of the author