9.0 Rate-Regulated Activities – Approve Feedback statement
UK ENDORSEMENT BOARD 17 SEPTEMBER 2021 AGENDA PAPER 9
Executive Summary
| Project Type | Influencing |
| Project Scope | Medium |
Purpose of the paper
The purpose of this paper is to request Board approval of the Regulatory Assets and Regulatory Liabilities feedback statement for publication.
Summary of the Issue
The Board approved the Final Comment Letter on Regulatory Assets and Regulatory Liabilities in July for submission to the International Accounting Standards Board on 30 July.
Decisions for the Board
To approve the Regulatory Assets and Regulatory Liabilities feedback statement for publication.
Recommendation
We recommend the Board approve the feedback statement for publication on the UKEB website.
Appendices
| Appendix 1 | Feedback Statement – Regulatory Assets and Regulatory Liabilities |
FEEDBACK STATEMENT
IASB ED/2021/1 Regulatory Assets and Regulatory Liabilities Exposure Draft
The UK Endorsement Board (UKEB) is the UK's national standard-setter for IFRS. Its statutory functions include influencing the development and subsequent adoption of International Accounting Standards for use in the UK. The UKEB's comment letter on this IASB Exposure Draft (ED) forms part of those influencing activities, and is intended to contribute to the IASB's due process.
The views expressed by the UKEB in this feedback statement are separate from, and will not necessarily affect the conclusions in any endorsement and adoption assessment of new or amended International Accounting Standards undertaken by the UKEB.
Purpose of this feedback statement
This feedback statement presents the views of UK Stakeholders heard during the UKEB's outreach activities on the IASB's ED/2021/1 Regulatory Assets and Regulatory Liabilities and explains how the UKEB's comment letter addressed those views.
Background to the IASB's ED
The ED sets out the IASB's proposals on how an entity can provide relevant information that faithfully represents how regulatory income and regulatory expense affect the entity's financial performance, and how regulatory assets and regulatory liabilities affect its financial position.
The ED was issued in January 2021 and the comment deadline was 30 July 2021.
IASB's Main Proposals
1. Objective and scope
The Standard would only apply to entities that are party to a regulatory agreement that is capable of creating regulatory assets and regulatory liabilities.
The new Standard would replace IFRS 14 Regulatory Deferral Accounts by introducing a new model for regulatory assets and regulatory liabilities.
2. Recognition
Regulatory assets and regulatory liabilities arise when the regulated rate is determined in such a way that some or all of the total allowed compensation for goods or services supplied in one period is charged to customers in a different period. The recognition of regulatory assets or regulatory liability leads to regulatory income and regulatory expense.
3. Measurement
Regulatory assets and regulatory liabilities are measured at historical cost, modified for subsequent measurement by using updated estimates of the amount and timing of future cash flows. The estimated future cash flows of a regulatory asset or regulatory liability would be discounted to their present value using the regulatory interest rate. After initial recognition, the carrying amount of the regulatory asset or regulatory liability would be updated at the end of each reporting period to reflect conditions existing at that date.
4. Presentation
In the statement of financial performance, an entity shall present all regulatory income minus regulatory expense in a separate line item immediately below revenue. In the statement of financial position, an entity shall present line items for regulatory assets and regulatory liabilities. Current and non-current regulatory assets, and current and non-current regulatory liabilities as separate classifications.
5. Disclosure
The ED proposes overall disclosure objectives and specific disclosure objectives to enable users of financial statements to understand the relationship between an entity's revenue and expenses, and an entity's regulatory assets and regulatory liabilities at the end of the reporting period.
Outreach activities approach
The UKEB's outreach activities took place between May and July 2021.
The outreach approach was underpinned by the UKEB's guiding principles of thought leadership, transparency, independence and accountability.
To develop our response and obtain a balanced range of views on the ED, we had meetings with two preparers that are likely to be within the scope of the proposals, staff of other national standard-setters, European Financial Reporting Advisory Group (EFRAG) and regulators. We received one comment letter on our draft comment letter from United Utilities Group Plc.
We also gathered input from public meetings such as the IASB's Accounting Standards Advisory Forum (ASAF) and the joint EFRAG, EFFAS, ABAF/BVFA and IASB webinar, in order to obtain a range of views on the IASB's proposals.
Our outreach resulted in various comments and views on the proposals made by the IASB. All comments and views were considered in reaching our final position.
A draft of the UKEB's comment letter was agreed by the UKEB at its meeting on 9 July 2021 and published on 14 July 2021 with the comment period ending on 26 July 2021.
1. Objective and Scope
| IASB proposal | UKEB draft position | Stakeholder views* | UKEB final position |
|---|---|---|---|
| The Standard would only apply to entities that are party to a regulatory agreement that is capable of creating regulatory assets and regulatory liabilities. | UKEB agreed with objective of the proposals in the ED however, it expressed concerns regarding: | Support UKEB draft position. | Supports IASB proposals and further recommended that: |
| 1. The type of regulatory agreements that are not in scope. | 1. the scope should be explicit that the agreements intended to be included in the scope of the definition “regulatory agreement" are a small subset of regulatory agreements. | ||
| The new Standard would replace IFRS 14 Regulatory Deferral Accounts by introducing a new model for regulatory assets and regulatory liabilities. | 2. Explicit inclusion of service concession arrangements in the proposals | 2. the definition of a regulator be included and state that it is an independent third party. | |
| 3. Transactions and events covered by other IFRS are not explicitly excluded from the scope. | 3. service concession arrangements be excluded from the scope unless there is clear evidence that users would gain additional information from the application of both IFRIC 12 and the proposed standard to such arrangements |
* Includes stakeholder views from all outreach activities
2. Recognition
| IASB proposal | UKEB draft position | Stakeholder views* | UKEB final position |
|---|---|---|---|
| Regulatory assets and regulatory liabilities arise when the regulated rate is determined in such a way that some or all of the total allowed compensation for goods or services supplied in one period is charged to customers in a different period. The recognition of regulatory assets or regulatory liability leads to regulatory income and regulatory expense. | No draft response as this area had not been identified as an issue in the UK. | Supports IASB proposals but expressed concerns relating to not recognising returns on assets not yet available for use. | Supports IASB proposal for recognising regulatory assets and liabilities. |
| Do not support IASB's proposal to not recognise returns on assets not yet available for use in Total Allowed Compensation as this does not reflect the economic substance of that return. |
* Includes stakeholder views from all outreach activities
3. Measurement
| IASB proposal | UKEB draft position | Stakeholder views* | UKEB final position |
|---|---|---|---|
| Regulatory assets and regulatory liabilities are measured at historical cost, modified for subsequent measurement by using updated estimates of the amount and timing of future cash flows. | Sought more guidance for the application of proposals relating to the: | Supports UKEB draft position. | Supportive of IASB proposals. |
| The estimated future cash flows of a regulatory asset or regulatory liability would be discounted to their present value using the regulatory interest rate. After initial recognition, the carrying amount of the regulatory asset or regulatory liability would be updated at the end of each reporting period to reflect conditions existing at that date. | 1. Interaction between a regulatory licence and a pricing period. | Requested further clarity regarding the boundary of the regulatory agreement, and what constitutes an enforceable agreement where an entity operates under a rolling long-term license subject to shorter price control periods. | Further proposed that the IASB includes illustrative examples to reflect situations whereby the recovery period for an asset is longer than the period of the license agreement or pricing period under the regulatory agreement. |
| 2. Interaction between boundary of regulatory agreement and compensation for cancellation of an agreement. | |||
| 3. length of life of an asset where recovery period is longer than licence agreement period. |
* Includes stakeholder views from all outreach activities
4. Presentation
| IASB proposal | UKEB draft position | Stakeholder views* | UKEB final position |
|---|---|---|---|
| In the statement of financial performance, an entity shall present all regulatory income minus regulatory expense in a separate line item immediately below revenue. In the statement of financial position, an entity shall present line items for regulatory assets and regulatory liabilities. | No draft response as this area had not been identified as an issue in the UK. | Supported IASB proposals with a minority of stakeholders proposing that entities be permitted to choose to include the amount within Revenue on the face of the income statement. | Supported IASB proposals. |
| Present current and non-current regulatory assets, and current and non-current regulatory liabilities as separate classifications. |
* Includes stakeholder views from all outreach activities
5. Disclosure
| IASB proposal | UKEB draft position | Stakeholder views* | UKEB final position |
|---|---|---|---|
| The ED proposes overall disclosure objectives and specific disclosure objectives to enable users of financial statements to understand the relationship between an entity's revenue and expenses, and an entity's regulatory assets and regulatory liabilities at the end of the reporting period | No draft response as this area had not been identified as an issue in the UK. | Supported overall disclosure proposals. One stakeholder suggested proposals that could enhance the IASBs current proposals. | Overall support for proposals but recommended additional disclosures about an entity's regulatory agreement. |
* Includes stakeholder views from all outreach activities
Disclaimer
This feedback statement has been produced in order to set out the UKEB's response to stakeholder comments received on the IASB's Regulatory Assets and Regulatory Liabilities ED 2021/1 and should not be relied upon for any other purpose. The views expressed in this feedback statement are those of the UK Endorsement Board at the point of publication. Any sentiment or opinion expressed within this feedback statement will not necessarily bind the conclusions, decisions, endorsement or adoption of any new or amended IFRS by the UKEB.
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