Project Initiation Plan - IFRS 20 Regulatory Assets and Regulatory Liabilities

OFFICIAL - PUBLIC

Purpose

1 This paper sets out the plan to assess whether to adopt for use in the UK¹ the new IFRS Accounting Standard IFRS 20 Regulatory Assets and Regulatory Liabilities. IFRS 20 was published by the IASB in May 2026. The Standard has an effective date of 1 January 2029, with earlier application permitted (subject to its endorsement for use in the UK).

2 The UKEB’s statutory functions mean that it must assess the requirements in the Standard against the statutory adoption criteria before deciding whether to adopt it for use in the UK. The Board’s aim would be to ensure that, if the criteria are met, adoption is completed in good time to permit UK entities to apply the Standard on the effective date of 1 January 2029.

Background

3 In January 2021 the IASB published its ED/2021/1 Regulatory Assets and Regulatory Liabilities (ED)² proposing a comprehensive model for entities subject to economic rate regulation that experience differences in timing by virtue of agreements with their respective regulators (“regulatory agreements”). Differences in timing arise if the period in which an entity can include compensation for costs in the regulated rate is different from the period when it supplies the related regulatory goods or services.

4 The purpose of the ED was to replace IFRS 14 Regulatory Deferral Accounts, an interim Standard, issued to enhance comparability of financial reporting by entities with rate-regulated activities, while the IASB developed its comprehensive standard for entities subject to rate regulation. It was not adopted for use in the EU and, consequently, did not form part of the UK-adopted international accounting standards (IAS) when the UK exited the EU.

5 The IASB received 128 comment letters in response to the ED. It also conducted additional outreach activities including discussions with its Consultative Group for Rate Regulation (CGRR). The IASB redeliberated the proposals in the ED from October 2021 to October 2025.

6 Subsequent to submitting a final comment letter in response to the ED, the UKEB set-up a Rate-regulated Activities Technical Advisory Group (RRA TAG) to consider the IASB’s redeliberation of the ED proposals. It met between March 2023 and December 2025. IASB staff were invited observers at the meetings. The UKEB web page on this project details the work the UKEB has undertaken since the ED was published.

Description of the main requirements in IFRS 20

7 A brief description of the main requirements in IFRS 20 is presented in the table in Appendix A.

Project Plan

8 The following factors have been considered when developing the project plan.

Proportionality Assessment

Significance and Size

Entities affected by the Standard

9 Analysis conducted by First Economics³ and the UKEB on the ED of IFRS 20 suggested that entities in scope belong to the following sectors: water, energy transmission and distribution, air traffic control and an airport. The main uniting factor is that the prices charged to customers in these sectors are subject to price regulation due to their substantial market power. Economically rate-regulated companies in scope of IFRS 20 form a significant share of these sectors in the UK.

10 The sectors in scope of IFRS 20, particularly water and energy, form part of the UK’s critical national infrastructure as entities operating in these sectors deliver regulated goods and services to almost all of the UK population.

11 Table 1 below provides a breakdown of the number of listed and unlisted groups reporting under UK-adopted IFRS Standards by sector.

Table 1: Number of UK groups expected to be in scope of the Standard4

12 The five listed groups comprise a market capitalisation of £102 billion, amounting to 3.4% of the total UK market capitalisation as of December 2025.

13 Both listed and unlisted entities in scope rely on bond issuances and bank lending to meet their capital needs. Therefore, IFRS 20 is likely to be of relevance to both bond traders/investors and bank lending departments.

14 Total gross borrowings⁵ of all groups in scope, comprising bonds (both publicly traded and underwritten through private placements) and bank and other institutional lending⁶, amounted to nearly £160 billion, equivalent to 5.2% of 2025 UK GDP.

15 Publicly available data suggests the entities in scope issued 392 bonds, which are publicly traded on the London Stock Exchange. Of these, 53% were issued by listed groups and 47% by unlisted groups⁷. See Table 2 below.

Table 2: Summary of borrowings

Note: Private placements are non-public offerings of securities sold directly to a select group of investors
Source: Company annual reports, LSE data.

Feedback on the Proposals from Desk-based Research / Initial Outreach

Complexity

16 IFRS 20 introduces new principles for recognition, measurement and disclosure requirements for regulatory income, regulatory expense, regulatory assets and regulatory liabilities of the entities within its scope. There are currently no existing requirements for entities to recognise these items. Consequently, entities will be applying the new requirements for the first time.

17 Differences in timing arising from regulatory agreements in the UK are typically not simple and straightforward because the underlying assets or contracts can last many decades. The Standard provides the requirements and guidance on accounting for these differences in timing and explains the approach to transition.

Expected Timeline / Urgency

18 There is no indication for an accelerated adoption in the UK. The planned project timeline is set out below.

Expected Interest / Sensitivity

19 UK entities that are subject to economic rate regulation play a key part in national infrastructure and there are several factors across the various sectors that increase expected interest and sensitivity.

Energy sector

20 The focus on net zero targets and renewable energy is likely to impact the capital expenditure of these entities. There is also likely to be an impact on the accounting for existing assets, for example, accelerated depreciation due to the need to phase out high carbon-producing assets. According to Ofgem, the UK’s energy regulator, reinforcing the electricity network to net zero transition could require an additional investment between £100–140 billion by 2050⁸.

Water sector

21 There has been parliamentary scrutiny of water entities regarding underinvestment in infrastructure, sewage pollution and high customer bills. This led to the government-commissioned investigation into the sector which resulted in the Independent Water Commission report⁹ published in July 2025. Its recommendations include that companies should more clearly define their spending into the following three areas:

1. capital expenditure, including asset replacement;
2. operational expenditure, including energy and labour costs; and
3. enhancement expenditure, including investment that improves services.

22 This recommendation is likely to lead to changes in the way those entities track and monitor operating and capital expenditure, potentially easing the implementation of IFRS 20.

23 The water sector is also affected by the UK’s net zero transition. Ofwat, the UK’s water regulator, estimates that achieving net zero emissions two decades ahead of government’s 2050 target could reduce greenhouse gas emissions by up to 10 million tonnes, requiring an estimated £2–4 billion of capital investment¹⁰. To mitigate the adverse impact on customer bills, a large proportion of this investment is expected to be recovered through regulatory depreciation of the entities’ regulatory capital bases (RCBs).

24 The UKEB therefore anticipates interest in this project from the entities within the scope of IFRS 20, investors, accounting firms, regulators, the government and media.

Connectivity

25 As part of the development of the PIP, we have considered potential overlaps between IASB Accounting Standards and ISSB Sustainability Disclosure Standards.

26 The areas of overlap relevant to UK entities may include:

1. Entities with rate-regulated activities usually have targets in their regulatory agreements that are directly linked to fulfilling environmental projects and commitments. These targets often require substantial infrastructure investments and consequently are directly linked to the financial statements.
2. These sectors are impacted by net-zero commitments as detailed above. They are also required to report their energy use and carbon (Greenhouse Gas (GHG)) emissions under either the Task Force on Climate-related Financial Disclosures (TCFD) requirements or the Streamlined Energy and Carbon Reporting (SECR) requirements in the UK.

Recommended UKEB Project Scope

27 Based on the proportionality assessment above we recommend a ‘Significant’ project scope and the approach described in this document reflects this assessment.

Project milestones and activities

28 The table below summarises the key project milestones as set out in the UKEB’s Due Process Handbook (DPH) as well as the activities planned.

Table 3: Project milestones and activities

Resources Allocated

29 To undertake the activities described in this project plan, a project team, overseen by a Senior Project Director, has been assigned consisting of:

1. Accounting implications: Project Director supported by a Project Manager.
2. Economic implications: Project Director (Economics Lead) supported by a Project Manager will contribute by providing input on the long term public good assessment.

Ad-hoc Advisory Body

30 The RRA TAG has the necessary skills and expertise to support the endorsement of IFRS 20.

Project Timeline

31 The diagram below sets out mandatory milestones and other activities described above. This provides a best estimate based on information known at this time. If necessary, a revised PIP will be presented to the Board, to reflect any major changes, as the project progresses.

Appendix A: Description of the main requirements in IFRS 20

Main requirements in IFRS 20

Objective

The objective of IFRS 20 is “to require an entity to 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”. It will supplement the information resulting from applying IFRS 15 Revenue from Contracts with Customers so that the entity’s financial statements will reflect the compensation for regulatory goods or services in the period of supply.

Scope

Entities are required to apply the Standard to all its regulatory assets and regulatory liabilities.

There is an exception for regulatory assets and regulatory liabilities that arise if premiums charged in insurance contracts within the scope of IFRS 17 Insurance Contracts are regulated.

A regulatory asset is defined as “an enforceable present right, created by a regulatory agreement, to add an amount in determining a regulated rate to be charged to customers in future periods because part or all of the total allowed compensation for regulatory goods or services already supplied has not yet been included in IFRS 15 revenue”.

A regulatory liability is defined as “an enforceable present obligation, created by a regulatory agreement, to deduct an amount in determining a regulated rate to be charged to customers in future periods because part or all of the total allowed compensation for regulatory goods or services to be supplied in the future has already been included in IFRS 15 revenue”.

Total allowed compensation is defined as “the amount of compensation to which a regulatory agreement entitles an entity for regulatory goods or services supplied in a reporting period”.

Unit of account

Entities are required to account for the right or obligation arising from an individual difference in timing or from a group of differences in timing, that are created by the same regulatory agreement, have similar expiry patterns and are subject to similar risks, as a single unit of account.

Direct (no direct) relationship concept11

Entities are required to recognise a regulatory asset or regulatory liability arising from regulatory depreciation of an entity’s regulatory capital base (RCB) if and only if the entity’s RCB has a direct relationship¹² with a related item or items (e.g. depreciable or amortisable assets).

The Standard also allows for the possibility that parts of an entity’s RCB meet the recognition criterion set out in paragraph 30.

An entity’s RCB (or part of it) has a direct relationship with a related item or items if the entity is able to track, by amount and reporting period, how regulatory depreciation provides compensation or makes a deduction for the amounts arising from the related items or items.

In determining whether an entity’s RCB has a direct relationship with a related item or items, an entity is required to use its judgement and consider all reasonable and supportable information that is available without undue cost or effort. Such information includes the regulatory methodology underlying:

• the determination of its RCB;
• the determination of regulatory depreciation; and
• how the regulator monitors whether regulatory depreciation provides compensation or makes a deduction for amounts arising from a related item or items.

The Standard sets out indicators of whether a RCB (or part of it) has a direct relationship with a related item of items and states that these indicators are not exhaustive and that an entity might give more weight to some indicators than others in making this determination. The Standard nonetheless permits entities to presume its RCB has no direct relationship with depreciable or amortisable assets if neither of the following indicators are present:

• the assets or classes in the RCB are sufficiently similar to the depreciable or amortisable assets or IFRS asset classes for the entity to be able to track any differences between assets or classes in the RCB and the related assets or IFRS asset classes; or
• the regulator determines an amount of regulatory depreciation to provide compensation for the depreciation or amortisation expense determined by applying IFRS Accounting Standards.

Recognition

Entities are required to recognise all regulatory assets and regulatory liabilities existing at the end of the reporting period and all regulatory income and regulatory expense arising during the reporting period.

If there is existence uncertainty an entity is required to recognise a regulatory asset or regulatory liability if it is more likely than not that it exists.

Inflation adjustments to the RCB

Compensation provided by inflation adjustments to an entity’s RCB forms part of the total allowed compensation for the period in which the inflation is recovered through regulatory depreciation included in determining the regulated rate.

Measurement

Initial measurement

The Standard requires that regulatory assets and regulatory liabilities are measured using a cash-flow based measurement technique which includes an estimate of all future cash flows and is discounted to its present value.

An exception is made for items that affect regulated rates only when related cash is paid or received, in which case a regulatory asset or liability is measured using the carrying amount of the related asset, liability or related loss allowance resulting from applying IFRS Accounting Standards.

Subsequent measurement

After initial recognition, an entity is required, at the end of each reporting period, to update estimates of the amount and timing of future cash flows arising from the regulatory asset or regulatory liability and continue to use the discount rate determined at initial recognition, unless the regulatory agreement changes the regulatory interest rate.

Classification and presentation

Entities are required to:

• In the statement of financial performance: classify all its regulatory income and regulatory expense (including regulatory interest income and regulatory interest expense) as revenue and present all regulatory income minus regulatory expense as a line item.
• In the statement of financial position: present line items for regulatory assets and regulatory liabilities, classified between current and non-current portions in accordance with IFRS 18 Presentation and Disclosure in Financial Statements, except when the entity presents all assets and liabilities in order of liquidity.

Disclosure

The overall objective of the disclosure requirements is to provide information that helps users understand:

• how regulatory income and expenses contribute to the entity’s total allowed compensation, hence its financial performance, and future cash flows; and
• how regulatory assets and liabilities affect the entity’s financial position and the amount, timing, and uncertainty of future cash flows.

Entities are required to disclose information that enables users to understand:

• the amounts recognised for regulatory assets, liabilities, income, and expense in the financial statements; and
• the nature of any unrecognised regulatory assets and unrecognised regulatory liabilities and why they have not been recognised.

Entities are also required to disclose information about:

• the relationship between its RCB and a related item or items; and
• the regulatory approach (real or nominal) used by the regulator to compensate the entity for inflation on its RCB.