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Deloitte, EFRAG, FRC have published their comment letters in response to the IASB´s Discussion Paper DP/2014/2 Reporting the Financial Effects of Rate Regulation.
Deloitte´s comment letter offers an analysis of the main points of the discussion paper and Deloitte agrees that that the hybrid scheme described as 'defined rate regulation' captures many of the features of regulatory regimes encountered in practice. Deloitte also agrees that a focus on the rights and obligations arising from rate regulation is necessary to determine whether these give rise to assets and/or liabilities that meet the criteria for recognition per the Conceptual Framework for Financial Reporting.
Going forward, Deloitte believes that a critical element of the Board's considerations will be analysing the unit of account for recognising revenue arising from the provision of rate regulated goods or services. In this context it will be necessary to consider the interaction with the requirements of IFRS 15 Revenue from Contracts with Customers.
Deloitte recommends that the next step in the project be an accounting discussion paper preceding the development of any new Standard or amendment to existing standards.
Deloitte´s full comment letter
EFRAG supports the IASB’s decision to initially focus the debate on accounting for rate-regulated activities on a particular type of rate regulation referred to as defined rate regulation in order to understand the economic impact of rate regulation on a limited range of activities before moving to the next stage of the project. EFRAG also broadly agrees that defined rate regulation forms a good basis for identifying which features of rate-regulatory schemes distinguish rate-regulated activities from other commercial activities.
However, EFRAG believes that the DP represents only a starting point in this project. As the IASB progresses the project, EFRAG believes it will need to consider in which circumstances an entity’s right to recover an agreed amount of revenue and obligations to perform certain rate-regulated activities create enforceable rights and obligations that should be recognised in the IFRS financial statements. The IASB might also need to consider whether it should eventually widen the scope of any potential future accounting guidance, in order to require disclosures of a wider range of schemes, to enable a necessary understanding of the impact of rate regulation in the IFRS financial statements.
Whilst EFRAG broadly supports the description of defined rate regulation, EFRAG believes that the existence of a rate-setting framework that creates enforceable rights and obligations and includes an adjusting mechanism based on the revenue requirement (as defined in the DP) has a pivotal role to play in the scoping of the IASB’s Rate-regulated Activities project. In EFRAG´s view, it is the enforceable rights and obligations that stem from this rate-setting framework that should be considered for recognition in the IFRS financial statements and therefore EFRAG sees the main purpose of the features listed in paragraph 4.4(a)–(c) of the DP as ensuring enforceability of those rights and obligations. EFRAG has also provided a number of suggestions about how these features might be improved so as to achieve this purpose, which may also assist in developing any potential future accounting guidance.
With regard to the accounting approaches proposed in the DP, EFRAG believes that the revenue approach has an important role to play in any future accounting guidance. EFRAG remains open to discussing a cost deferral approach described in the DP, and recommend the IASB to explore in more detail cases where such an approach might produce relevant information. Furthermore, EFRAG supports an approach that is principle-based and which can be applied to different rate regulatory regimes that evolve over time.
EFRAG believes that the disclosures in IFRS 14 Regulatory Deferral Accounts are a good starting point. EFRAG also supports separate presentation of regulatory balances in the IFRS financial statements, on the basis that it will enhance the relevance and usefulness of the information about the financial effects of rate regulation. EFRAG further notes that it is important for the IASB to consider a balanced approach with respect to the disclosure requirements and to focus on the types of disclosures that are useful for users of financial statements without imposing excessive costs on preparers.
Finally, EFRAG believes that the IASB should test, using real life examples, the description of defined rate regulation and any accounting guidance it develops to ensure that no rate-regulatory scheme inappropriately falls outside the scope of the project.
The FRCdoes not consider that the interim standard IFRS 14 Regulatory deferral accounts should become a permanent feature of IFRS. The FRC believes that the project should not only address “defined rate regulation”. Focusing on only a particular type of rate regulation would leave open the question of the appropriate financial reporting responses to other types of rate regulation. There would be a risk that the standard would be applied by analogy to other types of rate regulation, for which its requirements may not be appropriate. The FRC therefore considers that the project should comprehensively address the accounting for rate-regulated activities.
The FRC remains to be convinced that rate regulation usually creates assets and liabilities. A primary objective of the project should, in the FRC´s view, be to identify any instances where there is a credible case that rate regulation gives rise to enforceable rights and obligations that meet the definitions of assets and liabilities. Only once they have been identified can possible accounting approaches be considered.