IFRS 14 Regulatory Deferral Accounts

The IASB undertook a project to identify whether, and if so, how, an entity should reflect the impact that rate regulation might have on its activities in its financial statements. In 2009 an exposure draft was published to address the issues related to Rate-regulated activities. For both respondents and IASB members expressed very divergent views; at its September 2010 meeting, the IASB decided to suspend the project pending the outcome of the IASB agenda consultation.

In May 2012, the IASB discussed its strategy for developing its technical programme and it unanimously supported giving priority to developing standards-level proposals for rate-regulated activities. It was acknowledged that constituents argued that the IASB had not considered in its exposure draft the existence of several and different regulatory regimes. Consequently the IASB decided to develop a discussion paper as a matter of urgency which will enable the divergent views expressed during the previous project to be compared and analysed in a balanced way to build general acceptance of the basis for the IASB's possible conclusions on the project. This discussion paper would also be able to explore whether existing regulatory assets and regulatory liabilities can be analysed to identify the features necessary in a regulatory regime to give rise to the rights and obligations that support the recognition of assets and liabilities. Respondents in 2009 were also concerned that regulatory assets and liabilities did not meet the recognition criteria set in the Framework. IASB's developments on the main project on rate-regulated activities and corresponding EFRAG's activities are summarised here.

. However, constituents from some jurisdiction expected to apply International Standards had requested for an interim IFRS until a comprehensive solution is developed to ease their adoption of IFRSs. Therefore, The IASB discussed at its December 2012 meeting the core principles on which to develop an interim Standard and it tentatively decided to develop an Exposure Draft that will: a) permit 'grandfathering' of existing recognition and measurement policies for those entities that currently recognise regulatory assets or regulatory liabilities in accordance with their local accounting requirements;
b) require that such regulatory amounts are identified as separate regulatory accounts and be presented as separate line items in the financial statements with additional disclosure requirements; and
c) contain similar impairment test requirements to those required by IFRS 6 Exploration for and Evaluation of Mineral Resources. In April 2013, the IASB published the exposure draft on Regulatory Deferral Accounts.

In May 2013, EFRAG published its draft comment letter on the ED.
In its letter, EFRAG did not support the ED because:
- It results in a lack of comparability between (a) entities that take advantage of the ED and (b) entities that already apply IFRS or do not wish to apply the ED; and
- It is not limited to facilitating first-time adoption but maintains previous accounting policies for an indefinite period. Other interim standards such as IFRS 4 and IFRS 6 have shown that there was no such thing as a short-term interim standard.

Although EFRAG disagreed with the pursuance of this interim project, EFRAG was supportive of the IASB's decision to make the standard an option and of its efforts to limit comparability issues to the regulatory deferral account balances. Consequently, EFRAG carried out an analysis of the proposed standard:
- We assessed whether the IASB was successful with its intent of limiting comparability issues to the regulatory deferral account balance line items. We identified a number of issues that the IASB should resolve; and
- We considered the requirements in the ED and identified certain difficulties that application of the proposals may raise. EFRAG is seeking for comments on the letter by 21 August 2013.

After having consulted its constituents, EFRAG issued on 10 September 2013 its final comment letter on the ED.

In its letter EFRAG mantains its preliminary position on the ED, therefore EFRAG does not support the issue of the interim standard based on the proposals in the ED.

After having considered constituents' feedback, the IAS decided to publish IFRS14 as it recognises that discontinuing the recognition of regulatory deferral account balances before the completion of the comprehensive Rate-regulated Activities project could be a significant barrier to the adoption of IFRS for those entities for which regulatory deferral account balances represent a significant proportion of net assets. IFRS 14 allows those entities that currently recognise regulatory deferral account balances in accordance with their previous GAAP to continue to do so when making the transition to IFRS.

The Accounting Regulatory Committee has discussed at different meeting about IFRS14. More details are available here.

On 23 October 2015, the European Commission published a news item where it stated that it will not propose for endorsement the interim standard on rate regulated activities, IFRS 14. IFRS 14 is a temporary standard offering an accounting option to companies that adopt IFRS for the first time. The European Commission will not propose IFRS 14 for endorsement in the EU because very few European companies would fall within its scope. The European Commission will consider any future standard on rate regulated activities for endorsement in the EU under its normal process. More details are available here.

Click to access the IASB project page here.