10/09/2021 - EFRAG Final Comment Letter on Regulatory Assets and Regulatory Liabilities
EFRAG has published its Final Comment Letter on the IASB Exposure Draft ED/2021/1 Regulatory Assets and Regulatory Liabilities. EFRAG welcomes the IASB’s efforts to address a long-standing gap in current IFRS reporting for entities subject to rate regulation.
In its letter, EFRAG supports the overall objective of the ED but has identified a number of concerns with the proposals that the IASB should address before finalising the proposed Standard. EFRAG’s letter reflects a wide range of feedback from European constituents obtained during several outreach events, responses to effects-analysis surveys to preparers and users, and comment letters.
Objective, Scope and Definitions
EFRAG supports the IASB’s overall objective to develop an accounting model for regulatory assets and regulatory liabilities. EFRAG considers that there is clarity on the scope of the proposed Standard within the utilities sector, but acknowledges that there might be less clarity for other sectors which may unknowingly fall within the proposed scope.
EFRAG notes several aspects of scope where there is a need for further clarification on entities’ scope eligibility. EFRAG recommends the IASB to consider specific scope exclusions (e.g., for self-regulation). EFRAG considers that some of the terms used in the ED, such as customers and the regulator, need clarification.
EFRAG generally supports the proposed definitions of regulatory assets and regulatory liabilities and generally agrees that these meet the definitions of assets and liabilities under the Conceptual Framework. However, EFRAG notes some instances where the recognised regulatory assets and regulatory liabilities might not meet the definitions provided in the ED.
Total Allowed Compensation
EFRAG generally supports the proposed elements of total allowed compensation. However, EFRAG disagrees with paragraph B15 of the ED that states that regulatory returns earned on assets not yet available for use would not form part of total allowed compensation during construction and hence would require the recognition of a regulatory liability. EFRAG recommends that the accounting for these regulatory returns should depend on the economic substance of the regulatory agreement.
Furthermore, EFRAG is aware of situations where the proposed requirements on total allowed compensation under paragraphs B3-B9 related to allowable expenses will not reflect the economic substance of the regulatory agreement (e.g., recoverable costs are based on regulatory accounting and not IFRS expenses). EFRAG recommends that the IASB further analyses whether the requirements of paragraphs B3-B9 can be applied across diverse regulatory regimes.
Recognition and Measurement
EFRAG agrees that an entity should recognise all its regulatory assets and regulatory liabilities and generally supports the proposed recognition criteria. However, some of EFRAG’s stakeholders have noted concerns with high levels of uncertainty and recommended that the IASB considers a higher recognition threshold for cases of high existence uncertainty, similar to that in IFRS 15 (constraining estimates of variable consideration). EFRAG supports the proposed cash-flow measurement technique, but disagrees with:
the proposed new concept of a minimum adequate rate as the discount rate for regulatory assets, when the regulatory interest rate provided is insufficient. Should the IASB decide to maintain this concept, EFRAG recommends that the IASB develop a rebuttable presumption.
having different discounting approaches for regulatory assets and regulatory liabilities.
Presentation and Disclosure
EFRAG agrees an entity should present all regulatory income minus all regulatory expense as a separate line item immediately below revenue and to include regulatory interest income and regulatory interest expense within this line item. EFRAG also generally agrees with the proposed overall disclosure objectives. However, EFRAG recommends the IASB to focus more on the usefulness of information provided and adopt a more balanced disclosure approach by considering a prioritisation based on cost-benefit considerations and undertaking further outreach to users.
Transition and Effective date
To address the practical difficulties identified by constituents, EFRAG recommends modified retrospective application with exemptions or practical expedients for assets with long useful lives and where backdated CWIP regulatory returns will need to be deferred (should the IASB decide to retain this proposal).
EFRAG recommends that the effective date should be 24-36 months after the publication of the final standard to allow effective implementation
Other matters
EFRAG supports the remaining proposals and overall expects a positive cost-benefit relationship from implementing the proposed Standard. To order to address the concerns on several key aspects of the ED, EFRAG recommends the formation of a transition resource group to help with the implementation of the proposed Standard.
EFRAG final comment letter can be found here.
