ASCG comments on the IASB ED/2021/1 Regulatory Assets and Regulatory Liabilities

Today, the ASCG has submitted its comment letters to the IASB on the ED/2021/1 Regulatory Assets and Regulatory Liabilities and to EFRAG on its Draft Comment Letter on this ED.

The ASCG welcomes the IASB’s effort to set out the principles for the recognition, measurement, presentation and disclosure of regulatory assets and regulatory liabilities, and of regulatory income and regulatory expense.

We support the objective of the ED to develop an accounting model for an entity to provide relevant information that faithfully represents of how regulatory effects affect the entity’s financial performance and financial position. In general, we agree with the recognition and measurement principles. Further, we support the proposed overall and specific objectives of the disclosure requirements.

However, the ASCG has conceptual and economic concerns about the exception for regulatory returns on a balance relating to assets not yet available for use proposed in paragraph B15 and about the guidance in paragraphs B3-B9 of the ED on how an entity determines amounts that recover allowable expenses, even though these concerns are not as material as the concerns about the proposal in paragraph B15.

We only partly agree with the IASB’s analysis of the likely effects of implementing the proposals on the quality of financial reporting and of the likely costs of implementing the proposals. This is because we expect that the information provided applying the requirements proposed in paragraphs B3-B9 and especially in paragraph B15 would not give users of the financial statements a complete and clear picture about regulatory income, regulatory expense, regulatory assets, and regulatory liabilities. Moreover, the information provided might even be confusing and deceptive for users.

“We deem that users of financial statements would still need to refer to other sources to understand the effects of rate regulation. We also expect significant costs of applying some of the proposals, both on initial application and on an ongoing basis. In addition to applying local GAAP and IFRS, an entity would still need to implement and carry on separate regulatory accounts”, ASCG Vice-President Prof Dr Sven Morich commented on the current proposals of the IASB.

Thus, the ASCG does not expect a positive cost-benefit relationship from implementing the proposals. However, we think this relationship could significantly be improved by making the following amendments to the future standard as explained in our response to question 3:

1. deleting paragraph B15 (in our view, the most important change);
2. determining the components of the total allowed compensation by applying regulatory rules rather than IFRS Standards; and
3. clarifying that an entity identifies its performance obligations based on the regulatory agreement and that performance obligation does not necessary mean supply of goods or services to customers.