Comments from ACCA to the International Accounting Standards Board, November 2009.
ACCA (the Association of Chartered Certified Accountants) is pleased to have this opportunity to comment on the exposure draft (ED) on the above subject. The ED was considered by ACCA's Financial Reporting Committee and I am writing to give you their views.
We understand that one of the reasons why the IASB has developed the proposed IFRS is in order to address divergence in practice when accounting for rate-regulated activities. We agree that this is an important objective. However, we are not aware of the current accounting for rate-regulated activities being a major issue for constituents, and therefore do not believe that a full standard is required. We believe a more detailed effect analysis of how companies are currently reporting such activities using IFRS would be a more useful starting point for the project. This would enable a deeper understanding of where the practical problems lie, and allow an assessment as to whether these could be resolved through disclosure or, were there to be significant divergence in practice, through additional interpretive guidance.
In many jurisdictions, such as the UK, companies that are involved in rate-regulated activities are required to produce 'rate-regulated' statements for regulatory purposes. We believe that the preparation of such statements could be used to support IFRS-based financial statements, which include detailed disclosure about these activities, should there be a need to do so.
In principle we do not currently support the proposal for a new standard on rate-regulated activities. However, in order to assist the IASB due process, we have responded to the specific questions raised in the ED were a full standard to be issued.
Question 1
The exposure draft proposes two criteria that must be met for rate-regulated activities to be within the scope of the proposed IFRS (see paragraphs 3–7 of the draft IFRS and paragraphs BC13–BC39 of the Basis for Conclusions). Is the scope definition appropriate? Why or why not?
We support the scope of the ED and agree in principle with the two criteria used for assessing whether rate regulated activities are in scope. We note that while paragraph 4 emphasises the need for the rate to be binding for all customers (within each category), it would be helpful if the ED clarified whether negotiated rates which are less than the maximum approved rate would be in the scope of the standard. We presume that this would not be the case, but it would be helpful for this to be clarified.
Question 2
The exposure draft proposes no additional recognition criteria. Once an activity is within the scope of the proposed IFRS, regulatory assets and regulatory liabilities should be recognised in the entity's financial statements (see paragraphs BC40–BC42 of the Basis for Conclusions). Is this approach appropriate? Why or why not?
Although we note that under US GAAP, Financial Accounting Standard (FAS)71, Accounting for the Effects of Certain Types of Regulation , includes the criteria of assessing the ability of the entity to collect regulated rates from its customer, we believe that the scope criteria and the requirement to make a similar assessment as of each reporting date (as to whether impairment has occurred) should indicate future economic benefit to or from the entity. We therefore agree with the conclusions outlined in paragraphs BC40-42.
Question 3
The exposure draft proposes that an entity should measure regulatory assets and regulatory liabilities on initial recognition and subsequently at their expected present value, which is the estimated probability-weighted average of the present value of the expected cash flows (see paragraphs 12–16 of the draft IFRS and paragraphs BC44–BC46 of the Basis for Conclusions). Is this measurement approach appropriate? Why or why not?
We agree with the proposals that assets and liabilities stemming from regulated activities should be measured at their expected present value on initial recognition as well as at each subsequent reporting period. We also support the probability weighted cash flow approach, as this is consistent with IAS37.
Question 4
The exposure draft proposes that an entity should include in the cost of self-constructed property, plant and equipment or internally generated intangible assets used in regulated activities all the amounts included by the regulator even if those amounts would not be included in the assets' cost in accordance with other IFRSs (see paragraph 16 of the draft IFRS and paragraphs BC49–BC52 of the Basis for Conclusions). The Board concluded that this exception to the requirements of the proposed IFRS was justified on cost-benefit grounds. Is this exception justified? Why or why not?
In our general comments we suggested that decision-useful information relating to rate-regulated activities could be provided by additional disclosure rather than through the proposed accounting treatments in the ED. We believe that these costs, which would not otherwise be included in the cost of assets in accordance with IFRS, could be disclosed separately.
With regards the proposals in the ED, we believe that the Board does offer a pragmatic approach to this issue. We agree that if such costs are to be accounted for, there would not be any significant benefit to users in separately accounting for them, especially if they are closely related to other assets accounted for by the entity.
Question 5
The exposure draft proposes that at each reporting date an entity should consider the effect on its rates of its net regulatory assets and regulatory liabilities arising from the actions of each different regulator. If the entity concludes that it is not reasonable to assume that it will be able to collect sufficient revenues from its customers to recover its costs, it tests the cash-generating unit in which the regulatory assets and regulatory liabilities are included for impairment in accordance with IAS 36 Impairment of Assets. Any impairment determined in accordance with IAS 36 is recognised and allocated to the assets of the cash-generating unit in accordance with that standard (see paragraphs 17–20 of the draft IFRS and paragraphs BC53 and BC54 of the Basis for Conclusions). Is this approach to recoverability appropriate? Why or why not?
Theoretically, we would question the need for an impairment test at all, given that the rate-regulated assets would be measured at the expected cash flows at the end of each period. The probability-weighting of these estimates should therefore include any recoverability issues.
Furthermore, in our response to Question 2 we noted that FAS71 includes the criteria of assessing the ability of the entity to collect regulated rates from its customer for recognition purposes. Thus were an impairment test required to be performed when it is reasonable to assume that sufficient revenues cannot be collected from customers to cover its costs, this would be significantly different to either not recognising or derecognising regulatory assets altogether as under FAS71.
Question 6
The exposure draft proposes disclosure requirements to enable users of financial statements to understand the nature and the financial effects of rate regulation on the entity's activities and to identify and explain the amounts of regulatory assets and regulatory liabilities recognised in the financial statements (see paragraphs 24–30 of the draft IFRS and paragraphs BC59 and BC60 of the Basis for Conclusions).
Do the proposed disclosure requirements provide decision-useful information? Why or why not? Please identify any disclosure requirements that you think should be removed from, or added to, the draft IFRS.
As previously noted, we believe that full and appropriate disclosure requirements should provide users of financial statements with useful decision-making information regarding rate-regulated activities, and would negate the need for many of the proposed accounting treatments.
The disclosure requirements proposed in the ED appear to be quite exhaustive, and we would question the relevance of all of them, were a full IFRS to be issued. While we would certainly support the proposed reconciliation statement (Paragraph 27a), we believe that further clarifications are required. For instance, it is not clear whether regulatory assets are tangible or intangible, especially if they are not part of assets otherwise recognised. This could have implications for external users of the entity's financial statements.
It is also not clear as to whether the disclosure requirements apply to only those assets / liabilities recognised as a separate regulatory asset, or also to those included in the carrying amount of self-constructed property. This would be important information for users of the accounts.
Question 7
The exposure draft proposes that an entity should apply its requirements to regulatory assets and regulatory liabilities existing at the beginning of the earliest comparative period presented in the period in which it is adopted (see paragraph 32 of the draft IFRS and paragraphs BC62 and BC63 of the Basis for Conclusions). Any adjustments arising from the application of the draft IFRS are recognised in the opening balance of retained earnings. Is this approach appropriate? Why or why not?
First-time adoption
The exposure draft includes proposed amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards (see paragraph C1 of the draft IFRS). These amendments are the result of the Board's exposure draft Additional Exemptions for First-time Adopters published in September 2008. These amendments reflect the comments received on that exposure draft and the Board's redeliberations.
We agree that entities should be allowed to early adopt the proposed IFRS, and that the first time application should be retrospective, with adjustments being made to the opening balance of retained earnings in the earliest comparative period. We also agree that first time adopters of IFRS should be allowed to carry forward carrying amounts of qualifying property, plant and equipment and intangible assets from previous GAAP.