Comments from ACCA to the International Accounting Standards Board (IASB)
15 January 2015
ACCA supports the scope of the DP, and the main conclusions which it has been able to establish at this stage of the IASB’s project on rate-regulated activities. In particular, we agree that the IASB should presently focus on the specific type of rate-regulation described in the DP.
We also support the development of a methodology for rate-regulation which is grounded in the principles in the Conceptual Framework, and which has regard to the information needs of the primary users of the financial statements identified in para OB2 of the Framework (as opposed to other groups of users as well, because of the particular characteristics of rate regulation).
The project on rate regulation can, in ACCA’s view, be acceptably undertaken alongside the project on the revisions to the Conceptual Framework. Indeed, the work on rate regulation could well be informed by that on the Framework. As a further general point, we see the project on rate regulation as being at an early stage still. This leaves large scope for changes and exploration through, for example, the field-testing of ideas.
Whilst we note that this project will not inevitably lead to the issue of a new Standard, we believe that it should result in the withdrawal or replacement of IFRS 14, due to the interim nature of that Standard, and the wide-ranging reservations which we expressed in response to the IASB’s Exposure Draft at the time (ED/2013/5).
What information about the entity’s rate-regulated activities and the rate-regulatory environment do you think preparers of financial statements need to include in their financial statements or accompanying documents such as management commentary?
Please specify what information should be provided in:
(i) the statement of financial position;
(ii) the statement(s) of profit or loss and other comprehensive income;
(iii) the statement of cash flows;
(iv) the note disclosures; or
(v) the management commentary.
How do you think that information would be used by investors and lenders in making investment and lending decisions?
In view of the specific questions which follow this one, and the wide-ranging nature of this first question, we will provide an answer in general terms.
The information to be presented on rate regulation should respond to the needs of the primary users of the financial statements, rather than attempt to meet the needs of a much wider group of potential users. Those primary users are existing and potential lenders and creditors, whose main interests are, in summary the returns achievable on investments, an entity’s credit-worthiness and its cash flows. It is also worth noting that the relevant regulator is also likely to have an interest in the financial statements of an entity undertaking rate-regulated activities.
The above users do not, however, typically expect IFRS to meet all of their information needs. For example, lenders tend to make their own adjustments in calculating the particular information they need on liquidity. In addition, regulators are able to require additional information via a separate report completed by the entity undertaking rate-regulated activities, such as an Annual Return.
Consequently, we support assets, liabilities and profit / loss items being recognised and presented in accordance with a Standard which is based on the definitions and principles in the Conceptual Framework. Additional information may be essential to explain the items recognised in the primary statements in respect of rate-regulated activities, or to achieve a fair presentation overall. If so, this information should be included in the notes to the financial statements.
Other information should be presented in documents other than the annual financial statements, insofar as it is consistent with the information presented in the financial statements. For example, the Management Commentary is an appropriate location for forward-looking information (such as likely future risks or opportunities) on rate-regulated activities, which would complement that given within the annual financial statements.
Are you familiar with using financial statements that recognise regulatory deferral account balances as regulatory assets or regulatory liabilities, for example, in accordance with US generally accepted accounting principles (GAAP) or other local GAAP or in accordance with IFRS 14? If so, what problems, if any, does the recognition of such balances cause users of financial statements when evaluating investment or lending decisions in rate-regulated entities that recognise such balances compared to
We have no comments directly in response to this question. In our response to Question 13 below, we have raised the idea of field-testing a preferred rate-regulation methodology, particularly in jurisdictions such as Canada where rate-regulated activities have especially presented an issue, and which local GAAP has attempted to address.
Equally, we would support an examination by the IASB of jurisdictions such as Europe and Australia, where the adoption of IFRS precludes the recognition of assets, liabilities and profit / loss movements arising from rate-regulated activities. It is likely also to be instructive to ascertain what difficulties have resulted for preparers and users of financial statements in these jurisdictions, and whether they have a greater or lesser impact there.
Do you agree that, to progress this project, the IASB should focus on a defined type of rate regulation (see Section 4) in order to provide a common starting point for a more focused discussion about whether rate regulation creates a combination of rights and obligations for which specific accounting guidance or requirements might need to be developed (see paragraphs 3.6–3.7)? If not, how do you suggest that the IASB should address the diversity in the types of rate regulation summarised in Section 3?
We support the focus on a specific type of rate-regulation. At this early stage, and probably beyond it, we believe that the discussion of how to account for rate-regulated activities would be complicated by attempting to deal with more than one type of rate-regulation.
In our response to Q5 below, we comment on the characteristics of the type of rate-regulated activity chosen by the IASB for discussion.
Paragraph 2.11 notes that the IASB has not received requests for it to develop special accounting requirements for the form of limited or ‘market’ rate regulation that is used to supplement the inefficient competitive forces in the market (see paragraphs 3.30–3.33).
Where ‘market’ rate regulation involves setting a price cap, but no more, the effects on the reporting entity are straightforward compared to the type of rate regulated activity examined in the DP (and discussed in Qu. 5 below). For example, no deferral balances will arise. Consequently, we do not see a need for specific accounting requirements to be developed for this type of activity.
We note that the IASB has identified that ‘market’ rate regulation occurs far less frequently than the type of rate-regulation which is examined in the DP. Furthermore, the absence of concerns raised over ‘market’ rate regulation indicates that the IASB currently does not need to consider developing specific requirements. As set out in our response to Qu. 3 above, we prefer a focus on just the one type of rate regulation.
Where a price cap has a material effect on the financial statements, IAS 1 should, furthermore, provide sufficient guidance on the disclosures which would be appropriate.
Paragraphs 4.4–4.6 summarise the key features of defined rate regulation. These features have been the focus of the IASB’s exploration of whether defined rate regulation creates a combination of rights and obligations for which specific accounting guidance or requirements might be developed in order to provide relevant information to users of general purpose financial statements.
(a) The IASB has identified that the great majority of rate-regulated schemes contain elements of both cost-of-service and incentive-based regulation (para 1.13 of the DP). We agree that it is consequently appropriate for defined rate regulation, as examined in the DP, to reflect a situation in which the needs of customers to buy essential goods or services at a reasonable price are balanced with an entity’s need to attract capital, and remain financially viable.
(b) and (c) The features stated in the DP need to provide a basis for comments which will take this project further, and avoid over-prescription whilst still encompassing the main characteristics of the types of rate-regulated activities which exist. We agree that these criteria are met by the characteristics set out in paras 4.4 to 4.6 of the DP (subject to one reservation set out in the following paragraph below). As this project progresses, it is advisable for the IASB to ensure that these stated features remain comprehensive as well as appropriate, so that any eventual Standard has the correct scope.
As all of the features stated must be present for a defined rate-regulated activity to exist, the IASB may need to re-consider the use of the term ‘essential to customers’ (para 4.4 (a) (ii)), as this could be a subjective concept in the case of a number of activities. For example, whilst clean water and energy are essential for all individuals, not all will need to use toll roads, and there are now readily available alternatives to the postal service. It may be more relevant to relate the concept of ‘essential’ to society as a whole (i.e. a majority of people), rather than to the individual customer.
Paragraphs 4.62–4.72 contain an analysis of the rights and obligations that arise from the features of defined rate regulation.
(a) To a large extent, the rights and obligations will be determined by the key features of defined rate regulation, as dealt with in Qu. 5 above. We agree that the rights and obligations described in the DP appear complete at this stage, for the purposes of progressing the project on rate-regulated activities.
(b) We also agree that defined rate regulation is specific enough to warrant its own guidance and requirements. A further key consideration is that the specific accounting guidance or requirements will assist in replacing the transitional Standard IFRS 14 with material which is consistent with other current IFRS, and which is grounded in the principles set out in the Conceptual Framework.
Section 5 outlines a number of possible approaches that the IASB could consider developing further, depending on the feedback received from this Discussion Paper. It highlights some advantages and disadvantages of each approach.
If commenting on the asset/liability approach, please specify, if it is relevant, whether your comments reflect the existing definitions of an asset and a liability in the Conceptual Framework or the proposed definitions suggested in the Conceptual Framework Discussion Paper, published in July 2013.
(a) and (b) ACCA supports the IASB’s preferred method of the recognition of regulatory deferral assets and liabilities (para. 5.34(c) of the DP), based on the case put forward in section 5 of the DP (which examines the conceptual justification for recognition). We agree that the IASB should investigate an approach that is both practical, and compliant with the principles underlying IRFS. The information needs of investors and creditors also indicate that recognition is more appropriate than just a series of additional disclosures.
We do not support the recognition of a regulatory licence (intangible asset) only (para 5.34(a)), as to do so will not reflect defined rate regulation appropriately. Contrary to intangible assets generally, the licence does not arise from a specific transaction for which the booking of the opposite ‘credit entry’ is clearly determinable.
We also do not support the adoption, via an exemption from the requirements of IFRS, of the regulatory accounting requirements in the general purpose financial statements otherwise prepared in accordance with IFRS (para 5.34(b)). It is unhelpful for financial statements to reflect more than one accounting methodology, and this is a main reason why we would like to see the replacement of the interim Standard IFRS 14.
(c) As noted above, we support a revised Standard on rate regulation which is grounded in the principles and definitions of the Conceptual Framework (CF). We acknowledge that these definitions are subject to revision as part of the separate project on the CF, and that consequently, the two projects will need to have regard to each other as they continue. As a result, we believe that it is sufficient, at this stage, for the IASB to establish initial conclusions which can then be developed, both as the rate regulation project progresses, and also in accordance with eventual changes to the CF.
Does your organisation carry out activities that are subject to defined rate regulation? If so, what operational issues should the IASB consider if it decides to develop any specific accounting guidance or requirements?
ACCA does not carry out activities that are subject to defined rate regulation.
If, after considering the feedback from this Discussion Paper and the Conceptual Framework project, the IASB decides to prohibit the recognition of regulatory deferral account balances in IFRS financial statements, do you think that the IASB should consider developing specific disclosure-only requirements? If not, why not? If so, please specify what type of information you think would be relevant to investors and lenders in making their investing or lending decisions and why.
As indicated above, ACCA supports the recognition of regulatory deferral account balances in IFRS financial statements. If, ultimately, the IASB determines that recognition is not the correct approach, we would support the setting of disclosure requirements for rate-regulated activities.
It is feasible that the information requirements of investors and creditors (as described in para 2.22 of the DP) could be met by disclosure. However, these requirements will need to be considered carefully. Regard will need to be made particularly to explaining the artificial volatility in results arising from rate regulated activities which are not subject to specific recognition requirements in IFRS (as referred to in para. 2.24 of the DP).
Sections 2 and 6 discuss some of the information needs of users of general purpose financial statements. The IASB will seek to balance the needs of users of financial statements for information about the financial effects of rate regulation on an entity’s operations with concerns about obscuring the understandability of financial statements and the high preparation costs that can result from lengthy disclosures (see paragraph 2.27).
The recognition and measurement provisions for regulatory deferral account balances in IFRS 14 are of limited relevance to the current project on rate-regulated activities. They accord instead with previously-applied national accounting practice, and furthermore are a temporary measure which is limited to first-time adopters of IFRS.
IFRS 14 does, however, have presentation and disclosure requirements which may differ from the previously-applied national accounting practice which is the basis for recognition and measurement under IFRS 14. These presentation and disclosure requirements do include information which would continue to be useful to investors and lenders under a revised Standard, and should not impose undue costs on preparers. In particular, IFRS 14 aims to ensure that amounts in respect of rate regulation are clearly distinguished in the primary financial statements (albeit that under IFRS 14, this is because they represent amounts not otherwise recognised under IFRS), and that the impact of rate regulated activities is appropriately disclosed.
Notwithstanding the above support for certain aspects of IFRS 14, we prefer the IASB’s general approach to be one of a fundamental re-consideration of the accounting for rate-regulated activities, and not of attempting to use IFRS 14 as the basis of a new Standard. IFRS 14 was never intended to be a complete ‘IFRS-compliant’ solution.
IFRS 14 requires any regulatory deferral account balances that have been recognised to be presented separately from the assets and liabilities recognised in the statement of financial position in accordance with other Standards. Similarly, the net movements in regulatory deferral account balances are required to be presented separately from the items of income and expense recognised in the statement(s) of profit or loss and other comprehensive income.
If the IASB develops specific accounting requirements that would apply to both existing IFRS preparers and first-time adopters of IFRS, and those requirements resulted in the recognition of regulatory balances in the statement of financial position, what advantages or disadvantages do you envisage if the separate presentation required by IFRS 14 was to be applied?
As noted in our response to Q10 above, we support for all preparers, the separate presentation of amounts in the primary financial statements which concern rate-regulated activities. This support reflects the view that rate regulation is a specific situation with a material influence on the entities concerned. Clearly-presented information on this will also benefit investors and lenders, as they will better understand the effects of rate regulation and how, in the absence of a comprehensive Standard, artificial volatility would otherwise result (as described in our response to Qu. 9 above).
We acknowledge that, as noted in paras 6.13 – 6.15 of the DP, the extent to which certain items can meaningfully and effectively be disaggregated is not always clear. At this early stage of the project on rate-regulated activities, there should, however, remain adequate scope to examine this issue further.
Section 4 describes the distinguishing features of defined rate regulation. This description is intended to provide a common starting point for a more focused discussion about whether this type of rate regulation creates a combination of rights and obligations for which specific accounting guidance or requirements should be developed.
Paragraph 4.73 suggests that the existence of a rate regulator whose role and authority is established in legislation or other formal regulations is an important feature of defined rate regulation. Do you think that this is a necessary condition in order to create enforceable rights or obligations, or do you think that co-operatives or similar entities, which operate under self-imposed rate regulation with the same features as defined rate regulation (see paragraphs 7.6–7.9), should also be included within defined rate regulation? If not, why not? If so, do you think that such co-operatives should be included within the scope of defined rate regulation only if they are subject to formal oversight from a government department or other authorised body?
The DP envisages rate regulation where rules can be enforced, and are not subject to change informally or by agreement, once set. We agree with these criteria, which are wider than where a regulator, as defined, is solely established through a specific law.
Regulators need not necessarily be established through a standard legislative process. The source of their authority varies by country, and can reflect historic conditions from many years ago, such as Royal decree. However, their contemporary operation, even if self-regulating, will be subject to legally-binding oversight or sanction, if they are to operate in an official regulatory capacity. Therefore, we believe that the definition of a regulator should include self-regulating bodies, but only if they are subject to formal oversight from a government department or other appropriate authorised body.
Paragraphs 7.11–7.22 highlight some of the issues that the IASB may consider if it continues to progress this project.
Do you have any comments or suggestions on these or any other issues that may or may not have been raised in this Discussion Paper that you think the IASB should consider if it decides to develop proposals for any specific accounting requirements for rate-regulated activities?
The DP brings together a great deal of work done by the IASB, and the many questions arising, during its current and previous attempts to determine how rate-regulated activities can be brought within the scope of IFRS. It might be beneficial to continue the project, for now, by exploring the methodology which is in accordance with the majority views of respondents, only subsequently exploring other options where it becomes evident that these are more suitable.
For example, if the preferred methodology in the DP receives majority support from respondents, it could be field-tested, particularly in jurisdictions such as Canada where rate-regulated activities have especially presented an issue. This field-testing would provide an opportunity to examine the impact on other IFRS (a matter raised in section 7 of the DP).