13 February 2015

EFRAG: Feedback statement on the IASB’s paper Reporting the Financial Effects of Rate Regulation

In September 2014, the International Accounting Standards Board (IASB) published a Discussion Paper Reporting the Financial Effects of Rate Regulation (the ‘DP’) and requested comments by 15 January 2015.

The main observations made by users is summarised as follows:

• Scope and description of defined rate regulation – The description of rate regulation in the Discussion Paper is likely to apply to entities that operate airports, air traffic control and waste management and is not limited to the electricity, gas and water utility sector


• Where information about rate regulation is currently obtained by users - IFRS financial statements generally do not provide the information that users regard as relevant to understanding the impact of rate-regulated activities on an entity’s revenue and related costs, cash flows and financial position associated with an entity’s rate-regulated activities. Therefore, to make their investing and lending decisions, users obtain the information from different sources. However, the level of information provided by the regulator differs from regulation to regulation and within jurisdictions. This can significantly affect the accuracy and comparability of their analyses.


• Use of information - Information on rate regulation is used mainly to estimate future cash flows, enterprise value and assess the financial stability and creditworthiness of the entity operating in rate-regulated environment. In regimes where the regulatory asset base is used to assess the rate of return of entities operating rate-regulated activities, the regulatory asset base is the key indicator for users to develop their models.


• Where users would like to see the effects of rate regulation – Most of the users broadly favour the inclusion of the financial effects of rate-regulated activities in the primary financial statements as this would enhance the usefulness of the information provided. Users believe that recognising the economic effects of rate regulation in the primary statements would: (a) result in a measure of performance that reflects what an entity is entitled to earn; (b) result in useful financial information to assess prospects of future cash flows; and (c) portray the economic reality of entities operating rate-regulated activities. They support separate presentation of the effects of rate regulation on rate-regulated activities as they assess different risks profiles when entities also operate activities that are not rate-regulated.


• Some users have noted that a rate-regulated entity has rights and obligations that arise from the regulation, which other non-rate-regulated entities do not have. These rights and obligations result in assets and liabilities that need to be recognised in the financial statements in order to appropriately capture the economics of the regulation and reflect how it affects an entity that operates within that regulation.


• How current disclosures in IFRS could be improved to cater for users’ needs - Users that support recognition in the primary financial statements also want note disclosure that includes a qualitative description of the rate-regulated regimes in which the entity operates, information regarding the regulatory asset base and the factors affecting the rate-regulated revenue requirement agreed by the rate regulator.


• Issues and needs of users - In the absence of specific guidance in the IFRS literature, there is divergence in practice in providing a consistent set of financial information on the effects of rate regulation on an entity’s financial position, performance and cash flows.

Some users noted that there are drawbacks to the recognition of these the effects of rate regulation mainly because most rate-regulated regimes are very complex and continually changing. In their view, recognition of the effects of rate regulation at the expense of reliability and relevance would increase complexity and therefore reduce the understandability of financial statements.

Press release

Feedback statement

© EFRAG - European Financial Reporting Advisory Group