IFRS 14 is to identify the financial reporting requirements for ‘Regulatory Deferral Account Balances’ (RDAB) that come to light when an entity provides goods or services to customers at a price regulated by the government or rate fixed by regulatory that’s subject to rate regulation.
IFRS 14 is authorized, but not required, to be applied where an entity conducts rate-regulated activities and has recognized amounts in its previous Generally Accepted Accounting Principles (GAAP) financial statements that meet the definition of ‘RDAB’ (sometimes mentioned as ‘regulatory assets’ and ‘regulatory liabilities’). For an entity that is within the scope of and elects to apply, the requirement of IFRS 14 shall apply to all RDAB that arise from all of the entity’s rate-regulated activities.
- Rate regulation, a framework that establishes prices that a public utility or similar entity can charge to customers for regulated goods and services, is subject to oversight and approval by a ‘rate regulator’.
- A rate regulator is an agency that is permitted by statute or legislation to determine the rate or range of rates that are binding on an entity. In some cases, the rate regulator could also be a third party or a related party of the entity, such as the entity’s board of directors if the board is required by law or regulation to set rates to protect the interests of customers as well as to ensure overall financial viability.
- A regulatory deferral account balance is any expense (or income) account that might not be recognized as an asset or a liability in accordance with other IFRS, but that qualifies for deferral as it is (expected to be) included in establishing the rate(s) that can be charged to customers by the rate regulator.
Accounting policies for regulatory deferral account balances
Ind AS 8 Accounting Policies, Changes in Accounting Estimates, and Errors offers an exemption from applying Para 11 when an entity determines its accounting policies to recognize, measure, present, and disclose regulatory deferral account balances. Para 11 of Ind AS 8 requires an entity to consider the International Financial Reporting Standards requirements dealing with similar matters and the Conceptual Framework when setting its accounting policies. Ind AS 8 permits entities to change their accounting policies to recognize, measure, impairment, and derecognition of balances in regulatory deferral accounts. The Changes achieve higher relevance and reliability for the economic decision-making needs of the Financial Statements (FS) users. Nevertheless, entities cannot change their accounting policies (AP) to begin recognizing RDAB. Presentation in financial statements
- A company’s financial statements present the impact of RDAB separately. A company must follow this requirement regardless of its previous GAAP presentation policies related to RDAB. Thus:
- An entity shall present separate line items in the statement of financial position (Balance sheet) for the total of all:
- Regulatory deferral account debit balances; and
- Regulatory deferral account debit credit balances.
- They are not classified between current and non-current but are separately disclosed using subtotals.
- The net movement in RDAB is separately presented in the statement of profit or loss and other comprehensive income using appropriate subtotals.
IFRS 14 sets out disclosure objectives to enable users to assess:
- A description of the nature of and the risks associated with the price regulation establishing the price or prices that an entity can charge to customers for the goods or services it provides; and
- Rate regulation’s impact on a company’s financial statements (financial position, financial performance, and cash flow).
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