This post provides a comprehensive overview of IFRS 14 Regulatory Deferral Accounts, including its objectives, scope, recognition and measurement principles, presentation and disclosure requirements, and the broader context of the IASB’s project on rate-regulated activities.
1. Executive Summary
IFRS 14 “Regulatory Deferral Accounts” is an interim standard issued by the International Accounting Standards Board (IASB) in January 2014, effective from January 1, 2016 (with early adoption permitted). Its primary purpose is to provide a temporary solution for first-time adopters of IFRS that conduct rate-regulated activities and previously recognized “regulatory deferral account balances” under their national Generally Accepted Accounting Principles (GAAP). The standard allows these entities to continue applying their previous GAAP accounting policies for these specific balances, rather than forcing a potentially disruptive change before the IASB completes its comprehensive project on rate-regulated activities.
A key aspect of IFRS 14 is the separate presentation of these regulatory deferral account balances in the financial statements to enhance transparency and comparability. While intended to facilitate IFRS adoption for certain industries (e.g., utilities), the standard has faced criticism for introducing inconsistency into IFRS practice.
2. Background and Rationale for IFRS 14
- Absence of Specific IFRS Guidance: Prior to IFRS 14, there was no specific IFRS standard addressing rate-regulated activities. Entities were required to develop their own accounting policies based on IAS 8, which often led to the elimination of regulatory deferral account balances upon IFRS adoption.
- US GAAP Influence: US GAAP, specifically SFAS 71 (now Topic 980), has recognized the economic effect of certain types of rate regulation since at least 1962. Many national GAAPs adopted similar guidance.
- Barrier to IFRS Adoption: Discontinuing the recognition of regulatory deferral account balances was a “significant barrier to the adoption of IFRS for entities for which regulatory deferral account balances represent a significant proportion of net assets.” This led to industry-specific “carve-outs” or “carve-ins” in some jurisdictions, creating diversity.
- Interim Solution: The IASB recognized these “difficult practice problems” and decided in December 2012 to develop an interim standard (IFRS 14) to apply until the completion of a comprehensive project on rate-regulated activities. This standard is not intended to “anticipate the outcome of the comprehensive Rate-regulated Activities project.”
- Neutral Terminology: The standard uses the term “regulatory deferral account balances” instead of “regulatory assets” or “regulatory liabilities” because the IASB has not yet determined whether these balances meet the definitions of assets or liabilities in the Conceptual Framework.
3. Key Provisions of IFRS 14
3.1. Scope
IFRS 14 has a narrow scope, applying only to entities that:
- Are first-time adopters of IFRS (i.e., applying IFRS 1).
- Conduct rate-regulated activities. Rate regulation is defined as “a framework for establishing the prices that can be charged to customers for goods or services and that framework is subject to oversight and/or approval by a rate regulator.” This excludes self-regulated entities.
- “Recognised amounts that qualify as regulatory deferral account balances in its financial statements in accordance with its previous GAAP.”
- “All or nothing” choice: If an entity qualifies and elects to apply IFRS 14, it must do so for all its rate-regulated assets and liabilities, applying all requirements of its existing national GAAP to those balances.
- Entities that do not recognize these balances under previous GAAP, or newly formed businesses, are not eligible to apply IFRS 14.
3.2. Recognition, Measurement, Impairment, and Derecognition
- Continuation of Previous GAAP: Entities in scope are “permitted to continue applying previous GAAP accounting policies for regulatory deferral accounts.” This includes policies for recognition, measurement, impairment, and derecognition.
- Temporary Exemption from IAS 8: IFRS 14 grants an “exemption from paragraph 11 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors” to allow the continuation of previous GAAP policies, which might otherwise conflict with IFRS recognition criteria.
- Restricted Policy Changes: Changes to existing accounting policies for regulatory deferral accounts are limited. Any change must make the financial statements “more relevant and no less reliable, or more reliable and no less relevant” as described by IAS 8. Entities are not permitted to change accounting policies to start recognising regulatory deferral account balances that were not recognised under previous GAAP. However, they can recognize new balances that arise from a change in accounting policy (e.g., due to new IFRS guidance), provided it’s consistent with their previous GAAP policies.
- Interaction with Other Standards: While previous GAAP applies to regulatory deferral accounts, other specific IFRSs should be applied first for balances they cover. IFRS 14 also provides guidance on interaction with various other IFRSs, including IAS 10 (Events after the Reporting Period), IAS 12 (Income Taxes), IAS 28 (Investments in Associates and Joint Ventures), IAS 33 (Earnings per Share), IAS 36 (Impairment of Assets), IFRS 3 (Business Combinations), IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations), IFRS 10 (Consolidated Financial Statements), and IFRS 12 (Disclosure of Interests in Other Entities).
3.3. Presentation
- Separate Presentation: Balances arising from IFRS 14 are “presented separately in the balance sheet and the statement of comprehensive income.”
- Balance Sheet: “A separate line item is presented in the balance sheet for total regulatory deferral debit balances and total regulatory deferral credit balances, following a sub-total of all other assets and liabilities.” Offsetting is not permitted, and the distinction between current and non-current balances is not presented.
- Statement of Comprehensive Income: The “total movement in all regulatory deferral accounts is split between other comprehensive income (OCI) and profit and loss.” The amount recorded in profit and loss is a single line item after a sub-total for profit and loss. OCI movements are presented in two line items.
- Earnings per Share (EPS): Entities presenting EPS must also present “EPS excluding and including the movement in the regulatory deferral accounts.”
- Deferred Tax: “When an entity recognises a deferred tax asset or a deferred tax liability as a result of recognising regulatory deferral account balances, the entity shall present the resulting deferred tax asset (liability) and the related movement in that deferred tax asset (liability) with the related regulatory deferral account balances and movements in those balances, instead of within the total presented in accordance with IAS 12 Income Taxes.”
- Discontinued Operations: Regulatory deferral account balances related to discontinued operations are presented with other regulatory deferral account balances, not within the IFRS 5 “single-line” approach.
3.4. Disclosures
IFRS 14 requires extensive disclosures to help users assess the nature, risks, and effects of rate regulation:
- Nature and Extent of Rate Regulation: A description of the rate-regulated activity, the rate-setting process, and the identity of the rate regulator(s) (including related party status if applicable).
- Risks and Uncertainties: How future recovery or reversal of each balance is affected by risks (e.g., demand risk, regulatory risk, other market risks).
- Recognition and Measurement Basis: The basis for initial and subsequent recognition, derecognition, measurement, recoverability assessment, and impairment allocation.
- Reconciliation: “A reconciliation of the balances from the beginning to the end of the period” for each class of regulatory deferral account balance. This table should include amounts recognized in the current period, amounts recovered/reversed, and other movements (e.g., impairments, business combinations, foreign exchange effects).
- Return/Discount Rate: The rate of return or discount rate applicable to each class of balance.
- Remaining Periods: The expected remaining periods for recovery or reversal of balances.
- Impact on Income Tax: Disclosure of the impact of rate regulation on current and deferred tax, and separate disclosure of tax-related regulatory deferral account balances and their movements.
- Loss of Recoverability: If a balance is no longer fully recoverable or reversible, disclose the fact, the reason, and the amount of reduction.
- Qualitative Disclosures: These can be given in the financial statements or incorporated by cross-reference to other publicly available statements (e.g., management commentary).
4. Impact and Effects Analysis
- Facilitates IFRS Adoption: The IASB believes IFRS 14 “is likely to remove a major barrier to the adoption of IFRS for entities for which regulatory deferral account balances represent a significant proportion of net assets.”
- Improved Comparability (Overall): By reducing barriers to IFRS adoption, more entities will apply IFRS, “improving the comparability of the financial statements of rate-regulated entities across jurisdictions.”
- Enhanced Transparency: The “segregated presentation and related disclosures” are expected to “highlight more clearly this impact” of rate regulation and “increase the transparency of these items.”
- Limited Impact on Net Assets/Profit: The standard permits continuing existing recognition and measurement policies, so it “should have little or no impact on the net assets or the net profit reported in the financial statements.”
- Presentation Changes: While recognition policies remain largely unchanged, presentation will shift to separate line items, requiring preparers to track differences in more detail. However, this is mitigated by existing IFRS 1 exemptions for first-time adopters and often aligns with existing regulatory record-keeping.
- Criticism (Dissenting Opinions): Some IASB members (Messrs. Edelmann, Gomes, and Zhang) voted against IFRS 14’s publication, citing concerns about:
- Reduced Comparability and Inconsistency: Introducing “inconsistent accounting treatment” for regulatory deferral account balances, as previous IFRS practice was to derecognize them.
- Uncertainty for Future Adopters: Setting a precedent for interim solutions for major projects.
- Conflict with Conceptual Framework: Belief that some regulatory deferral account balances “do not think that all such balances meet the definitions of assets and liabilities in the IASB’s Conceptual Framework.” They argued that permitting their recognition in the statement of financial position is “contrary to the current accounting principles.”
5. IFRS for SMEs Standard and Future Outlook
- No Current Alignment: The IFRS for SMEs Standard currently “has no section that corresponds to IFRS 14.” Entities applying it cannot recognize regulatory deferral account balances unless permitted by other sections.
- Ongoing IASB Project: The IASB has an “active project on Rate-regulated Activities which could lead to the replacement of IFRS 14.” An Exposure Draft, “Regulatory Assets and Regulatory Liabilities,” was published in January 2021.
- SMEIG Recommendation: The SME Implementation Group (SMEIG) and many respondents recommend not aligning the IFRS for SMEs Standard with IFRS 14 in its current comprehensive review, primarily due to the ongoing comprehensive project and the belief that “the topic is not common among SMEs.”
- Future Review: The recommendation is to “revisit this topic in a future review of the IFRS for SMEs Standard once it has completed its project on Rate-regulated Activities.”
6. Definitions
- Rate-regulated activities: “Activities subject to a framework for establishing the prices that can be charged to customers for goods or services and that framework is subject to oversight and/or approval by a rate regulator.”
- Rate regulator: “An authorised body that is empowered by statute or regulation to establish the rate or a range of rates that bind an entity.” This can include the entity’s own governing body if statutorily empowered to set rates in both customer and entity interest.
- Regulatory deferral account balance: “The balance of any expense (or income) account that would not be recognised as an asset or a liability in accordance with other Standards, but that qualifies for deferral because it is included, or is expected to be included, by the rate regulator in establishing the rate(s) that can be charged to customers.”
- Previous GAAP: “The basis of accounting that a first-time adopter used immediately before adopting IFRS.”
- First-time adopter: “An entity that presents its first IFRS financial statements.”
How Prabix Advisory Can Help
At Prabix Advisory, we guide first-time adopters through the complexities of IFRS 14 on Regulatory Deferral Accounts, ensuring a smooth and compliant transition to IFRS. Our experts help businesses in regulated industries correctly recognize, measure, and present regulatory deferral balances while aligning with disclosure requirements. By providing tailored support – from transition planning to detailed reporting – we make sure your financial statements remain transparent, comparable, and fully compliant with international standards and UAE regulatory expectations.