Executive Summary
IFRS 20 Regulatory Assets and Regulatory Liabilities, issued in May 2026, establishes a new accounting framework for companies subject to rate regulation. The Standard addresses a critical gap in financial reporting by requiring companies to provide transparent information regarding “total allowed compensation”—the amount of compensation a company is entitled to for regulatory goods or services supplied in a specific period.
Under previous standards, specifically IFRS 15 Revenue from Contracts with Customers, a disconnect often existed between the timing of goods or services supplied and the timing of compensation charged through regulated rates. IFRS 20 resolves this by requiring the recognition of regulatory assets and regulatory liabilities, providing a more complete picture of a company’s financial performance and future cash flow prospects.
Critical Takeaways:
- Effective Date: 1 January 2029 (earlier application permitted).
- Replacement: IFRS 20 supersedes IFRS 14 Regulatory Deferral Accounts.
- Primary Objective: To represent how regulatory income and expenses affect financial performance and how regulatory assets and liabilities affect financial position.
- Key Principle: Recognition of compensation for regulatory goods or services in the same period they are supplied.
- Economic Impact: Improved comparability across companies and jurisdictions, potentially leading to better economic decision-making and a lower cost of capital for regulated entities.
1. The Core Problem: Information Gaps in Rate Regulation
In regulated industries such as utilities, energy, and transportation, regulatory agreements define the compensation a company can charge customers. A “difference in timing” arises when the compensation for services supplied in one period is charged to customers in a different period.
The Disconnect with IFRS 15
- Current State: IFRS 15 revenue reflects the regulated rate charged for goods/services in the current period.
- The Conflict: IFRS 15 revenue in a period may not equal the total allowed compensation for that same period.
- Consequence: Without IFRS 20, investors may receive insufficient information to understand a company’s true financial performance. For example, during the 2022 global energy crisis, European Transmission System Operators (TSOs) incurred high costs to ensure grid stability. Without IFRS 20, these costs resulted in upfront losses that could be misinterpreted, despite the TSOs having enforceable rights to recover those costs in future periods.
2. Definitional Framework of IFRS 20
IFRS 20 introduces specific definitions to capture the rights and obligations created by regulatory agreements.
Key Entities
| Entity | Definition |
|---|---|
| Regulatory Asset | An enforceable present right to add an amount to future regulated rates for services already supplied that has not yet been included in IFRS 15 revenue. |
| Regulatory Liability | An enforceable present obligation to deduct an amount from future regulated rates for services to be supplied in the future that has already been included in IFRS 15 revenue. |
| Regulatory Agreement | An agreement creating enforceable rights and obligations prescribing how a regulator determines a regulated rate or range. |
Total Allowed Compensation
This is the compensation a company is entitled to charge for services supplied in a period. It is calculated as:
- IFRS 15 Revenue
- (+) Regulatory Income: Origination of regulatory assets or fulfillment of regulatory liabilities.
- (-) Regulatory Expense: Origination of regulatory liabilities or recovery of regulatory assets.
3. Financial Statement Impacts
IFRS 20 requires standardized presentation and disclosure to ensure transparency and comparability.
3.1 Statement of Profit or Loss
- Classification: All regulatory income and expenses (minus regulatory interest) are classified as revenue.
- Line Item: Companies must present “regulatory income or regulatory expense” as a separate line item classified as revenue.
- Net Effect: This line item bridges the gap between IFRS 15 revenue and the total allowed compensation for the period.
3.2 Statement of Financial Position
- Presentation: Companies must present current and non-current regulatory assets and liabilities.
- Impact on Metrics: Total assets and liabilities will increase for companies that did not previously recognize these balances. Fieldwork indicates that 78% of participants expect to recognize both assets and liabilities.
3.3 Statement of Cash Flows
- Total Cash Flow: IFRS 20 does not affect total net cash flows, as regulatory assets/liabilities are recovered or fulfilled indirectly through rate adjustments rather than direct cash payments.
- Operating Activities: Using the indirect method, companies will adjust operating profit/loss for changes in regulatory assets and liabilities.
3.4 Significant Note Disclosures
The Standard requires objective-based disclosures to help users assess future cash flows:
- Reconciliations: From opening to closing carrying amounts of regulatory assets/liabilities.
- Maturity Analysis: Showing when the company expects to recover assets or fulfill liabilities.
- Unrecognised Items: Information about items not meeting recognition criteria (e.g., due to lack of a “direct relationship” with the regulatory capital base).
4. Measurement and Recognition Criteria
4.1 The Cash-Flow-Based Technique
Regulatory assets and liabilities are measured using a technique that:
- Includes all estimated future cash flows.
- Discounts these flows using the regulatory interest rate specified in the agreement.
- Updates estimates each reporting period.
4.2 The “Direct Relationship” Concept
Recognition of assets/liabilities arising from regulatory depreciation is conditional.
- Criterion: Recognition occurs only if there is a “direct relationship” between the company’s regulatory capital base (RCB) and related items (such as property, plant, and equipment).
- Rationale: If the relationship is not direct, identifying the link between regulatory depreciation and accounting depreciation is often impracticable or results in high measurement uncertainty. In these cases, companies must disclose the nature of these unrecognised assets/liabilities rather than recognize them.
5. Implementation Costs and Mitigations
5.1 Primary Cost Drivers
Companies are expected to incur costs in four main areas:
- Systems and Processes: Changes to identify and track timing differences and apply measurement requirements.
- Internal Education: Training finance, regulatory, and management staff.
- External Communication: Explaining financial reporting changes to investors.
- Audit Fees: Incremental costs for auditing new judgements and estimates (e.g., enforceability and cash flow projections).
5.2 Cost Mitigations provided by IASB
The IASB included several reliefs to balance costs and benefits:
- Discounting Relief: A one-year relief from discounting if the time between recognition and the application of the regulatory interest rate is expected to be 12 months or less.
- Simplified Measurement: A simplified approach for items where the regulatory agreement provides compensation only when cash is paid (e.g., pension costs), matching the measurement to the related IFRS liability.
- Scope Exclusions: For example, regulatory assets/liabilities arising from IFRS 17 Insurance Contracts premiums are excluded to reduce complexity.
6. Transition and Stakeholder Feedback
6.1 Transition Options
Companies have two choices for implementation:
- Retrospective Approach: Full restatement of prior periods.
- Modified Retrospective Approach: A simplified transition that allows for several reliefs, including the use of hindsight and prospective application of implied interest rates.
- Fieldwork Insight: 79% of surveyed companies plan to use the modified retrospective approach.
6.2 Stakeholder Sentiment
Fieldwork surveys among 30-54 companies across 22 jurisdictions revealed:
- Comparability: Most participants believe IFRS 20 will improve comparability across entities with similar regulatory schemes.
- Usefulness: The common view is that the Standard will provide useful information by matching incurred expenses with related compensation.
- Non-GAAP Measures: Companies expect a reduction in the need for alternative performance measures once regulatory effects are captured in the primary financial statements.
“Standardization of accounting treatment for regulated activities can provide greater transparency and consistency in the reporting of key cost drivers and revenue streams.” — Fieldwork Participant Comment.