The International Accounting Standards Board (IASB) has issued International Financial Reporting Standard IFRS 20, entitled “Regulatory Assets and Regulatory Liabilities”, to replace the interim standard IFRS 14. Its mandatory application begins on 1 January 2029, with early application permitted.
Objective of the standard
IFRS 20 aims to unify the accounting for the effects arising from rate regulation in sectors such as electricity, water, gas and transport, where there are timing differences between actual costs and the compensation allowed.
Regulatory assets versus regulatory liabilities
| Item | Regulatory assets | Regulatory liabilities |
|---|---|---|
| Definition | A present right to increase prices in the future | A present obligation to reduce prices in the future |
| Common cause | Deferred costs whose recovery is permitted | Excess revenue that must be refunded to customers |
| Effect | Positive for the financial position | Negative for the financial position |
How they are measured
Both regulatory assets and regulatory liabilities are measured using the discounted cash flow approach:
- Estimating the future cash flows (including regulatory interest).
- Discounting them using the regulatory interest rate specified in the regulatory agreement.
- They are remeasured at each reporting period, with the estimates updated.
Practical examples
Example 1: The regulatory asset
In 2028, an electricity company incurred additional costs of KD 12 million. It was permitted to recover them over 3 years (4.2 million a year) with interest of 5%. → A regulatory asset is recognised at its present value (approximately 11.44 million) and recorded as regulatory income.
Example 2: The regulatory liability
The company earned excess revenue of KD 8 million. It must be refunded over two years with interest of 4%. → A regulatory liability is recognised at its present value (approximately 7.98 million) and recorded as a regulatory expense.
Presentation in the financial statements
- Statement of financial position: separate presentation of regulatory assets and regulatory liabilities.
- Income statement: separate presentation of regulatory income and regulatory expense.
Where the standard is applied on a voluntary basis, the auditor must refer to this clearly in his report and in the financial disclosures. This is so that the comparison between the financial statements of a company that applies the standard and those of another that has not applied it to its financial statements is clear and fair, and to avoid any misleading of investors or shareholders.
Conclusion
IFRS 20 is an important step towards enhancing transparency and comparability in sectors subject to regulation. Early application requires a careful assessment of regulatory contracts and their effect on the financial statements.