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  • IFRB-2021-04


15 February 2021

Entities conductingrate regulated activities are required to establish prices to be charged to customers in accordance with a pricing frameworkthat is subjectto oversight and/or approval by a rate regulator, often a statutory body. Rate regulation often gives rise to a difference in timing between the period when the entity supplies goods and services to customers and the period when it is entitled to charge the customers for those goods and services.In such cases, the revenue reported by the entity in its statement of financial performance and the assets and liabilities reported in its statement of financial position do not reflect the ‘complete picture’of the compensation that the entity is entitled to for the goods and services supplied during that period. Currently, IFRS Standards do not require entities to inform investors aboutsuch differencesin timing, except in the limited circumstances in which IFRS 14 RegulatoryDeferral Accountsapplies.InJanuary 2012, as an interim measure, the International Accounting Standards Board (IASB) issued IFRS 14. IFRS 14 permitted entities conducting rate regulated activities to continue to recognise and measure theirregulatory deferral account balances in accordancewith theirprevious GAAP in their first and subsequent IFRS financial statements.As IFRS 14’s scope was limited to entities applying IFRS forthe first time, the number of entities applying it has been limited. In January 2021, the IASB has published the Exposure Draft (ED) of a new standard,RegulatoryAssets and RegulatoryLiabilitiesthat is intended to replace IFRS 14.The ED may be accessed here.The IASB has also provided a Snapshotthat provides an overview ofthe proposalsand a debrief videothat introduces the proposed requirements. The ED is open for comments until 30 June 2021. The proposed standard is expected to have a significant effect onentities in rate regulated sectors such as power, telecommunication, public infrastructure, public transport.For entitiesthat arecurrently not accounting for regulatory deferral accountbalancesas permitted by IFRS 14in limited circumstances,the proposed standard maysignificantly affect financial performance metrics and ratios such as EBITDA,operating profit, net income, earnings per share, return on investment andcurrent ratio.Such entities will need to evaluate effects of these changes on their loan covenants, credit ratings and other key performance indicators.