Writing a column about developments in financial reporting can sometimes be a slow process. Between 2017 and 2023, no new IFRS Accounting Standards were issued, although there was the set-up of the International Sustainability Standards Board and issue of the first two sustainability standards, IFRS S1 and IFRS S2. While that moved quickly initially, there have been no further standards since; see my earlier piece.
Thankfully, 2024 brought the issue of two new standards: IFRS 18, Presentation and Disclosure in Financial Statements; and IFRS 19, Subsidiaries without Public Accountability: Disclosures. While IFRS 19 is quite a narrow standard that is unlikely to affect many, IFRS 18 will have significant impacts for many companies.
Even though it is not mandatory until periods beginning on or after 2027, many queries are being raised over the implementation of IFRS 18; see my recent update.
The impact of this new standard is unlikely to be seismic
Despite dealing with many queries regarding IFRS 18, the International Accounting Standards Board (IASB) has been busy enough and released another new standard in May: IFRS 20, Regulatory Assets and Regulatory Liabilities.
In stark contrast to IFRS 18, which replaces IAS 1, Presentation of Financial Statements, one of the oldest surviving IASs, IFRS 20 replaces IFRS 14, Regulatory Deferral Accounts, which is one of the more recently issued standards.
Filling a gap
The impact of this new standard is unlikely to be seismic, and will only affect entities subject to rate regulation that determines how much a company can charge customers and when it can charge them. This will commonly be entities that supply vital services, such as electricity, water and gas.
The aim is for IFRS 20 to help fill a gap in IFRS Standards, particularly around revenue
The aim is for IFRS 20 to help fill a gap in IFRS Standards, particularly around revenue. It is believed that the application of IFRS 15, Revenue from Contracts with Customers, may not fully reflect the company’s performance for the period, due to what IFRS 20 refers to as ‘timing differences’.
To explain the reason for the new standard, the IASB outlined a fact pattern demonstrating the problem. In this, Company A has a regulatory agreement entitling them to recover input costs incurred on supplying regulatory goods or services. Company A charges a customer a regulated rate in year one of US$100, but input costs were US$120.
According to the agreement, Company A has an enforceable right to add the under-recovered costs from year one in determining the regulated rate to be charged in year two. If input costs in year two were US$100, then Company A could therefore charge US$120.
Without IFRS 20, the results of Company A would look as follows:
This creates a difference in timing, but the argument is that this isn’t a fair reflection of the underlying transaction.
In some ways, it feels similar to principles in deferred taxation under IAS 12
Under IFRS 20, Company A will have to present all regulatory income minus all regulatory expense as a line item in the statement of profit or loss (called regulatory income or regulatory expense). This line item supplements IFRS 15 revenue.
This would make the results of Company A:
As the additional US$20 income recorded in year one will not be received until year two, a regulatory asset of US$20 would also be recorded in year one to reflect the right to recover the under-recovered costs: Dr Regulatory asset US$20, Cr Regulatory income (SPL) US$20.
In year two, this asset will be released, as the amount is then recorded in revenue under IFRS 15: Dr Regulatory expense US$20, Cr Regulatory asset US$20.
In some ways, it feels similar to principles in deferred taxation under IAS 12, trying to match the expense and the income of the underlying transaction where possible.
The core principle in IFRS 20 is that total compensation is recognised in P&L in the same period in which the related regulatory goods or services are supplied. The aim is that IFRS 20 provides more complete information about the compensation a company is entitled to for regulatory goods or services that it supplies in a period (thereby giving a more complete picture of the revenue earned from those goods or services).
IFRS 20 is effective from 1 January 2029. Companies are permitted to apply the standard early.
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