IFRS 14 Regulatory Deferral Accounts permits an entity that is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for ‘regulatory deferral account balances per its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements.
Regulatory deferral account balances, and movements in them, are presented separately in the statement of financial position and statement of profit or loss and other comprehensive income, and specific disclosures are required.
IFRS 14 was initially issued in January 2014 and applies to an entity’s first annual IFRS financial statements for a period beginning on or after January 1, 2016.
IFRS 14 specifies financial reporting requirements for regulatory deferral account balances when an entity provides products or services at a regulated price or rate. IFRS 14 is a limited-scope standard for rate-regulated firms that haven’t implemented IFRS (IFRS). It allows rate-regulated firms to adopt IFRS for the first time to avoid changing accounting principles for regulatory deferral accounts until the IASB completes its project on rate-regulated activities.
IFRS 14 is permitted, but not required, to be applied where an entity conducts rate-regulated activities and has recognised amounts in its previous GAAP financial statements that meet the definition of ‘regulatory deferral account balances’ (sometimes referred to as ‘regulatory assets’ and ‘regulatory liabilities’). [IFRS 14.5]
Entities qualified to implement IFRS 14 are not compelled to do so and can choose to apply just IFRS 1 First-time Adoption of International Financial Reporting Standards. The option to implement IFRS 14 is only accessible on the initial adoption of IFRSs; therefore, an entity cannot apply it to subsequent financial statements. An organisation that chooses IFRS 14 for its initial IFRS financial statements must continue to use it.
The requirements of IFRS 14 must apply to all regulatory deferral account balances arising from an entity’s rate-regulated activities. [IFRS 14.8]
Accounting policies for regulatory deferral account balances
IFRS 14 exempts an entity from IAS 8 paragraph 11 when determining accounting procedures for regulatory deferral account balances. Paragraph 11 of IAS 8 requires an entity to consider IFRSs and the Conceptual Framework when formulating accounting rules.
The exemption allows qualifying organisations to continue using the accounting procedures used for regulatory deferral account balances under the accounting basis used immediately before adopting IFRS (‘prior GAAP’), subject to IFRS 14’s presentation requirements. Entities may amend their accounting policies for regulatory deferral account balances under IAS 8, but only if the adjustment makes the financial statements more relevant and less credible for economic decision-making.
Changing accounting policies to recognise regulatory deferral account balances is not allowed.
Interaction with other Standards
The requirements of other IFRSs must be applied to regulatory deferral account balances, subject to specific exceptions, exemptions and additional requirements contained in IFRS 14 [IFRS 14.16]. These are briefly summarized below: [IFRS 14.B7-B28]
Presentation in financial statements
The impact of regulatory deferral account balances is separately presented in an entity’s financial statements. This requirement applies regardless of the entity’s previous presentation policies in respect of regulatory deferral balance accounts under its previous GAAP. Accordingly:
Separate line items are presented in the statement of financial position for the total of all regulatory deferral account debit balances and all regulatory deferral account credit balances [IFRS 14.20]. Regulatory deferral account balances are not classified between current and non-current but are separately disclosed using subtotals [IFRS 14.21]. The net movement in regulatory deferral account balances is separately presented in the statement of profit or loss and other comprehensive income using subtotals.
The Illustrative examples accompanying IFRS 14 set out an illustrative presentation of financial statements by an entity applying the Standard.
IFRS 14 sets out disclosure objectives to allow users to assess: [IFRS 14.27]
- the nature of, and risks associated with, the rate regulation that establishes the price(s) the entity can charge customers for the goods or services it provides – including information about the entity’s rate-regulated activities and the rate-setting process, the identity of the rate regulator(s), and the impacts of risks and uncertainties on the recovery or reversal of regulatory deferral balance accounts
- the effects of rate regulation on the entity’s financial statements – including the basis on which regulatory deferral account balances are recognised, how they are assessed for recovery, a reconciliation of the carrying amount at the beginning and end of the reporting period, discount rates applicable, income tax impacts and details of balances that are no longer considered recoverable or reversible.