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 in accordance with 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.
The objective of IFRS 14 is to specify the financial reporting requirements for ‘regulatory deferral account balances that arise when an entity provides goods or services to customers at a price or rate subject to rate regulation. [IFRS 14:1]
IFRS 14 is designed as a limited scope standard to provide an interim, short-term solution for rate-regulated entities that have not yet adopted International Financial Reporting Standards (IFRS). Its purpose is to allow rate-regulated entities to adopt IFRS for the first time to avoid changes in accounting policies regarding regulatory deferral accounts until the International Accounting Standards Board (IASB) can complete its comprehensive 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 that are eligible to apply IFRS 14 are not required to do so and so can choose to apply only the requirements of IFRS 1 First-time Adoption of International Financial Reporting Standards when first applying IFRSs. The election to adopt IFRS 14 is only available on the initial adoption of IFRSs, meaning an entity cannot apply IFRS 14 for the first time in financial statements subsequent to those prepared on the initial adoption of IFRSs. However, an entity that elects to apply IFRS 14 in its first IFRS financial statements must continue to apply it in subsequent financial statements. [IFRS 14.6]
When applied, the requirements of IFRS 14 must be applied to all regulatory deferral account balances arising from an entity’s rate-regulated activities. [IFRS 14.8]
Accounting policies for regulatory deferral account balances
When an entity determines its accounting policies for regulatory deferral account balances, IFRS 14 provides an exemption from paragraph 11 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. [IFRS 14.9] Paragraph 11 of IAS 8 requires an entity to consider the requirements of IFRSs dealing with similar matters and the requirements of the Conceptual Framework when setting its accounting policies.
The effect of the exemption is that eligible entities can continue to apply the accounting policies used for regulatory deferral account balances under the basis of accounting used immediately before adopting IFRS (‘previous GAAP’) when applying IFRSs, subject to the presentation requirements of IFRS 14 [IFRS 14.11].
Entities are permitted to change their accounting policies for regulatory deferral account balances following IAS 8, but only if the change makes the financial statements more relevant and no less reliable, or more reliable and no less relevant, to the economic decision-making needs of users of the entity’s financial statements. However, an entity is not permitted to change accounting policies to start to recognise regulatory deferral account balances. [IFRS 14.13]
Interaction with other Standards
The requirements of other IFRSs are required to 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 summarised 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 are separately presented in the statement of profit or loss and other comprehensive income using subtotals [IFRS 14.22-23]
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.