The International Accounting Standards Board issued a new International Financial Reporting Standard on Wednesday for businesses subject to rate regulation, such as electricity, water and gas utilities.
The new standard,
"'IFRS 20 will provide investors with more complete and transparent information about companies operating in these critical rate-regulated industries," said IASB chair Andreas Barckow in a statement Wednesday.
Rate regulation determines how much such companies can charge their customers and when to charge them. If there's a difference between when a company supplies regulatory goods and services and when it charges customers for those goods and services, the reported revenue may not fully reflect the company's performance in a period, the IASB noted. IFRS 20 calls this a "difference in timing." The new standard requires companies to account for the effects of differences in timing in their financial statements.
Utilities are probably the sector that will be most affected by the standard, but they're not the only companies that could potentially be affected, according to an IASB official who asked not to be identified. IFRS 20 will ensure income will be recognized in the same period in which a company actually provides essential goods or services to its customers.
For example, an electricity supplier may need to incur significant costs to upgrade or maintain the infrastructure it needs to provide electricity to customers. Instead of charging customers for that amount immediately, which would lead to a large jump in their electricity bills, the regulator allows it to charge customers over the next few years, depending on how large the amount is. Under IFRS 20, the company will recognize that right on its balance sheet as a regulatory asset and recognize income in the year in which it provides that infrastructure to its customers, so it will see an increase in revenue in that year. In cases where the electricity company needs funding for some services in advance, the regulator will sometimes allow the company to get that funding in advance from customers, but require it to reduce the amounts that it charges customers in future years, so that would give rise to a regulatory liability.
IFRS 20 is expected to reduce diversity in accounting practices and improve comparability between companies in regulated industries.
The IASB developed IFRS 20 over 14 years, engaging in extensive consultations with stakeholders, including over 300 comment letters, more than 200 meetings and two rounds of fieldwork in 22 jurisdictions to ensure the standard strikes the right balance between providing useful information and ensuring practical implementation.
IFRS 20 is effective for annual reporting periods starting on or after Jan. 1, 2029, but early adoption is permitted for companies that choose to apply the standard ahead of that date.
IFRS 20 supplements the information a company provides when applying IFRS 15, Revenue from Contracts with Customers, and replaces IFRS 14, Regulatory Deferral Accounts. IFRS 14 was an interim standard that put some provisions in place for companies subject to rate regulation and provided them with interim accounting requirements. Once IFRS 20 becomes effective, IFRS 14 will be withdrawn. The new standard includes transition guidance for companies that have been using IFRS 14, although only a limited number were using it, and only in certain jurisdictions. IFRS 20 was written for use in the nearly 150 jurisdictions where IFRS has been adopted.
IFRS 20 differs from U.S. GAAP, where there is a cost deferral approach. IFRS 20 looks at future cash flows arising from regulatory assets and liabilities. In some situations, multinational companies applying IFRS 20 may get similar results to what they would get under U.S. GAAP, according to an IASB official, but that won't always be the case.
The new standard includes many illustrative examples showing how to apply it in particular scenarios to help with consistent application. The IASB is also planning to do a series of webcasts and conferences and is ready to talk to companies if they have issues arising from the implementation.
