Regulatory deferral accounts: IFRS 14 and the new IFRS 20

Why do most IFRS utilities show no regulatory balances today?

Without a specific standard, a right to charge higher tariffs in future for costs already incurred does not meet the definition of an asset under other IFRS standards, because it depends on future sales to customers. So, before IFRS 20, most utilities reporting under IFRS recognise revenue as billed and costs as incurred, and the effects of regulatory true-ups appear in profit when the tariffs change. They explain the effect in their commentary and alternative performance measures.

What does IFRS 14 allow?

IFRS 14, an interim standard issued in 2014, lets a company adopting IFRS for the first time continue its previous accounting for regulatory deferral account balances, presenting them as separate line items in the balance sheet and income statement. Companies already reporting under IFRS cannot use it. That is why a few utilities show regulatory balances under IFRS while most do not. IFRS 20 replaces IFRS 14.

How does IFRS 20 work?

IFRS 20 applies to regulatory agreements that set the rates a company charges for its goods or services, in any industry. It is built on the total allowed compensation: the full amount the agreement entitles the company to for the goods or services it supplies, including the allowed return. When part of that compensation for goods or services already supplied will be billed in future tariffs, the company has a regulatory asset, an enforceable right to add an amount to future rates. When it has billed amounts relating to future supply, or must refund customers, it has a regulatory liability. Movements are presented as regulatory income and regulatory expense, and the balances are measured by reference to the future cash flows they will generate, including the return the regulator allows on them. IFRS 20 is effective from 1 January 2029 and may be applied early; in the EU, EFRAG has asked whether the effective date should be deferred by a year, so EU endorsement timing may differ.

Regulatory deferral accounts: a fuel cost under-recovery

A utility's tariffs for the year assume fuel costs of US$ 100 million. Actual fuel costs are 110 million. The regulator allows the 10 million under-recovery to be billed next year, with a 5% return, so next year's tariffs include an extra 10.5 million. Other costs and revenue are ignored.

Today, the utility reports a 10 million loss in year 1 and a 10.5 million gain in year 2, although nothing changed in its underlying performance. Under IFRS 20, it recognises a regulatory asset of 10 million in year 1, so profit reflects the compensation it has earned, and in year 2 only the allowed return of 0.5 million affects profit. In practice the asset accrues the return over time rather than in one step.

What will IFRS 20 change for utilities?

Balance sheets will show new regulatory assets and liabilities, sometimes large, for items such as fuel and power cost true-ups, deferred storm and pandemic costs, performance incentives and returns on assets under construction that the regulator allows before they are in service. EBITDA, working capital, returns on assets and debt covenants defined on IFRS figures may all change, so lenders and boards should be consulted well before 2029. Comparative information for the year before first application must be restated.

How does US GAAP handle this?

ASC 980, Regulated Operations, has required US utilities to recognise regulatory assets when recovery through future rates is probable, and regulatory liabilities for amounts to be refunded, for decades. IFRS 20 brings IFRS closer to that position, although its scope, definitions and measurement differ. See power and utilities accounting and IFRS 15 revenue.

This guide is general information. It is not tax or legal advice for your situation.