IFRS 14 Regulatory Deferral Accounts is an accounting standard issued by the International Accounting Standards Board (IASB) in 2014. It provides guidance on the accounting treatment of regulatory deferral accounts, which arise when an entity is subject to price regulation that requires the entity to defer the recognition of some costs or revenues until a future period. In this article, we will discuss the rules, descriptions, examples, case studies, and new developments of IFRS 14 Regulatory Deferral Accounts in 1000 words.
Rules and Descriptions:
The primary objective of IFRS 14 is to provide temporary relief to entities that are subject to regulatory deferral accounting until the IASB completes its comprehensive project on rate-regulated activities. The standard provides guidance on how to account for regulatory deferral account balances and related items that arise from rate-regulated activities.
IFRS 14 applies to all entities that are subject to rate regulation, regardless of the type of regulatory regime or the specific industry. The standard defines rate regulation as a framework that permits or requires a regulated entity to charge prices for goods or services that are subject to regulatory oversight.
The standard requires entities to recognize regulatory deferral account balances as assets or liabilities, depending on whether they represent deferred expenses or deferred revenue. The entity should recognize the balance in the statement of financial position and amortize it over the expected period of recovery using a systematic and rational method.
The standard also requires entities to disclose information about the nature and extent of rate regulation, the amounts recognized in regulatory deferral accounts, and the methods used to amortize these amounts. Entities must also disclose information about the significant judgments and estimates used in determining the balances of regulatory deferral accounts.
To illustrate the application of IFRS 14, let’s consider an example of a regulated utility company that is subject to rate regulation. The regulator requires the company to charge customers based on the cost of providing services plus a reasonable rate of return. The company’s cost of providing services includes depreciation of its assets, which are recovered through regulated rates over their useful lives.
Under the regulatory framework, the company is required to defer the recognition of some of its depreciation expense until future periods, resulting in a regulatory deferral account. The company recognizes this account as a regulatory asset on its balance sheet, which represents the amount of depreciation that the company has deferred and expects to recover from future customers.
As the company recovers the deferred depreciation through regulated rates, it amortizes the regulatory asset over the remaining useful life of the related asset. The company must also disclose information about the balance of its regulatory asset, the methods used to amortize it, and the significant judgments and estimates used in determining the balance.
One notable case study that highlights the application of IFRS 14 is the regulatory deferral accounts recognized by electric utility companies in the United States. The Federal Energy Regulatory Commission (FERC) regulates electric utilities and requires them to use regulatory accounting principles to account for the costs and revenues associated with their rate-regulated activities.
Electric utilities are required to defer the recognition of some of their costs and revenues, resulting in regulatory deferral accounts. These accounts represent the difference between the costs or revenues recognized under regulatory accounting and the amounts that would have been recognized under Generally Accepted Accounting Principles (GAAP).
Electric utilities must amortize the balances of their regulatory deferral accounts over the remaining period of recovery, using a systematic and rational method. They must also disclose information about the balances of their regulatory deferral accounts, the methods used to amortize them, and the significant judgments and estimates used in determining the balances.