Update – Rate-regulated Activities

February 2013 News — AcSB Defers Mandatory IFRS Changeover Date to 2015 and IASB Plans Outreach

  • In February 2013, the Accounting Standards Board (AcSB) decided to extend the existing deferral of the mandatory IFRS changeover date for entities with qualifying rate-regulated activities by an additional year to January 1, 2015. Discussions at the International Accounting Standards Board’s (IASB) January 2013 meeting (see the January 2013 "IASB Update") indicate that the IASB is on track to:
    • publish an exposure draft proposing the interim IFRS described under “December 2012 News” (below) in March 2013; and
    • issue an interim standard by the end of the year.

The end of 2013 is also when the AcSB’s IFRS deferral for this sector would have ended absent an extension. The AcSB wishes to provide first-time adopters of IFRSs adequate time to prepare comparative figures based on a new interim IFRS. The new mandatory IFRS changeover date decided by the AcSB coincides with the expiration of the Canadian Securities Administrators’ (CSA) exemptive relief for entities that aren’t registered with the U.S. Securities and Exchange Commission (SEC) to temporarily apply U.S. GAAP instead of IFRSs.

  • To assist with its recently reactivated comprehensive project on accounting for rate-regulated activities, the IASB:
    • plans to issue a request for information in the second quarter of 2013; and
    • is establishing, and invites nominations for, a consultative group that will provide specialist analysis of accounting issues relating to this topic. The AcSB encourages qualified Canadians to apply by the IASB’s deadline of March 4, 2013.

December 2012 News — IASB Decides to Develop an Interim IFRS

  • At its December 2012 meeting, the IASB decided to develop an interim IFRS on rate-regulated activities that “grandfathers” existing recognition and measurement policies (see the December 2012 “IASB Update” for more details).

September 2012 News — AcSB Defers Mandatory IFRS Changeover Date to 2014 and IASB Restarts Project

  • In September 2012, the AcSB decided to extend the existing deferral of the mandatory IFRS changeover date for entities with qualifying rate-regulated activities by an additional year to January 1, 2014. The AcSB’s September 5-6, 2012 Decision Summary has more details.
  • As reported in its September 2012 "IASB Update," the IASB decided to restart its previous project on rate-regulated activities with the development of a discussion paper. The IASB also discussed, but did not decide, whether to develop an interim IFRS, and considered some alternatives for what type of interim IFRS might be appropriate. At its October 2012 meeting, the IASB’s IFRS Advisory Council will be asked for input on whether the IASB should develop an interim IFRS.

July 2012 News — Rate-regulated Activities in International Spotlight

  • As reported in its May 2012 “IASB Update,” the IASB has unanimously supported giving priority to developing standards-level proposals in a limited number of areas, including rate-regulated activities. Agenda paper 4 – Agenda consultation 2011 for the June 2012 meeting of the IFRS Advisory Council noted that some IASB members have acknowledged that research might indicate the need for interim guidance as a means of addressing rate-regulated activities in the short term. The guidance mentioned in the agenda paper is the type recommended by the AcSB in its comment letter on the IASB’s Request for Views, “Agenda Consultation 2011.”
  • On July 13, 2012, the SEC issued a Final Staff Report on a work plan intended to assist the SEC in determining whether and how to incorporate International Financial Reporting Standards (IFRSs) into the U.S. financial reporting regime. Among other things, the report: 
    • includes rate-regulated activities as one of four significant areas where U.S. GAAP provides industry-specific guidance and IFRSs do not; and
    • discusses the effect of a transition to IFRSs if the U.S. GAAP guidance in each of those areas is not retained.
  • The SEC Staff concludes that the industry guidance should not be removed from U.S. GAAP until the IASB has had the ability to evaluate fully the guidance for each particular industry and develop guidance, as appropriate, to the extent a void is identified in IFRSs. This report adds to the encouragement the IASB has already received from stakeholders to deal with rate-regulated activities sooner rather than later.

March 2012 News — AcSB Defers Mandatory IFRS Changeover Date to 2013

  • In March 2012, the AcSB decided to extend, by an additional year, the mandatory changeover date to IFRSs for entities with qualifying rate-regulated activities. Such entities must now adopt IFRSs by January 1, 2013.  The AcSB’s March 20-21, 2012 Decision Summary has more details. In addition, the following answers questions asked about the extension.

Answering Stakeholders’ Questions

Why an extension now, when the AcSB rejected previous requests and many with the ability to adopt U.S. GAAP have done so?

The extension is intended to avoid two possible sets of changes for Canadian entities that have not yet adopted IFRSs. The first will be when they change over to IFRSs. The second would occur if the IASB subsequently requires an accounting for the effects of rate regulation that differs from an entity’s accounting under existing IFRSs.

Until March 2012, there was nothing to suggest that this second event would occur in the foreseeable future. In September 2010, the IASB “paused” its Rate-regulated Activities project, started in 2008, citing an inability to resolve the issues in a timely fashion. The IASB decided that its next step on this topic was to consider whether to include rate-regulated activities in its future agenda. That process has been commenced as part of the IASB’s Agenda Consultation 2011 project. Read more about these IASB decisions under the last item in its September 2010 Update.

Absent a stated intention on the part of the IASB to develop guidance on rate-regulated activities within a particular time frame, the AcSB was unable to act. It could find no justification for prolonging the use of pre-changeover standards in Part V of the CICA Handbook – Accounting by this sector beyond the additional year provided by its first deferral. That deferral was intended to give affected entities additional time to prepare for IFRSs.  

However, recent developments suggest an increased possibility that the IASB may:

  • commit to resolving the issues associated with accounting for the effects of rate regulation as part of its future agenda-setting process; and
  • develop interim guidance permitting the continuation of accounting practices in accordance with pre-changeover Canadian GAAP in the meantime.  

The extension decided by the AcSB in March 2012 is intended to provide a “bridge” to when such interim guidance hopefully becomes available for use by Canadian first-time adopters.

Who will benefit from this extension?

The extension is available to all entities with qualifying rate-regulated activities. However, the AcSB is aware that it is unlikely to be utilized by entities that:

  • are legally prohibited from adopting IFRSs; or
  • have the ability, and have decided, to adopt U.S. GAAP in place of IFRSs. Such entities previously reported in accordance with pre-changeover Canadian GAAP, and either: 
    • are registered with the SEC and have chosen to adopt U.S. GAAP instead of IFRSs in accordance with CSA regulations; or
    • aren’t SEC registrants but have been successful in obtaining exemptive relief from the CSA to apply U.S. GAAP until January 1, 2015.

The extension is expected to hold more appeal for government business enterprises that do not qualify for the CSA’s exemptive relief and whose owners do not prohibit them from adopting IFRSs. Without the extension, those entities would have been required to adopt IFRSs at the beginning of 2012.

Why is the extension for one year only?

Consistent with each of its extensions of the IFRS deferral for investment companies, the AcSB decided to extend the rate-regulated activities deferral by one year only. The Board will monitor future developments and consider the need for a further deferral should an interim solution not occur within a year but remain a possibility.    

What recent developments caused the AcSB to reconsider the need for an extension?

Several developments caused this, including:

  • India’s publication of an exposure document on rate-regulated activities based largely on the IASB’s July 2009 Exposure Draft on this topic;
  • the inclusion of a rate-regulated activities unit of account issue on the agenda for the May 2012 meeting of the IFRS Interpretations Committee;
  • speeches by the IASB Chairman (in Mexico on March 7, 2012, and in Korea on April 4, 2012) acknowledging the topic’s importance and the possibility of the IASB addressing it through a future project; and, most importantly,
  • an IASB public roundtable on its July 2011 Request for Views, “Agenda Consultation 2011,” held in Toronto on March 14, 2012.

The rate-regulated sector was well represented at the IASB roundtable. As a result, the discussions focused largely on rate-regulated activities. The IASB members and staff in attendance explored with participants the characteristics and feasibility of an interim solution that would meet the needs of Canadian first-time adopters. An audio recording of the roundtable is available on the IASB’s Agenda Consultation 2011 project page (see “Project news — 20 March 2012”).

What is the AcSB doing to move this topic forward?

In addition to monitoring international developments relating to rate-regulated activities, the AcSB and its staff U.S. every means possible to move this topic forward in the global standard-setting arena. This includes impressing upon the IASB and other national standard setters:

  • the importance of this topic to Canadians and first-time adopters in other jurisdictions;
  • the unacceptable situation in Canada created by the current lack of IFRS guidance in this area, in terms of the diversity in accounting frameworks chosen; and
  • the need for the IASB to resolve the issues and provide interim guidance in the meantime.

The AcSB has made these points:

  • in letters to the IASB, including the AcSB’s comment letter on the IASB’s Request for Views, “Agenda Consultation 2011”;
  • at two roundtables attended by some IASB members (i.e., the AcSB’s October 26, 2011 rate-regulated activities roundtable with the IASB Vice-Chair and the IASB’s March 14, 2012 agenda consultation roundtable discussed above); and
  • at various meetings of the International Forum of Accounting Standard Setters (formerly “National Standard Setters”).

Karen Jones, CA
Principal, Accounting Standards Board
Phone: +1 (416) 204-3463
Email: karen.jones@cica.ca