Phil Dowad, KPMG’s global IFRS revenue recognition and provisions leader, said: “These proposals are expected to remove barriers to the adoption of IFRS in some jurisdictions. Lack of specific guidance on accounting for rate-regulated activities under IFRS is often seen as a hurdle that holds entities back from adopting IFRS in certain parts of the world, including North America and India. These proposals may accelerate adoption of IFRS by rate-regulated entities in those jurisdictions.”
Accounting for rate-regulated activities has been hotly debated for many years, as IFRS currently does not contain specific accounting requirements for such activities. In contrast, some national accounting frameworks include specific guidance on accounting for the effects of rate regulation under which the timing of recognition of revenues or expenses is aligned with rate-setting mechanisms set out by regulatory authorities. This often reduces volatility in reported earnings. The proposed interim IFRS would allow a so-called ‘grandfathering approach’, meaning that entities subject to rate regulation could opt to continue to apply their existing (local) accounting principles to regulated activities. This is similar to the approach previously taken by the IASB for insurance and extractive industries.
To clearly show the effect of accounting for rate-regulated activities, those regulatory deferral balances would be presented separately in the financial statements. Entities that already apply IFRS would not be allowed to change back to their previous local accounting approach, or to reinstate regulatory balances that they eliminated when they adopted IFRS.
Ramon Jubels, KPMG partner in Brazil, said: “This interim standard would result in diversity between those entities yet to transition to IFRS and those that already have. In this regard, the separate presentation would be helpful for users in comparing entities by transparently reporting the impact of recognising regulatory balances in the statement of financial position. However, some countries, such as Brazil and Korea, that recently transitioned to IFRS, will have mixed views. They would have welcomed the relief offered by the interim standard.”
In the meantime, it will remain unclear whether or when regulatory balances can be recognised under IFRS in the future, which the IASB is considering in its comprehensive project. The comprehensive project is unlikely to conclude for several years.
The proposals are open for comment until 4 September 2013.
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