Over the next year (or years), companies in Canada and the U.S. will make the transition towards adopting International Financial Reporting Standards (IFRS). These standards will have a...
IFRS and You
How the new standards affect utility balance sheets.
revalued each accounting period, stakeholders need to consider how this obligation should be recovered through rates. Fourth, some utilities engage in large procurements for their customers and currently use the normal purchase and sales exemption to opt out of fair value accounting for these contracts. Because IFRS has stricter limitations on what qualifies as a non-fair value contract, stakeholders need to consider how they’ll handle an increased volatility in earned return on equity. Specifically, incentive rate making schemes or earnings tests might require modification.
Finally, because asset impairments and revaluations tend to be discrete events, it’s possible to simply reverse such revaluations for ratemaking purposes. Alternatively, stakeholders could allow such revaluations to impact rate base, but they must avoid asymmetry. In other words, if asset write-downs are reflected, asset write-ups should be as well.
1. The cost of capital is often determined as a recovery of interest paid plus a return on the equity portion of the rate base, which is measured as the net original cost of utility asset used to serve customers.
2. Although regulatory accounting may differ from financial reporting to shareholders, difference are often controversial, and keeping and maintaining several different systems is costly, so if a shift to IFRS causes the financial reporting and the regulatory accounting figures to deviate, it will necessarily impose a burden on customers, regulated companies, and other stakeholders.
3. In contrast, many regulated entities outside North America where IFRS has been implemented, are subject to so-called price caps where the price of service is set, but not in the same direct manner linked to the regulated company’s financial statements. Therefore, some implementation issues are unique to North America while others are elevated.
4. There are many other aspects in which IFRS and GAAP differ beyond the scope of this paper. Other areas that are likely to affect North American utilities include the accounting treatment for contingent liabilities, financial instruments, leases, accounts receivable, and securitization.
5. Regulatory assets are assets whose recovery is contingent upon regulatory approval. For example, recovery of the costs of fuel that exceeded the cost allowed in rates is dependent upon the regulators approval. The excess costs are collected and reported as a regulatory asset until the regulator approves recovery.
6. See, IASB, “ Rate-regulated Activities ,” Exposure Draft, August 2009 and the notes to the IAS Board meeting on July 21, 2010.
7. Canadian regulators, utilities and consumers have been involved in developing guidelines for the implementation and specifically how to handle the disappearance of regulatory assets and liabilities under IFRS. For example, the Alberta Utilities Commission has issued a report on the issue in which the Commission instructs the utilities to continue accounting for regulatory assets and liabilities for regulatory purposes. As IFRS doesn’t allow the capitalization of costs such as general overhead, pre-operating costs, or training costs, the Commission indicates that one option is to include such items as regulatory assets. Thus, a consequence of the IFRS implementation may be that, for regulatory purposes, the magnitude of regulatory assets increases.
8. SJW Corp. letter