How the new standards affect utility balance sheets.
Bente Villadsen is a principal, Amit Koshal is an associate and Wyatt Toolson is a senior research analyst at The Brattle Group. The authors acknowledge the assistance of Stephen Fang, Patrick Ringland, Michael J. Vilbert and Fiona Wang. This article expresses the opinions of the authors and not necessarily those of The Brattle Group or its clients.
Over the next year (or years), companies in Canada and the United States will make the transition toward adopting International Financial Reporting Standards (IFRS). These standards will have a significant impact on the reporting requirements and financial disclosures of regulated companies, largely because a regulated company’s financial information is used not only for financial reporting purposes, but also for ratemaking purposes. In particular, most electric, gas, water and pipeline utilities in North America are regulated on a cost-of-service basis, which allows them to recover costs they incur in providing service, including their cost of capital.1 Because cost-of service regulation creates a strong link between the utility’s cost and assets, the measurement of these costs and assets and how they’re reported on the financial statements becomes important.2, 3