IFRS 20 will apply to companies that are subject to rate regulation, where the regulation determines both how much a company can charge its customers and the timing of those charges. This type of regulation commonly applies to companies providing essential services, such as electricity, water and gas, as well as transportation industries.
When there is a mismatch between when a company delivers regulatory goods and services and when it charges customers for them, the reported revenue may not fully reflect the company’s performance for a given period. IFRS 20 refers to this as a ”difference in timing”, and requires companies to account for the effects of such differences in timing in their financial statements. Before IFRS 20, companies applying IFRS Accounting Standards were not required to recognise the effects of differences in timing. This gap has caused a lack of information about the effects of differences in timing.
This information will enable investors to better assess a company’s financial performance, financial position and prospects for future cash flows and thereby facilitating better decision-making and comparability between companies.
IFRS 20 is also expected to reduce diversity in accounting practices and improve comparability between companies operating in regulated industries.
The definitions of regulatory assets and regulatory liabilities, and resulting definitions of regulatory income and regulatory expense, are based on the principle that a company recognises the total allowed compensation for regulatory goods or services supplied by the company in the same reporting period that it supplies those regulatory goods or services.
A regulatory agreement is an agreement that creates a set of enforceable rights and enforceable obligations that prescribes how a regulator determines a regulated rate that a company charges for goods or services supplied to customers in a period.
A regulator is a body required by law or regulation to determine the regulated rate.
A regulatory asset is an enforceable present right, created by a regulatory agreement, to add an amount in determining a regulated rate to be charged to customers in future periods because part or all of the total allowed compensation for regulatory goods or services already supplied has not yet been included in IFRS 15 revenue.
A regulatory liability is an enforceable present obligation, created by a regulatory agreement, to deduct an amount in determining a regulated rate to be charged to customers in future periods because part or all of the total allowed compensation for regulatory goods or services to be supplied in the future has already been included in IFRS 15 revenue.
Regulatory income is income arising from changes in a regulatory asset or a regulatory liability.
Regulatory expense is expense arising from changes in a regulatory asset or a regulatory liability.
IFRS 20 is effective for annual reporting periods beginning on or after 1 January 2029. A company can choose to apply IFRS 20 earlier. The standard is not yet endorsed by EU.
IFRS 20 provides two transition approaches a company can use when it first applies IFRS 20. A company can apply IFRS 20 either:
Regardless of which transition approach a company applies, it is required to present adjusted comparative information for the period immediately preceding the period in which it first applies IFRS 20. A first-time adopter of IFRS Accounting Standards will also be permitted to use the modified retrospective approach when applying IFRS 20.
To facilitate implementation, dib provides a clear description of the new standard, as well as relevant supporting material from the IASB, easily accessible.
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