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The basis of accounting that a first-time adopter used immediately before adopting Ind ASs for its reporting requirements in India. For instance, for companies preparing their financial statements in accordance with the existing Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006 3 shall consider those financial statements as previous GAAP financial statements.
Explanation:
Guidance Note on Accounting for the Rate Regulated
Activities, issued by the Institute of Chartered Accountants
of India (ICAI) shall be considered to be the previous
GAAP.
Rate-regulated activities
An entity’s activities that are subject to rate regulation
Rate regulation
'Cost of Service Regulation' as defined in the Guidance Note on Accounting for Rate Regulated Activities .
Rate regulator
'Regulator' as defined in the Guidance Note on
Accounting for Rate Regulated Activities.
Regulatory deferral account balance
A 'Regulatory Asset' or a 'Regulatory Liability' as
defined in the Guidance Note on Accounting for Rate
Regulated Activities .
Appendix B
Application Guidance
This appendix is an integral part of the Standard.
B1 Historically, rate regulation applied to all activities of an entity. However, with acquisitions, diversification and deregulation, rate regulation may now apply to only a portion of an entity’s activities, resulting in it having both regulated and non-regulated activities. This Standard applies only to the rate-regulated activities that are subject to statutory or regulatory restrictions through the actions of a rate regulator, regardless of the type of entity or the industry to which it belongs.
B2 An entity shall not apply this Standard to activities that are self- regulated, ie activities that are not subject to a pricing framework that is overseen and/or approved by a rate regulator.
Continuation of existing accounting policies
B3 For the purposes of this Standard, a regulatory deferral account balance is defined as the balance of any expense (or income) account that would not be recognised as an asset or a liability in accordance with other Standards, but that qualifies for deferral because it is included, or is expected to be included, by the rate regulator in establishing the rate(s) that can be charged to customers. Some items of expense (income) may be outside the regulated rate(s) because, for example, the amounts are not expected to be accepted by the rate regulator or because they are not within the scope of the rate regulation. Consequently, such an item is recognised as income or expense as incurred, unless another Standard permits or requires it to be included in the carrying amount of an asset or liability.
B4 In some cases, other Standards explicitly prohibit an entity from recognising, in the balance sheet, regulatory deferral account balances that might be recognised, either separately or included within other line items such as property, plant and equipment in accordance with previous GAAP accounting policies. However, in accordance with paragraph 11 of this Standard, an entity that elects to apply this Standard in its first Ind AS financial statements applies the exemption from paragraph 11 of Ind AS 8 in order to continue to apply its previous GAAP accounting policies for the recognition, measurement, impairment, and derecognition of regulatory deferral account balances. Such accounting policies may include, for example, the following practices:
(a) recognising a regulatory deferral account debit balance when the entity has the right, as a result of the actual or expected actions of the rate regulator, to increase rates in future periods in order to recover its allowable costs (ie the costs for which the regulated rate(s) is intended to provide recovery);
(b) recognising, as a regulatory deferral account debit or credit balance, an amount that is equivalent to any loss or gain on the disposal or retirement of both items of property, plant and equipment and of intangible assets, which is expected to be recovered or reversed through future rates;
(c) recognising a regulatory deferral account credit balance when the entity is required, as a result of the actual or expected actions of the rate regulator, to decrease rates in future periods in order to reverse over-recoveries of allowable costs (ie amounts in excess of the recoverable amount specified by the rate regulator); and
(d) measuring regulatory deferral account balances on an undiscounted basis or on a discounted basis that uses an interest or discount rate specified by the rate regulator.
B5 The following are examples of the types of costs that rate regulators might allow in rate-setting decisions and that an entity might, therefore, recognise in regulatory deferral account balances:
(i) volume or purchase price variances;
(ii) costs of approved ‘green energy’ initiatives (in excess of amounts that are capitalised as part of the cost of property, plant and equipment in accordance with Ind AS 16 Property, Plant and Equipment );
(iii) non-directly-attributable overhead costs that are treated as capital costs for rate regulation purposes (but are not permitted, in accordance with Ind AS 16, to be included in the cost of an item of property, plant and equipment);
(iv) project cancellation costs;
(v) storm damage costs; and
(vi) deemed interest (including amounts allowed for funds that are used during construction that provide the entity with a return on the owner’s equity capital as well as borrowings).
B6 Regulatory deferral account balances usually represent timing differences between the recognition of items of income or expenses for regulatory purposes and the recognition of those items for financial reporting purposes. When an entity changes an accounting policy on the first-time adoption of Ind AS or on the initial application of a new or revised Standard, new or revised timing differences may arise that create new or revised regulatory deferral account balances. The prohibition in paragraph 13 that prevents an entity from changing its accounting policy in order to start to recognise regulatory deferral account balances does not prohibit the recognition of the new or revised regulatory deferral account balances that are created because of other changes in accounting policies required by Ind AS. This is because the recognition of regulatory deferral account balances for such timing differences would be consistent with the existing recognition policy applied in accordance with paragraph 11 and would not represent the introduction of a new accounting policy. Similarly, paragraph 13 does not prohibit the recognition of regulatory deferral account balances arising from timing differences that did not exist immediately prior to the date of transition to Ind AS but are consistent with the entity’s accounting policies established in accordance with paragraph 11 (for example, storm damage costs).
Applicability of other Standards
B7 An entity that is within the scope of, and that elects to apply, the requirements of this Standard shall continue to apply its previous GAAP accounting policies for the recognition, measurement, impairment and derecognition of regulatory deferral account balances. However, paragraphs 16 – 17 state that, in some situations, other Standards might also need to be applied to regulatory deferral account balances in order to reflect them appropriately in the financial statements. The following paragraphs outline how some other Standards interact with the requirements of this Standard. In particular, the following paragraphs clarify specific exceptions to, and exemptions from, other Standards and additional presentation and disclosure requirements that are expected to be applicable.
Application of Ind AS 10 Events after the Reporting Period
B8 An entity may need to use estimates and assumptions in the recognition and measurement of its regulatory deferral account balances. For events that occur between the end of the reporting period and the date when the financial statements are authorised for issue, the entity shall apply Ind AS 10 to identify whether those estimates and assumptions should be adjusted to reflect those events.
Application of Ind AS 12 Income Taxes
B9 Ind AS 12 requires, with certain limited exceptions, an entity to recognise a deferred tax liability and (subject to certain conditions) a deferred tax asset for all temporary differences. A rate-regulated entity shall apply Ind AS 12 to all of its activities, including its rate- regulated activities, to identify the amount of income tax that is to be recognised.
B10 In some rate-regulatory schemes, the rate regulator permits or requires an entity to increase its future rates in order to recover some or all of the entity’s income tax expense. In such circumstances, this might result in the entity recognising a regulatory deferral account balance in the balance sheet related to income tax, in accordance with its accounting policies established in accordance with paragraphs 11–12. The recognition of this regulatory deferral account balance that relates to income tax might itself create an additional temporary difference for which a further deferred tax amount would be recognised.
B11 Notwithstanding the presentation and disclosure requirements of Ind AS 12, when an entity recognises a deferred tax asset or a deferred tax liability as a result of recognising regulatory deferral account balances, the entity shall not include that deferred tax amount within the total deferred tax asset (liability) balances. Instead, the entity shall present the deferred tax asset (liability) that arises as a result of recognising regulatory deferral account balances either:
(a) with the line items that are presented for the regulatory deferral account debit balances and credit balances; or
(b) as a separate line item alongside the related regulatory deferral account debit balances and credit balances.
B12 Similarly, when an entity recognises the movement in a deferred tax asset (liability) that arises as a result of recognising regulatory deferral account balances, the entity shall not include the movement in that deferred tax amount within the tax expense (income) line item that is presented in the statement of profit and loss in accordance with Ind AS 12. Instead, the entity shall present the movement in the deferred tax asset (liability) that arises as a result of recognising regulatory deferral account balances either:
(a) with the line items that are presented in the statement of profit and loss for the movements in regulatory deferral account balances; or
(b) as a separate line item alongside the related line items that are presented in the statement of profit and loss for the movements in regulatory deferral account balances.
Application of Ind AS 33 Earnings per Share
B13 Paragraph 66 of Ind AS 33 requires some entities to present, in the statement of profit and loss, basic and diluted earnings per share both for profit or loss from continuing operations and profit or loss that is attributable to the ordinary equity holders of the parent entity. In addition, paragraph 68 of Ind AS 33 requires an entity that reports a discontinued operation to disclose the basic and diluted amounts per share for the discontinued operation, either in the statement of profit or loss and other comprehensive income or in the notes.
B14 For each earnings per share amount presented in accordance with Ind AS 33, an entity applying this Standard shall present additional basic and diluted earnings per share amounts that are calculated in the same way, except that those amounts shall exclude the net movement in the regulatory deferral account balances. Consistent with the requirement in paragraph 73 of Ind AS 33, an entity shall present the earnings per share required by paragraph 26 of this Standard with equal prominence to the earnings per share required by Ind AS 33 for all periods presented.
Application of Ind AS 36 Impairment of Assets
B15 Paragraphs 11–12 require an entity to continue to apply its previous GAAP accounting policies for the identification, recognition, measurement and reversal of any impairment of its recognised regulatory deferral account balances. Consequently, Ind AS 36 does not apply to the separate regulatory deferral account balances recognised.
B16 However, Ind AS 36 might require an entity to perform an impairment test on a cash-generating unit (CGU) that includes regulatory deferral account balances. This test might be required because the CGU contains goodwill, or because one or more of the impairment indicators described in Ind AS 36 have been identified relating to the CGU. In such situations, paragraphs 74–79 of Ind AS 36 contain requirements for identifying the recoverable amount and the carrying amount of a CGU. An entity shall apply those requirements to decide whether any of the regulatory deferral account balances recognised are included in the carrying amount of the CGU for the purpose of the impairment test. The remaining requirements of Ind AS 36 shall then be applied to any impairment loss that is recognised as a result of this test.
Application of Ind AS 103 Business Combinations
B17 The core principle of Ind AS 103 is that an acquirer of a business recognises the assets acquired and the liabilities assumed at their acquisition-date fair values. Ind AS 103 provides limited exceptions to its recognition and measurement principles. Paragraph B18 of this Standard provides an additional exception.
B18 Paragraphs 11–12 require an entity to continue to apply its previous GAAP accounting policies for the recognition, measurement, impairment and derecognition of regulatory deferral account balances. Consequently, if an entity acquires a business, it shall apply, in its consolidated financial statements, its accounting policies established in accordance with paragraphs 11–12 for the recognition and measurement of the acquiree’s regulatory deferral account balances at the date of acquisition. The acquiree’s regulatory deferral account balances shall be recognised in the consolidated financial statements of the acquirer in accordance with the acquirer’s policies, irrespective of whether the acquiree recognises those balances in its own financial statements.
Application of Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations
B19 Paragraphs 11–12 require an entity to continue to apply its previous accounting policies for the recognition, measurement, impairment and derecognition of regulatory deferral account balances. Consequently, the measurement requirements of Ind AS 105 shall not apply to the regulatory deferral account balances recognised.
B20 Paragraph 33 of Ind AS 105 requires a single amount to be presented for discontinued operations in the statement of profit and loss. Notwithstanding the requirements of that paragraph, when an entity that elects to apply this Standard presents a discontinued operation, it shall not include the movement in regulatory deferral account balances that arose from the rate-regulated activities of the discontinued operation within the line items that are required by paragraph 33 of Ind AS 105. Instead, the entity shall present the movement in regulatory deferral account balances that arose from the rate-regulated activities of the discontinued operation either:
(a) within the line item that is presented for movements in the regulatory deferral account balances related to profit or loss; or
(b) as a separate line item alongside the related line item that is presented for movements in the regulatory deferral account balances related to profit or loss
B21 Similarly, notwithstanding the requirements of paragraph 38 of Ind AS 105, when an entity presents a disposal group, the entity shall not include the total of the regulatory deferral account debit balances and credit balances that are part of the disposal group within the line items that are required by paragraph 38 of Ind AS 105. Instead, the entity shall present the total of the regulatory deferral account debit balances and credit balances that are part of the disposal group either:
(a) within the line items that are presented for the regulatory deferral account debit balances and credit balances; or
(b) as separate line items alongside the other regulatory deferral account debit balances and credit balances.
B22 If the entity chooses to include the regulatory deferral account balances and movements in those balances that are related to the disposal group or discontinued operation within the related regulated deferral account line items, it may be necessary to disclose them separately as part of the analysis of the regulatory deferral account line items described by paragraph 33 of this Standard.
Application of Ind AS 110 Consolidated Financial Statements and Ind AS 28 Investments in Associates and Joint Ventures
B23 Paragraph 19 of Ind 110 requires that a “parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances”. Paragraph 8 of this Standard requires that an entity that is within the scope of, and elects to apply, this Standard shall apply all of its requirements to all regulatory deferral account balances arising from all of the entity’s rate-regulated activities. Consequently, if a parent recognises regulatory deferral account balances in its consolidated financial statements in accordance with this Standard, it shall apply the same accounting policies to the regulatory deferral account balances arising in all of its subsidiaries. This shall apply irrespective of whether the subsidiaries recognise those balances in their own financial statements.
B24 Similarly, paragraphs 35–36 of Ind AS 28 require that, in applying the equity method, an “entity’s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances”. Consequently, adjustments shall be made to make the associate’s or joint venture’s accounting policies for the recognition, measurement, impairment and derecognition of regulatory deferral account balances conform to those of the investing entity in applying the equity method.
Application of Ind AS 112 Disclosure of Interests in Other Entities
B25 Paragraph 12(e) of Ind AS 112 requires an entity to disclose, for each of its subsidiaries that have non-controlling interests that are material to the reporting entity, the profit or loss that was allocated to non-controlling interests of the subsidiary during the reporting period. An entity that recognises regulatory deferral account balances in accordance with this Standard shall disclose the net movement in regulatory deferral account balances that is included within the amounts that are required to be disclosed by paragraph 12(e) of Ind AS 112.
B26 Paragraph 12(g) of Ind AS 112 requires an entity to disclose, for each of its subsidiaries that have non-controlling interests that are material to the reporting entity, summarised financial information about the subsidiary, as specified in paragraph B10 of Ind AS 112. Similarly, paragraph 21(b)(ii) of Ind AS 112 requires an entity to disclose, for each joint venture and associate that is material to the reporting entity, summarised financial information as specified in paragraphs B12–B13 of Ind AS 112. Paragraph B16 of Ind AS 112 specifies the summary financial information that an entity is required to disclose for all other associates and joint ventures that are not individually material in accordance with paragraph 21(c) of Ind AS 112.
B27 In addition to the information specified in paragraphs 12, 21, B10, B12–B13 and B16 of Ind AS 112, an entity that recognises regulatory deferral account balances in accordance with this Standard shall also disclose the total regulatory deferral account debit balance, the total regulatory deferral account credit balance and the net movements in those balances, split between amounts recognised in profit or loss and amounts recognised as other comprehensive income, for each entity for which those Ind AS 112 disclosures are required.
B28 Paragraph 19 of Ind AS 112 specifies the information that an entity is required to disclose when the entity recognises a gain or loss on losing control of a subsidiary, calculated in accordance with paragraph 25 of Ind AS 110. In addition to the information required by paragraph 19 of Ind AS 112, an entity that elects to apply this Standard shall disclose the portion of that gain or loss that is attributable to derecognising regulatory deferral account balances in the former subsidiary at the date when control is lost.
Appendix 1
Note: This Appendix is not a part of this Indian Accounting Standard. The purpose of this Appendix is only to bring out the differences, if any, between Indian Accounting Standard (Ind AS) 114 and the corresponding International Financial Reporting Standard (IFRS) 14, Regulatory Deferral Accounts.
Comparison with IFRS 14, Regulatory Deferral Accounts
1 Appendix A, Defined terms have been modified to clarify that Guidance Note of Accounting for Rate Regulated Activities would be considered as the previous GAAP for the purpose of Ind AS 114.
2 Under paragraph 6 of Ind AS 114, a footnote has been added to clarify the application of requirements of previous GAAP in the case of an entity subject to rate regulation coming into existence after Ind AS coming into force or an entity whose activities become subject to rate regulation as defined in this Ind AS subsequent to preparation and presentation of its first Ind AS financial statements.
3 Different terminology is used in this standard, e.g., the term ‘ balance sheet’ is used instead of ‘Statement of financial position’, and ‘Statement of profit and loss’ is used instead of ‘Statement of Profit and Loss and comprehensive income’.
Footnotes
# This Ind AS was notified vide G.S.R. 111(E) dated 16 th February, 2015 and G.S.R. 419(E) dated 18 t h June, 2021.
1 An entity subject to rate regulation coming into existence after Ind AS coming into force or an entity whose activities become subject to rate regulation as defined in this Ind AS subsequent to preparation and presentation of its first Ind AS financial statements shall be entitled to apply the requirements of the previous GAAP in respect of its such rate regulated activities.
2 Substituted vide Notification No. G.S.R. 419(E) dated 18 th June, 2021.
* The term “faithful representation”, which is used in the Conceptual Framework for Financial Reporting under Ind AS issued by the Institute of Chartered Accountants of India, encompasses the main characteristics that the Framework for the Preparation and Presentation of Financial Statements in accordance with Indian Accounting Standards called “reliability”. The requirement in paragraph 13 of this Standard is based on the requirements of Ind AS 8, which retains the term “reliable”.
3 Subsequently, MCA issued Companies (Accounting Standards) Rules, 2021, vide
notification dated 23rd June, 2021, superseding Companies (Accounting Standards)
Rules, 2006.
