IFRS 14: Regulatory Deferral Accounts

International Financial Reporting Standard 14 (IFRS 14), Regulatory Deferral Accounts, is a temporary accounting rule. It provides a short-term solution for companies with rate-regulated activities as they transition to IFRS for the first time. Rate regulation occurs when a government body sets the prices a company can charge, common for utilities providing electricity or gas. The standard offers a practical bridge, allowing companies to avoid significant accounting changes for specific accounts until the International Accounting Standards Board (IASB) finalizes a more complete standard.

Who Can Apply IFRS 14

Eligibility to use IFRS 14 is narrowly defined. A company must be a “first-time adopter” of IFRS, preparing its very first set of financial statements under these standards. Companies that have already transitioned to and are reporting under IFRS are not permitted to apply this standard.

The second condition is that the entity must conduct “rate-regulated activities,” where a regulatory body establishes the prices the company charges its customers. For an entity to qualify, it must have already recognized “regulatory deferral account balances” in its financial statements under its previous accounting framework, such as U.S. Generally Accepted Accounting Principles (GAAP).

These balances represent timing differences created by the rate-setting process. For instance, a regulator might allow a utility to recover the cost of a major storm over several years through future customer rates. Under its old accounting system, the company would have recorded an asset for these future recoverable costs. IFRS 14 allows a company to continue this practice upon adopting IFRS, and the choice to apply the standard is optional.

Core Accounting Treatment

IFRS 14 permits an eligible company to continue using the accounting policies from its previous GAAP for its regulatory deferral account balances. The standard does not introduce a new method for recognizing or measuring these balances. It effectively “freezes” the company’s existing accounting policy for these items at the date of its transition to IFRS.

Regulatory deferral account balances represent amounts that a regulator allows a company to recover from customers in future periods or requires it to refund. Without IFRS 14, a first-time adopter might be forced to write off these balances. This is because they may not meet the definition of an asset or liability under other IFRS rules.

This election applies only to these deferral balances. All other assets, liabilities, income, and expenses on the financial statements must fully comply with all other relevant IFRS standards. For example, while a company could continue its prior accounting for a regulatory asset, its accounting for property, plant, and equipment must follow IAS 16, Property, Plant and Equipment.

Presentation and Disclosure Requirements

When an entity applies IFRS 14, it must follow specific presentation rules for transparency. The total of all regulatory deferral account debit balances and the total of all credit balances must be presented as separate line items in the statement of financial position. These balances are not to be classified as current or non-current.

In the statement of profit or loss and other comprehensive income, the net change in the regulatory deferral account balances for the period must be presented as a distinct line item. This shows the financial impact of a regulator’s decisions during the year, separate from the company’s other operating results.

IFRS 14 also mandates detailed disclosures to help investors understand the nature of these balances. The company must describe the rate regulation it is subject to, how the regulator determines prices, and the associated risks. It must also provide a reconciliation of the carrying amount of the regulatory deferral account balances from the beginning to the end of the period.

Status as an Interim Standard

IFRS 14 is an interim standard and was never intended to be a permanent part of IFRS. The IASB issued it as a temporary measure for first-time adopters from jurisdictions with established rate-regulation accounting. The board recognized that forcing these companies to eliminate their regulatory balances, only to potentially re-establish them later, would be inefficient.

The standard serves as a bridge while the IASB finalizes a comprehensive project on the topic. The board is expected to issue a new standard, Regulatory Assets and Regulatory Liabilities, in the second half of 2025. This new standard will establish a single accounting model for all entities with rate-regulated operations and will supersede IFRS 14.