Page 1 of 11Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
5 February 2015International Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Sirs,IASB Discussion Paper of Reporting the Financial Effects of Rate RegulationThe Hong Kong Institute of Certified Public Accountants is the only body authorised bylaw to promulgate financial reporting, auditing and ethical standards for professionalaccountants in Hong Kong. We are grateful for the opportunity to provide you with ourcomments on this Discussion Paper (DP). We had also previously responded to:
IASB Exposure Draft on Regulatory Deferral Accounts (ED/2013/5)
(http://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2013/sub_rda.pdf).IASB Request for Information on Rate Regulation(http://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2013/sub_rate.pdf).IASB Exposure Draft on Rate-regulated Activities (ED/2009/8)
(http://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2009/sub-rate-regulated-activities.pdf).We welcome the IASB's comprehensive project on rate-regulated activities and supportthe IASB in considering the need for specific accounting guidance or requirements toaccount for the combination of rights and obligations that arise in defined rate regulations.We are mindful that IFRS is a principles-based standard and the IASB has a policy toavoid developing industry specific standards. Nevertheless, we support the IASB's focuson a defined type of rate regulation as a first step of the research project to provide acommon starting point before moving to the next stage of the project, which hopefully, isto determine whether rights and obligations exist in the context of a broader regulatedenvironment.While we broadly support the description of defined rate regulation as highlighted in theDP, we have provided certain suggestions so that it can be improved. In addition, weconsider the defined regulatory period is an important feature that would support theargument that there is a combination of rights and obligations created by defined rateregulation.Page 2 of 11As mentioned in our comments to the IASB 2009 ED on Rate-regulated Activities, we areconcerned whether the recognition of regulatory deferral account balances would meetthe definitions of assets and liabilities in the Conceptual Framework. Therefore, wesuggest the IASB conduct a full analysis of the rights and obligations arising from rateregulation and whether they can meet the definitions of assets and liabilities contained inConceptual Framework, which is currently under revision before moving to the next stageof the project. Otherwise, the lack of conceptual basis for the recognition of regulatorydeferral accounts as assets or liabilities might lead us to creating exceptions to IFRS.If the IASB concludes that the regulatory assets and liabilities meet the definition of assetsand liabilities, we support the approach of developing specific IFRS guidance orrequirements for rate-regulated activities, which considers deferring or accelerating therecognition of a combination of costs and revenue. Users of financial statements arefamiliar with this approach as it has been adopted in the US GAAP and has theadvantage of aligning the timing of recognition for regulatory purpose with IFRS financialreporting purpose.Our responses to the questions raised in the DP are set out in the Appendix for yourconsideration.If you have any questions regarding the matters raised in this letter, please contact BenLo, our Associate Director of Standard Setting at ben@hkicpa.org.hk.Yours faithfully,Christina NgHead of Financial ReportingCN/BLEncl.Page 3 of 11APPENDIXHong Kong Institute of CPAsComment on IASB Discussion Paper of Reporting the Financial Effects of RateRegulationQuestion 1(a) What information about the entity's rate-regulated activities and the rate-regulatory environment do you think preparers of financial statements needto include in their financial statements or accompanying documents suchas management commentary?Please specify what information should be provided in:
(i) the statement of financial position;
(ii)
the statement(s) of profit or loss and other comprehensive income;
(iii)
the statement of cash flows;
(iv)
the note disclosures; or(v)
the management commentary.(b) How do you think that information would be used by investors and lendersin making investment and lending decisions?We understand that users of financial statements need information regarding thefinancial effects of rate regulation. However, except for IFRS 14 which providesguidance about how to account for regulatory deferral accounts and is only applicableto first-time adopters of IFRS, there is no guidance for existing IFRS users on thisrespect.We are informed that users of existing IFRS financial statements need informationregarding the risks that entities face as a result of rate regulation. In particular,qualitative information about the rate-setting mechanism that adjusts for over-billingsand under-billings, how the relevant rate regulation operates and is enforced, risksassociated with the recovery of regulatory balances and expected period of recoveryare considered as important.In terms of financial performance, users would like to know how reported earnings infinancial statements be reconciled to the earnings permitted by the rate regulation. Interms of financial position, as some of the rate-regulated activities would be able togenerate a reasonable return based on a certain percentage of rate-regulated entities'net asset, information on future investment plans of rate-regulated entities would alsobe considered as useful for users in assessing the future prospects if they would like toinvest in shares in those rate-regulated entities.Question 2Are you familiar with using financial statements that recognise regulatorydeferral account balances as regulatory assets or regulatory liabilities, forPage 4 of 11example, in accordance with US generally accepted accounting principles(GAAP) or other local GAAP or in accordance with IFRS 14? If so, what problems,if any, does the recognition of such balances cause users of financialstatements when evaluating investment or lending decisions in rate-regulatedentities that recognise such balances compared to:
(a) non-rate-regulated entities; and(b) rate-regulated entities that do not recognise such balances?Hong Kong fully adopted IFRS in 2005 (word for word) and issued HKFRS 14Regulatory Deferral Accounts, the equivalent of IFRS 14. We are not aware of anyentities in Hong Kong that are eligible to apply HKFRS 14 as it is only applicable tofirst-time adopters that recognise regulatory deferral account balances in their financialstatements in accordance with previous GAAP.Question 3Do you agree that, to progress this project, the IASB should focus on a definedtype of rate regulation (see Section 4) in order to provide a common startingpoint for a more focused discussion about whether rate regulation creates acombination of rights and obligations for which specific accounting guidance orrequirements might need to be developed (see paragraphs 3.6-3.7)? If not, howdo you suggest that the IASB should address the diversity in the types of rateregulation summarised in Section 3?We are mindful that IFRS is a principles-based standard and the IASB has a policy toavoid developing industry specific standard. Nevertheless, we support the IASB's focuson a defined type of rate regulation as a first step of the research project to provide acommon starting point before moving to the next stage of the project, which hopefully,is to determine whether rights and obligations exist in the context of a broaderregulated environment. We suggest that the IASB widen the scope of the project if thecomments received on this DP indicate that there are some other activities whichcreate rights and obligations similar to that of defined rate regulation.Question 4Paragraph 2.11 notes that the IASB has not received requests for it to developspecial accounting requirements for the form of limited or 'market' rateregulation that is used to supplement the inefficient competitive forces in themarket (see paragraphs 3.30-3.33).(a) Do you agree that this type of rate regulation does not create a significantlydifferent economic environment and, therefore, does not require anyspecific accounting requirements to be developed? If not, why not?(b) If you agree that this type of rate regulation does not require any specificaccounting requirements, do you think that the IASB should, alternatively,consider developing specific disclosure requirements? If so, what wouldyou propose and why?Page 5 of 11We agree that market regulation as mentioned in paragraphs 3.30-3.33 of the DP doesnot require any specific accounting requirements to be developed. Unlike the definedrate regulation in the scope of this DP, which may create a combination of rights andobligations, we do not believe market regulation has characteristics that differsignificantly from other commercial activities.Moreover, existing IFRS, such as paragraphs 138 and 112(c) of IAS 1 Presentation ofFinancial Statements, already require disclosure of information relating to the nature ofthe entity’s operations or otherwise that is relevant to the understanding of the financialstatements. Accordingly, entities that are subject to 'market regulation' would beexpected to explain the type of regulatory environment that the reporting entity isengaged in.Question 5Paragraphs 4.4-4.6 summarise the key features of defined rate regulation. Thesefeatures have been the focus of the IASB's exploration of whether defined rateregulation creates a combination of rights and obligations for which specificaccounting guidance or requirements might be developed in order to providerelevant information to users of general purpose financial statements.(a) Do you think that the description of defined rate regulation captures anappropriate population of rate-regulatory schemes within its scope? If so,why? If not, why not?(b) Do you think that any of the features described should be modified in orderto include or exclude particular types of rate-regulatory schemes or rate-regulated activities included within the scope of defined rate regulation?Please specify and give reasons to support any modifications to thefeatures that you suggest, with particular reference to why the features mayor may not give rise to circumstances that result in particular informationneeds for users of the financial statements.(c) Are there any additional features that you think should be included toestablish the scope of defined rate regulation or would you omit any of thefeatures described? Please specify and give reasons to support anyfeatures that you would add or omit.We believe the description of defined rate regulation generally captures an appropriatepopulation. However, we are of the view that the following features, most or all of whichare mentioned in various parts of the DP, should be emphasised in the key features ofdefined rate regulation:
(a) A rate-setting framework that is legally enforceable that governs the operationsand financial affairs of the rate-regulated entities for an agreed period of time;
(b) The existence of an external rate regulator (such as a government) whose roleand authority, established in legislation or other formal regulations, are to enforcethe rate-regulated entity's rights and obligations created by a defined rateregulation; andPage 6 of 11(c) A rate-setting mechanism that allows the recovery of costs and required rate ofreturn.In addition, we are of the view that the element of defined regulatory period should beincluded as a feature of defined rate regulation. In Hong Kong, electricity generation,distribution and supply is considered as a type of industry which is subject to rateregulation by means of a Scheme of Control Agreement (SCA) between thegovernment of Hong Kong and the two power companies. Based on the SCA, theregulatory period is usually shorter than the useful lives of assets invested by thepower companies. In order to safeguard a change implemented by the Hong Konggovernment to the electricity supply market structure that would cause material impactto the power companies, a provision is included in the SCA that entitles rate-regulatedentities to recover from the market stranded costs. Under the SCA, the amounts ofstranded costs and recovery mechanism are to be agreed between the Governmentand the regulated companies.Based on the above fact pattern, we consider the element of defined regulatory periodis an important provision which ensures the recovery of investment and return beyondthe regulatory period. This provision also supports the argument that there is acombination of rights and obligations created by defined rate regulation that the IASBshould consider developing guidance or requirements.We consider that these features mentioned in the paragraphs directly above wouldalso be good indicators to illustrate the principles/guidance for determining whetherrights and obligations exist in the context of a regulated environment, should the IASBconsiders to develop principles/guidance for rate-regulated entities that are broaderthan the scope considered in the DP.If the IASB decides to develop specific accounting guidance or requirements for rate-regulated activities, we also recommend that the features listed in paragraph 4.4(a) - (d)
of the DP are considered as factors rather than criteria for determining whether anentity falls within the scope of this project. This approach would be consistent withIFRS as a principles-based standard.Question 6Paragraphs 4.62-4.72 contain an analysis of the rights and obligations that arisefrom the features of defined rate regulation.(a) Are there any additional rights or obligations that you think the IASB shouldconsider? Please specify and give reasons.(b) Do you think that the IASB should develop specific accounting guidance orrequirements to account for the combination of rights and obligationsdescribed? Why or why not?We are not aware of any other rights or obligations that have not been identified in thisDP and we support the IASB in developing specific accounting guidance orrequirements to account for the combination of rights and obligations as described inthe DP. We think that existing IFRS does not prescribe specific accountingrequirements to provide relevant and useful information for understanding the financialeffects of rate-regulated entities.Page 7 of 11Question 7Section 5 outlines a number of possible approaches that the IASB couldconsider developing further, depending on the feedback received from thisDiscussion Paper. It highlights some advantages and disadvantages of eachapproach.(a) Which approach, if any, do you think would best portray the financial effectsof defined rate regulation in IFRS financial statements and is most likely toprovide the information that investors and lenders consider is most relevantto help them make their investing and lending decisions? Please givereasons for your answer?(b) Is there any other approach that the IASB should consider? If so, pleasespecify and explain how such an approach could provide investors andlenders with relevant information about the financial effects of rateregulation.(c) Are there any additional advantages or disadvantages that the IASB shouldconsider before it decides whether to develop any of these approachesfurther? If so, please describe them.If commenting on the asset/liability approach, please specify, if it is relevant,whether your comments reflect the existing definitions of an asset and a liabilityin the Conceptual Framework or the proposed definitions suggested in theConceptual Framework Discussion Paper, published in July 2013.Section 5 of the DP provides a detailed discussion regarding the debate on whetherregulatory deferral account balances would meet the definitions of assets and liabilitiesunder the existing Conceptual Framework and the definitions proposed by theConceptual Framework discussion paper. However, no definite conclusions weredrawn at the end of this section. As mentioned in our comments to the IASB 2009 EDon Rate-regulated Activities, it is unclear whether the recognition of regulatory deferralaccount balances would meet the existing definitions of assets and liabilities and webelieve it is fundamental to have a proper debate on this.As the project on Conceptual Framework is still in progress, we recommend that theIASB provides additional guidance on the concepts of 'control', 'past events' and'present obligation' so that it would be easier to determine if regulatory assets andliabilities would meet the definition of assets and liabilities under IFRS. Otherwise, thelack of conceptual basis for the recognition of regulatory assets and liabilities wouldcreate exceptions to IFRS and result in comparability issues.We note, however, that some of our constituents operating in regulated industries inHong Kong would support the approach to report using regulatory accounting as itwould facilitate the interpretation and understanding by investors and shareholders.One of these key constituents thinks that this approach would also reduce the efforts inpreparing two sets of financial statements.Accordingly, while we believe IFRS should be principles-based and we do not supportthe creation of exceptions to IFRS, we suggest the IASB conduct a full analysis of thePage 8 of 11rights and obligations arising from rate regulation and whether they can be recognisedas assets and liabilities under the Conceptual Framework project to provide aconceptual basis for the package of rights and obligations to be recognised to providedecision-useful information for users. In the event that the IASB cannot provide aconceptual justification for the recognition of regulatory account balances, the IASBshould consider prescribing disclosure that would provide relevant information to users.If the IASB conclude that the recognition of regulatory account balances meet thedefinition of assets and liabilities, we would support the approach of developingspecific IFRS guidance or requirements for rate-regulated activities that considersdeferring or accelerating the recognition of a combination of costs and revenue. Wewere informed that users of financial statements are familiar with this approach as ithas been adopted in the US GAAP. This approach has the advantage of aligning thetiming of the recognition for regulatory purpose with IFRS financial reporting purpose.We are not aware of any other approach that the IASB should consider and we believethat the IASB has provided a detailed discussion regarding the advantages anddisadvantages for respective approach identified in this DP.Question 8Does your organisation carry out activities that are subject to defined rateregulation? If so, what operational issues should the IASB consider if it decidesto develop any specific accounting guidance or requirements?This question is not applicable to us as the Institute is a body authorised by law topromulgate financial reporting standards for professional accountants in Hong Kong.Question 9If, after considering the feedback from this Discussion Paper and the ConceptualFramework project, the IASB decides to prohibit the recognition of regulatorydeferral account balances in IFRS financial statements, do you think that theIASB should consider developing specific disclosure-only requirements? If not,why not? If so, please specify what type of information you think would berelevant to investors and lenders in making their investing or lending decisionsand why.If the IASB decides to prohibit the recognition of regulatory deferral account balancesin IFRS financial statements, we recommend the IASB should consider developingspecific disclosure requirements for rate-regulated activities as users of financialstatements would like to understand the economic impacts of rate-regulation (such asinformation about the rate-setting mechanism, risks associated with rate regulation andhow would it affect the entity's financial position, financial performance and cash flows).However, the IASB should be careful to avoid disclosure overload that will addcomplexity to users. This is why our preferred approach is as per our response toquestion 7. That is, we would prefer the IASB to find a way within the conceptualframework which allows the recognition of regulatory assets and liabilities, as webelieve this would provide decision-useful information in a less confusing manner thana disclosure-only approach.Page 9 of 11Question 10Sections 2 and 6 discuss some of the information needs of users of generalpurpose financial statements. The IASB will seek to balance the needs of usersof financial statements for information about the financial effects of rateregulation on an entity's operations with concerns about obscuring theunderstandability of financial statements and the high preparation costs that canresult from lengthy disclosures (see paragraph 2.27).(a) If the IASB decides to develop specific accounting requirements for allentities that are subject to defined rate regulation, to what extent do youthink the requirements of IFRS 14 meet the information needs of investorsand lenders? Is there any additional information that you think should berequired? If so, please specify and explain how investors or lenders arelikely to use that information.(b) Do you think that any of the disclosure requirements of IFRS 14 could beomitted or modified in order to reduce the cost of compliance with therequirements, without omitting information that helps users of financialstatements to make informed investing or lending decisions? If so, pleasespecify and explain the reasons for your answer.As mentioned in our comments to the IASB's ED of Regulatory Deferral Accounts, webelieve the disclosure requirements contained in IFRS 14 provide decision-usefulinformation and the cost of obtaining such information is considered reasonable.Moreover, we are aware that users need other information such as those mentioned inour response to Question 1 of this letter.While we believe some of the disclosure requirements of IFRS 14 could be modified inorder to be consistent with other IFRSs, we do not think any of the disclosurerequirements contained in IFRS 14 should be omitted. However, as IFRS 14 isconsidered as an interim standard and the disclosures focus on allowing users tounderstand diverse accounting practices across jurisdictions, the IASB shouldtherefore re-evaluate the disclosure requirements once an accounting model on rate-regulated activities is developed.Question 11IFRS 14 requires any regulatory deferral account balances that have beenrecognised to be presented separately from the assets and liabilities recognisedin the statement of financial position in accordance with other Standards.Similarly, the net movements in regulatory deferral account balances arerequired to be presented separately from the items of income and expenserecognised in the statement(s) of profit or loss and other comprehensive income.If the IASB develops specific accounting requirements that would apply to bothexisting IFRS preparers and first-time adopters of IFRS, and those requirementsresulted in the recognition of regulatory balances in the statement of financialposition, what advantages or disadvantages do you envisage if the separatepresentation required by IFRS 14 was to be applied?Page 10 of 11If there was no longer a difference under IFRS between those entities which had beenable to adopt IFRS 14 as first time adopters and those entities which had not, then wedo not consider that the regulatory account balances and their movements shouldcontinue to be presented separately from other amounts related to that regulatedbusiness in the manner required by IFRS 14.Instead, we consider it would be more meaningful to regard the regulated business asa separate segment, if the entity was involved in both regulated business and non-regulated business to a material extent. Separate presentation in such cases wouldenable users to compare information between entities that have a mix of rate-regulatedandnon-regulatedactivities(forexample,rate-regulatedentitiesthatareconglomerates) from those entities that solely engage in rate-regulated activities.Having said that, whether separate presentation is needed would depend on theaccounting approach being developed by the IASB based on the comments receivedon this DP.Question 12Section 4 describes the distinguishing features of defined rate regulation. Thisdescription is intended to provide a common starting point for a more focuseddiscussion about whether this type of rate regulation creates a combination ofrights and obligations for which specific accounting guidance or requirementsshould be developed.Paragraph 4.73 suggests that the existence of a rate regulator whose role andauthority is established in legislation or other formal regulations is an importantfeature of defined rate regulation. Do you think that this is a necessary conditionin order to create enforceable rights or obligations, or do you think that co-operatives or similar entities, which operate under self-imposed rate regulationwith the same features as defined rate regulation (see paragraphs 7.6-7.9),should also be included within defined rate regulation? If not, why not? If so, doyou think that such co-operatives should be included within the scope of definedrate regulation only if they are subject to formal oversight from a governmentdepartment or other authorised body?As mentioned in our response to Question 5, we believe the existence of a rateregulator (such as a government) whose role and authority are established inlegislation or by other formal regulations is an important feature of defined rateregulation as this form of regulator is responsible for enforcing the rights andobligations under a regulatory pricing framework.We are aware and are concerned that co-operatives or similar entities that are self-regulated would cover a wide range of activities, which might not be the target of theIASB. Accordingly, we suggest that the IASB does not include those forms of entitieswithin the scope of defined rate regulation. Moreover, we believe that the accountingfor defined rate regulation should only be developed for entities that supply essentialgoods or services with limited competition. The existence of a rate regulator providescertainty on the enforcement of the rights and obligations arising from defined rateregulation while such a certainty does not exist for those self-imposed schemes.Page 11 of 11Question 13Paragraphs 7.11-7.22 highlight some of the issues that the IASB may consider ifit continues to progress this project.Do you have any comments or suggestions on these or any other issues thatmay or may not have been raised in this Discussion Paper that you think theIASB should consider if it decides to develop proposals for any specificaccounting requirements for rate-regulated activities?We agree that the IASB should consider the interaction with other standards that arementioned in paragraphs 16-17 and B7-B28 of IFRS 14.
Instutute comments on IASB Discussion Paper of Reporting the Finanical Effects of Rate Regulation
下载原件Page 1 of 11Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
5 February 2015International Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Sirs,IASB Discussion Paper of Reporting the Financial Effects of Rate RegulationThe Hong Kong Institute of Certified Public Accountants is the only body authorised bylaw to promulgate financial reporting, auditing and ethical standards for professionalaccountants in Hong Kong. We are grateful for the opportunity to provide you with ourcomments on this Discussion Paper (DP). We had also previously responded to:
IASB Exposure Draft on Regulatory Deferral Accounts (ED/2013/5)
(http://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2013/sub_rda.pdf).IASB Request for Information on Rate Regulation(http://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2013/sub_rate.pdf).IASB Exposure Draft on Rate-regulated Activities (ED/2009/8)
(http://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2009/sub-rate-regulated-activities.pdf).We welcome the IASB's comprehensive project on rate-regulated activities and supportthe IASB in considering the need for specific accounting guidance or requirements toaccount for the combination of rights and obligations that arise in defined rate regulations.We are mindful that IFRS is a principles-based standard and the IASB has a policy toavoid developing industry specific standards. Nevertheless, we support the IASB's focuson a defined type of rate regulation as a first step of the research project to provide acommon starting point before moving to the next stage of the project, which hopefully, isto determine whether rights and obligations exist in the context of a broader regulatedenvironment.While we broadly support the description of defined rate regulation as highlighted in theDP, we have provided certain suggestions so that it can be improved. In addition, weconsider the defined regulatory period is an important feature that would support theargument that there is a combination of rights and obligations created by defined rateregulation.Page 2 of 11As mentioned in our comments to the IASB 2009 ED on Rate-regulated Activities, we areconcerned whether the recognition of regulatory deferral account balances would meetthe definitions of assets and liabilities in the Conceptual Framework. Therefore, wesuggest the IASB conduct a full analysis of the rights and obligations arising from rateregulation and whether they can meet the definitions of assets and liabilities contained inConceptual Framework, which is currently under revision before moving to the next stageof the project. Otherwise, the lack of conceptual basis for the recognition of regulatorydeferral accounts as assets or liabilities might lead us to creating exceptions to IFRS.If the IASB concludes that the regulatory assets and liabilities meet the definition of assetsand liabilities, we support the approach of developing specific IFRS guidance orrequirements for rate-regulated activities, which considers deferring or accelerating therecognition of a combination of costs and revenue. Users of financial statements arefamiliar with this approach as it has been adopted in the US GAAP and has theadvantage of aligning the timing of recognition for regulatory purpose with IFRS financialreporting purpose.Our responses to the questions raised in the DP are set out in the Appendix for yourconsideration.If you have any questions regarding the matters raised in this letter, please contact BenLo, our Associate Director of Standard Setting at ben@hkicpa.org.hk.Yours faithfully,Christina NgHead of Financial ReportingCN/BLEncl.Page 3 of 11APPENDIXHong Kong Institute of CPAsComment on IASB Discussion Paper of Reporting the Financial Effects of RateRegulationQuestion 1(a) What information about the entity's rate-regulated activities and the rate-regulatory environment do you think preparers of financial statements needto include in their financial statements or accompanying documents suchas management commentary?Please specify what information should be provided in:
(i) the statement of financial position;
(ii)
the statement(s) of profit or loss and other comprehensive income;
(iii)
the statement of cash flows;
(iv)
the note disclosures; or(v)
the management commentary.(b) How do you think that information would be used by investors and lendersin making investment and lending decisions?We understand that users of financial statements need information regarding thefinancial effects of rate regulation. However, except for IFRS 14 which providesguidance about how to account for regulatory deferral accounts and is only applicableto first-time adopters of IFRS, there is no guidance for existing IFRS users on thisrespect.We are informed that users of existing IFRS financial statements need informationregarding the risks that entities face as a result of rate regulation. In particular,qualitative information about the rate-setting mechanism that adjusts for over-billingsand under-billings, how the relevant rate regulation operates and is enforced, risksassociated with the recovery of regulatory balances and expected period of recoveryare considered as important.In terms of financial performance, users would like to know how reported earnings infinancial statements be reconciled to the earnings permitted by the rate regulation. Interms of financial position, as some of the rate-regulated activities would be able togenerate a reasonable return based on a certain percentage of rate-regulated entities'net asset, information on future investment plans of rate-regulated entities would alsobe considered as useful for users in assessing the future prospects if they would like toinvest in shares in those rate-regulated entities.Question 2Are you familiar with using financial statements that recognise regulatorydeferral account balances as regulatory assets or regulatory liabilities, forPage 4 of 11example, in accordance with US generally accepted accounting principles(GAAP) or other local GAAP or in accordance with IFRS 14? If so, what problems,if any, does the recognition of such balances cause users of financialstatements when evaluating investment or lending decisions in rate-regulatedentities that recognise such balances compared to:
(a) non-rate-regulated entities; and(b) rate-regulated entities that do not recognise such balances?Hong Kong fully adopted IFRS in 2005 (word for word) and issued HKFRS 14Regulatory Deferral Accounts, the equivalent of IFRS 14. We are not aware of anyentities in Hong Kong that are eligible to apply HKFRS 14 as it is only applicable tofirst-time adopters that recognise regulatory deferral account balances in their financialstatements in accordance with previous GAAP.Question 3Do you agree that, to progress this project, the IASB should focus on a definedtype of rate regulation (see Section 4) in order to provide a common startingpoint for a more focused discussion about whether rate regulation creates acombination of rights and obligations for which specific accounting guidance orrequirements might need to be developed (see paragraphs 3.6-3.7)? If not, howdo you suggest that the IASB should address the diversity in the types of rateregulation summarised in Section 3?We are mindful that IFRS is a principles-based standard and the IASB has a policy toavoid developing industry specific standard. Nevertheless, we support the IASB's focuson a defined type of rate regulation as a first step of the research project to provide acommon starting point before moving to the next stage of the project, which hopefully,is to determine whether rights and obligations exist in the context of a broaderregulated environment. We suggest that the IASB widen the scope of the project if thecomments received on this DP indicate that there are some other activities whichcreate rights and obligations similar to that of defined rate regulation.Question 4Paragraph 2.11 notes that the IASB has not received requests for it to developspecial accounting requirements for the form of limited or 'market' rateregulation that is used to supplement the inefficient competitive forces in themarket (see paragraphs 3.30-3.33).(a) Do you agree that this type of rate regulation does not create a significantlydifferent economic environment and, therefore, does not require anyspecific accounting requirements to be developed? If not, why not?(b) If you agree that this type of rate regulation does not require any specificaccounting requirements, do you think that the IASB should, alternatively,consider developing specific disclosure requirements? If so, what wouldyou propose and why?Page 5 of 11We agree that market regulation as mentioned in paragraphs 3.30-3.33 of the DP doesnot require any specific accounting requirements to be developed. Unlike the definedrate regulation in the scope of this DP, which may create a combination of rights andobligations, we do not believe market regulation has characteristics that differsignificantly from other commercial activities.Moreover, existing IFRS, such as paragraphs 138 and 112(c) of IAS 1 Presentation ofFinancial Statements, already require disclosure of information relating to the nature ofthe entity’s operations or otherwise that is relevant to the understanding of the financialstatements. Accordingly, entities that are subject to 'market regulation' would beexpected to explain the type of regulatory environment that the reporting entity isengaged in.Question 5Paragraphs 4.4-4.6 summarise the key features of defined rate regulation. Thesefeatures have been the focus of the IASB's exploration of whether defined rateregulation creates a combination of rights and obligations for which specificaccounting guidance or requirements might be developed in order to providerelevant information to users of general purpose financial statements.(a) Do you think that the description of defined rate regulation captures anappropriate population of rate-regulatory schemes within its scope? If so,why? If not, why not?(b) Do you think that any of the features described should be modified in orderto include or exclude particular types of rate-regulatory schemes or rate-regulated activities included within the scope of defined rate regulation?Please specify and give reasons to support any modifications to thefeatures that you suggest, with particular reference to why the features mayor may not give rise to circumstances that result in particular informationneeds for users of the financial statements.(c) Are there any additional features that you think should be included toestablish the scope of defined rate regulation or would you omit any of thefeatures described? Please specify and give reasons to support anyfeatures that you would add or omit.We believe the description of defined rate regulation generally captures an appropriatepopulation. However, we are of the view that the following features, most or all of whichare mentioned in various parts of the DP, should be emphasised in the key features ofdefined rate regulation:
(a) A rate-setting framework that is legally enforceable that governs the operationsand financial affairs of the rate-regulated entities for an agreed period of time;
(b) The existence of an external rate regulator (such as a government) whose roleand authority, established in legislation or other formal regulations, are to enforcethe rate-regulated entity's rights and obligations created by a defined rateregulation; andPage 6 of 11(c) A rate-setting mechanism that allows the recovery of costs and required rate ofreturn.In addition, we are of the view that the element of defined regulatory period should beincluded as a feature of defined rate regulation. In Hong Kong, electricity generation,distribution and supply is considered as a type of industry which is subject to rateregulation by means of a Scheme of Control Agreement (SCA) between thegovernment of Hong Kong and the two power companies. Based on the SCA, theregulatory period is usually shorter than the useful lives of assets invested by thepower companies. In order to safeguard a change implemented by the Hong Konggovernment to the electricity supply market structure that would cause material impactto the power companies, a provision is included in the SCA that entitles rate-regulatedentities to recover from the market stranded costs. Under the SCA, the amounts ofstranded costs and recovery mechanism are to be agreed between the Governmentand the regulated companies.Based on the above fact pattern, we consider the element of defined regulatory periodis an important provision which ensures the recovery of investment and return beyondthe regulatory period. This provision also supports the argument that there is acombination of rights and obligations created by defined rate regulation that the IASBshould consider developing guidance or requirements.We consider that these features mentioned in the paragraphs directly above wouldalso be good indicators to illustrate the principles/guidance for determining whetherrights and obligations exist in the context of a regulated environment, should the IASBconsiders to develop principles/guidance for rate-regulated entities that are broaderthan the scope considered in the DP.If the IASB decides to develop specific accounting guidance or requirements for rate-regulated activities, we also recommend that the features listed in paragraph 4.4(a) - (d)
of the DP are considered as factors rather than criteria for determining whether anentity falls within the scope of this project. This approach would be consistent withIFRS as a principles-based standard.Question 6Paragraphs 4.62-4.72 contain an analysis of the rights and obligations that arisefrom the features of defined rate regulation.(a) Are there any additional rights or obligations that you think the IASB shouldconsider? Please specify and give reasons.(b) Do you think that the IASB should develop specific accounting guidance orrequirements to account for the combination of rights and obligationsdescribed? Why or why not?We are not aware of any other rights or obligations that have not been identified in thisDP and we support the IASB in developing specific accounting guidance orrequirements to account for the combination of rights and obligations as described inthe DP. We think that existing IFRS does not prescribe specific accountingrequirements to provide relevant and useful information for understanding the financialeffects of rate-regulated entities.Page 7 of 11Question 7Section 5 outlines a number of possible approaches that the IASB couldconsider developing further, depending on the feedback received from thisDiscussion Paper. It highlights some advantages and disadvantages of eachapproach.(a) Which approach, if any, do you think would best portray the financial effectsof defined rate regulation in IFRS financial statements and is most likely toprovide the information that investors and lenders consider is most relevantto help them make their investing and lending decisions? Please givereasons for your answer?(b) Is there any other approach that the IASB should consider? If so, pleasespecify and explain how such an approach could provide investors andlenders with relevant information about the financial effects of rateregulation.(c) Are there any additional advantages or disadvantages that the IASB shouldconsider before it decides whether to develop any of these approachesfurther? If so, please describe them.If commenting on the asset/liability approach, please specify, if it is relevant,whether your comments reflect the existing definitions of an asset and a liabilityin the Conceptual Framework or the proposed definitions suggested in theConceptual Framework Discussion Paper, published in July 2013.Section 5 of the DP provides a detailed discussion regarding the debate on whetherregulatory deferral account balances would meet the definitions of assets and liabilitiesunder the existing Conceptual Framework and the definitions proposed by theConceptual Framework discussion paper. However, no definite conclusions weredrawn at the end of this section. As mentioned in our comments to the IASB 2009 EDon Rate-regulated Activities, it is unclear whether the recognition of regulatory deferralaccount balances would meet the existing definitions of assets and liabilities and webelieve it is fundamental to have a proper debate on this.As the project on Conceptual Framework is still in progress, we recommend that theIASB provides additional guidance on the concepts of 'control', 'past events' and'present obligation' so that it would be easier to determine if regulatory assets andliabilities would meet the definition of assets and liabilities under IFRS. Otherwise, thelack of conceptual basis for the recognition of regulatory assets and liabilities wouldcreate exceptions to IFRS and result in comparability issues.We note, however, that some of our constituents operating in regulated industries inHong Kong would support the approach to report using regulatory accounting as itwould facilitate the interpretation and understanding by investors and shareholders.One of these key constituents thinks that this approach would also reduce the efforts inpreparing two sets of financial statements.Accordingly, while we believe IFRS should be principles-based and we do not supportthe creation of exceptions to IFRS, we suggest the IASB conduct a full analysis of thePage 8 of 11rights and obligations arising from rate regulation and whether they can be recognisedas assets and liabilities under the Conceptual Framework project to provide aconceptual basis for the package of rights and obligations to be recognised to providedecision-useful information for users. In the event that the IASB cannot provide aconceptual justification for the recognition of regulatory account balances, the IASBshould consider prescribing disclosure that would provide relevant information to users.If the IASB conclude that the recognition of regulatory account balances meet thedefinition of assets and liabilities, we would support the approach of developingspecific IFRS guidance or requirements for rate-regulated activities that considersdeferring or accelerating the recognition of a combination of costs and revenue. Wewere informed that users of financial statements are familiar with this approach as ithas been adopted in the US GAAP. This approach has the advantage of aligning thetiming of the recognition for regulatory purpose with IFRS financial reporting purpose.We are not aware of any other approach that the IASB should consider and we believethat the IASB has provided a detailed discussion regarding the advantages anddisadvantages for respective approach identified in this DP.Question 8Does your organisation carry out activities that are subject to defined rateregulation? If so, what operational issues should the IASB consider if it decidesto develop any specific accounting guidance or requirements?This question is not applicable to us as the Institute is a body authorised by law topromulgate financial reporting standards for professional accountants in Hong Kong.Question 9If, after considering the feedback from this Discussion Paper and the ConceptualFramework project, the IASB decides to prohibit the recognition of regulatorydeferral account balances in IFRS financial statements, do you think that theIASB should consider developing specific disclosure-only requirements? If not,why not? If so, please specify what type of information you think would berelevant to investors and lenders in making their investing or lending decisionsand why.If the IASB decides to prohibit the recognition of regulatory deferral account balancesin IFRS financial statements, we recommend the IASB should consider developingspecific disclosure requirements for rate-regulated activities as users of financialstatements would like to understand the economic impacts of rate-regulation (such asinformation about the rate-setting mechanism, risks associated with rate regulation andhow would it affect the entity's financial position, financial performance and cash flows).However, the IASB should be careful to avoid disclosure overload that will addcomplexity to users. This is why our preferred approach is as per our response toquestion 7. That is, we would prefer the IASB to find a way within the conceptualframework which allows the recognition of regulatory assets and liabilities, as webelieve this would provide decision-useful information in a less confusing manner thana disclosure-only approach.Page 9 of 11Question 10Sections 2 and 6 discuss some of the information needs of users of generalpurpose financial statements. The IASB will seek to balance the needs of usersof financial statements for information about the financial effects of rateregulation on an entity's operations with concerns about obscuring theunderstandability of financial statements and the high preparation costs that canresult from lengthy disclosures (see paragraph 2.27).(a) If the IASB decides to develop specific accounting requirements for allentities that are subject to defined rate regulation, to what extent do youthink the requirements of IFRS 14 meet the information needs of investorsand lenders? Is there any additional information that you think should berequired? If so, please specify and explain how investors or lenders arelikely to use that information.(b) Do you think that any of the disclosure requirements of IFRS 14 could beomitted or modified in order to reduce the cost of compliance with therequirements, without omitting information that helps users of financialstatements to make informed investing or lending decisions? If so, pleasespecify and explain the reasons for your answer.As mentioned in our comments to the IASB's ED of Regulatory Deferral Accounts, webelieve the disclosure requirements contained in IFRS 14 provide decision-usefulinformation and the cost of obtaining such information is considered reasonable.Moreover, we are aware that users need other information such as those mentioned inour response to Question 1 of this letter.While we believe some of the disclosure requirements of IFRS 14 could be modified inorder to be consistent with other IFRSs, we do not think any of the disclosurerequirements contained in IFRS 14 should be omitted. However, as IFRS 14 isconsidered as an interim standard and the disclosures focus on allowing users tounderstand diverse accounting practices across jurisdictions, the IASB shouldtherefore re-evaluate the disclosure requirements once an accounting model on rate-regulated activities is developed.Question 11IFRS 14 requires any regulatory deferral account balances that have beenrecognised to be presented separately from the assets and liabilities recognisedin the statement of financial position in accordance with other Standards.Similarly, the net movements in regulatory deferral account balances arerequired to be presented separately from the items of income and expenserecognised in the statement(s) of profit or loss and other comprehensive income.If the IASB develops specific accounting requirements that would apply to bothexisting IFRS preparers and first-time adopters of IFRS, and those requirementsresulted in the recognition of regulatory balances in the statement of financialposition, what advantages or disadvantages do you envisage if the separatepresentation required by IFRS 14 was to be applied?Page 10 of 11If there was no longer a difference under IFRS between those entities which had beenable to adopt IFRS 14 as first time adopters and those entities which had not, then wedo not consider that the regulatory account balances and their movements shouldcontinue to be presented separately from other amounts related to that regulatedbusiness in the manner required by IFRS 14.Instead, we consider it would be more meaningful to regard the regulated business asa separate segment, if the entity was involved in both regulated business and non-regulated business to a material extent. Separate presentation in such cases wouldenable users to compare information between entities that have a mix of rate-regulatedandnon-regulatedactivities(forexample,rate-regulatedentitiesthatareconglomerates) from those entities that solely engage in rate-regulated activities.Having said that, whether separate presentation is needed would depend on theaccounting approach being developed by the IASB based on the comments receivedon this DP.Question 12Section 4 describes the distinguishing features of defined rate regulation. Thisdescription is intended to provide a common starting point for a more focuseddiscussion about whether this type of rate regulation creates a combination ofrights and obligations for which specific accounting guidance or requirementsshould be developed.Paragraph 4.73 suggests that the existence of a rate regulator whose role andauthority is established in legislation or other formal regulations is an importantfeature of defined rate regulation. Do you think that this is a necessary conditionin order to create enforceable rights or obligations, or do you think that co-operatives or similar entities, which operate under self-imposed rate regulationwith the same features as defined rate regulation (see paragraphs 7.6-7.9),should also be included within defined rate regulation? If not, why not? If so, doyou think that such co-operatives should be included within the scope of definedrate regulation only if they are subject to formal oversight from a governmentdepartment or other authorised body?As mentioned in our response to Question 5, we believe the existence of a rateregulator (such as a government) whose role and authority are established inlegislation or by other formal regulations is an important feature of defined rateregulation as this form of regulator is responsible for enforcing the rights andobligations under a regulatory pricing framework.We are aware and are concerned that co-operatives or similar entities that are self-regulated would cover a wide range of activities, which might not be the target of theIASB. Accordingly, we suggest that the IASB does not include those forms of entitieswithin the scope of defined rate regulation. Moreover, we believe that the accountingfor defined rate regulation should only be developed for entities that supply essentialgoods or services with limited competition. The existence of a rate regulator providescertainty on the enforcement of the rights and obligations arising from defined rateregulation while such a certainty does not exist for those self-imposed schemes.Page 11 of 11Question 13Paragraphs 7.11-7.22 highlight some of the issues that the IASB may consider ifit continues to progress this project.Do you have any comments or suggestions on these or any other issues thatmay or may not have been raised in this Discussion Paper that you think theIASB should consider if it decides to develop proposals for any specificaccounting requirements for rate-regulated activities?We agree that the IASB should consider the interaction with other standards that arementioned in paragraphs 16-17 and B7-B28 of IFRS 14.