EXPOSURE DRAFT 10

Exposure Draft 10



Exposure Draft 10

Introduction

The ED defines regulatory assets and regulatory liabilities, sets out criteria for their recognition, specifies how they should be measured and requires disclosures about their financial effects(Alexander, Britton, Jorissen, 2007).

The relevant aspects of ED 10

The ED's key features are(www.iasb.org):

1) All business combinations within its scope must be accounted for by the purchase method.

2) An acquirer must be identified for every business combination within its scope.

3) The acquirer must recognise all identifiable assets, liabilities, and contingent liabilities of the acquiree at the date of acquisition, regardless of whether the acquiree had previously recognised them. However, the ED specifically prohibits recognition of "acquisition liabilities" not previously recognised on the acquiree's books.

4) The ED prohibits amortization of goodwill, and instead requires that goodwill be tested for impairment.

5) The ED requires disclosure of the effects of business combinations occurring prior to, during, and subsequent to the reporting period.

6) The ED requires disclosures to enable users to evaluate changes in goodwill during the reporting period.

The ED's proposals would apply to the operating activities of an entity that meet both of the following criteria at the end of each reporting period (www.icaew.co.uk):

An authorised body (the regulator) establishes the price the entity must charge its customers for the goods or services the entity provides, and that price binds the customers

The price established by regulation (the rate) is designed to recover the specific costs the entity incurs in providing the regulated goods or services and to earn a specified return (cost-of-service regulation). The specified return could be a minimum or a range and need not be fixed or guaranteed.

The ED defines cost-of-service regulation as “a form of regulation for setting an entity's prices (rates) in which there is a cause-and-effect relationship between the entity's specific costs and its revenues.” (www.iasknowledge.com) However, the ED specifies that regulatory mechanisms that determine rates based on targeted or assumed costs (i.e., industry averages), rather than the entity's actual costs incurred or expected to be incurred, are not within the scope of the ED (www.iasb.org).

Recognition and measurement

The ED proposes that the entity recognise regulatory assets and regulatory liabilities for amounts that would otherwise have been recognised in the statement of comprehensive income when it has the right to increase or the obligation to decrease rates in future periods as a result of the actual or expected actions of the regulator(Alexander, Britton, Jorissen, 2007). Regulatory assets represent an entity's right to recover specific previously incurred costs and to earn a specified return. Regulatory liabilities represent an entity's obligation to refund previously collected amounts and to pay a specified return (Elliott, Elliott, 2008).

The ED proposes that regulatory assets and regulatory liabilities are measured initially and at each subsequent reporting period at their expected present value. Expected present value includes (Ernst, Young, 2008, pp.56):

An estimate of the future cash flows that will arise in a range of possible outcomes

An estimate of the probability of each outcome occurring

The time value of ...