Exposure Draft
Rate Regulated Activities
Additional Approach the Board should consider
Existing
The ED covers the following approach:
1. Recognition, measurement and disclosure of the effect on financial statements
of entities operating activities that provide goods or services whose prices are
subject to cost-of-service regulation.
2. ED states that the entity shall recognize a regulatory asset for its right to
recover specific previously incurred costs and to earn a specified return
Missing approach
1. The standard does not cover the aspect of sale of subsidized rate (fixed by the
regulator) products by the entity, where the regulator reimburses the entity for the
differential between
i.
ii.
the price which is designed to recover specific costs the entity incurs in
providing the goods and to earn a specified return, and the
subsidized rate
2. Also the measurement aspect of revenue/ income whether to be measured at the
regulated/ subsidized price or the price recoverable form the regulatory body (cost
+ return) is not covered.
Facts:
Example
An entity manufactures and sells a product, for which the regulator establishes the
price, the entity must charge to its customers (i.e. the subsidized price). However, the
regulator will reimburse the entity the differential between the (i) subsidized price and
(ii) the price which is designed to recover specific costs the entity incurs in providing
the goods and to earn a specified return on that.
Sale price fixed by regulator (subsidized price) - INR50
Cost of manufacture – INR60
Specified rate of return- (12% on cost) - INR7.2
Total recoverable form regulator- INR77.2
As per the Exposure draft, the entity should recognize Regulatory asset for its right to
recover incurred costs and return amounting to INR27.2 (77.2 – 50) at its expected
present value.
Query, the standard should be able to answer
In the above example, the
1. Entity should measure revenue at INR50 or INR77.2?
2. If the revenue is to be recognized at INR50, then while creating the regulatory asset,
where should the credit for differential amount of Rs.27.2 to be accounted for?
3. Should the differential of INR 27.2 be treated as Regulator/ Government subsidy
(though the fact is that the subsidy is for the consumers and not the entity)?