Alberta Utilities Commission
Regulatory Accounting Procedures
Pertaining to the Implementation of the International Financial Reporting
Standards (IFRS)
Draft Copy
Version 0.9
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Table of Contents
1.
2.
3.
4.
5.
PURPOSE OF THE IFRS PROCEDURES........................................................................... 3
DEFINITIONS....................................................................................................................... 4
BACKGROUND ................................................................................................................... 6
GUIDING PRINCIPLES ....................................................................................................... 9
ACCOUNTING ISSUE DESCRIPTION AND EXPECTED REGULATORY
ACCOUNTING DISCLOSURE ......................................................................................... 10
5.1 IFRS Initial Adoption Adjustments......................................................................... 10
5.2 Specific Regulatory Accounting Items ................................................................... 10
5.2.1 Regulatory Assets and Liabilities (Deferral Accounts) ................................... 10
5.2.2 Property Plant & Equipment ............................................................................ 10
5.2.2.1 Revaluation Option................................................................................. 10
5.2.2.2 Capitalization/Non-Capitalization of Costs: General and
Administrative Overhead........................................................................ 11
5.2.2.3 Capitalization/Non-Capitalization of Costs: Borrowing
Costs/Equity Allowance for Funds used During Construction
(AFUDC)................................................................................................ 11
5.2.2.4 Capitalization/Non-Capitalization of Costs: Depreciation of
Assets Used in the Construction of Other Assets................................... 11
5.2.2.5 Capitalization/Non-Capitalization of Costs: Asset Relocation
Costs ....................................................................................................... 11
5.2.2.6 Capitalization/Non-Capitalization of Costs: Pre-Operating Costs ......... 12
5.2.2.7 Capitalization/Non-Capitalization of Costs: Training Costs.................. 12
5.2.2.8 Capitalization/Non-Capitalization of Costs: Asset
Commissioning Costs............................................................................. 13
5.2.2.9 Treatment of Gains and Losses upon Retirement or Disposal of
Assets...................................................................................................... 13
5.2.2.10 Componentization: Tracking, Depreciation Rates,
Commencement of Depreciation............................................................ 13
5.2.2.11 Asset Retirement Obligations/Future Removal and Site
Restoration Costs.................................................................................... 14
5.2.2.12 Treatment of Insurance Proceeds ........................................................... 14
5.2.2.13 Impairment of Assets.............................................................................. 14
5.2.2.14 Deemed Finance Leases ......................................................................... 15
5.2.2.15 Capital Inventories.................................................................................. 15
5.2.2.16 Treatment of Customer Contributions.................................................... 15
5.2.3 Accounting Method for Income Taxes ............................................................ 15
5.2.4 Pension Costs/Other Employment Benefits..................................................... 15
5.2.5 Intangible Assets .............................................................................................. 15
5.2.6 Debt Transaction Costs .................................................................................... 16
5.2.7 Discount Rate ................................................................................................... 16
5.2.8 Reserves for General Damages and Self Insurance ......................................... 16
5.2.9 Business Combinations .................................................................................... 16
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1. PURPOSE OF THE IFRS PROCEDURES
The IFRS Procedures have been prepared by the Alberta Utilities Commission
(Commission or AUC) in order to summarize the rate-making accounting
procedures and requirements for the use of all regulated electric utilities, gas
utilities, regulated service providers, and default service providers (referred to
herein as a utility or utilities) adopting the IFRS standards of financial reporting.
The IFRS Procedures are intended for use primarily, but not exclusively, by:
•
a utility’s accounting, financial, and regulatory personnel;
•
a utility’s external auditors;
•
the Commission’s regulatory staff; and
•
intervenors or other interested parties, when reviewing a utility’s financial
information.
In order to improve and update the standards for regulatory accounting and
reporting, the Commission, with the involvement of stakeholders, will periodically
review and amend the material contained in these IFRS Procedures as
circumstances warrant. These circumstances include but are not limited to the
following:
-
the issuance of a new International Financial Reporting Standard by the
International Accounting Standards Board (IASB);
the issuance of an interpretation by the International Financial Reporting
Interpretations Committee;
when a stakeholder has brought an IFRS issue to the AUC’s attention for
resolution.
The latest version of the IFRS Procedures will be available for viewing and
downloading on the AUC’s web site.
The AUC will formulate a process to have proposed revisions distributed to
interested stakeholders for review and comments. This process will involve the
formation of a working group, when required, to discuss the issues and achieve
resolution on the matter.
Any revisions to the IFRS Procedures will be communicated to stakeholders and
posted on the AUC’s website.
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2. DEFINITIONS
When used in these IFRS Procedures:
(a)
Existing accounting practice means the accounting procedures and
policies in use by a utility immediately prior to the adoption of these IFRS
Procedures;
(b)
International Accounting Standards Board or IASB means the
independent standard-setting body of the International Accounting
Standards Committee Foundation;
(c)
Regulatory accounting means the collective accounting guidelines,
procedures, policies, and practices used by utilities when providing
financial information to the AUC for rate-making purposes;
(d)
Regulatory Assets and Liabilities are assets and liabilities that result
from rate actions of regulatory agencies when it is probable that specific
revenues, expenses, gains and losses that would have been included in
net income in one period under the general requirements of the Uniform
System of Accounts will be charged or refunded to customers in a future
period. Assets and liabilities can specifically result from rate regulation as
follows:
(i) Assets arise when the regulator has previously ruled that certain
previously incurred costs will be collected from customers either
directly or through rates in a future period. This can arise from the
timing of collection of certain expenses in rates charged to customers
that differs from the period in which the expense would be recognized
under IFRS by companies that are not subject to rate regulation.
(ii) Liabilities arise when the utility collects from customers in rates
amounts that the regulator has previously ruled must be refunded to
customers either directly or through rates in a future period or that are
intended to cover costs to be incurred in the future. This can occur if
costs are below a previously approved forecast or if they are collected
from customers in a period before they are incurred. This can also
arise when the revenue is recognized in a period that is different from
the period that it would be recognized under IFRS by companies that
are not subject to rate regulation.
The term “costs” can include revenue shortfall, expenses, and gains and
losses on sale of assets. Regulatory assets and liabilities can arise from
the approval by the regulator of a specific deferral account or the approval
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of a methodology for recovering costs such as using the cash method to
recover income taxes and post employment benefit costs;
Uniform System of Accounts means the system of accounts to be filed by an electric
utility as set out in AUC Decision 2007-017, or by a gas utility as set out in Alberta
Regulation 546/63 (Uniform Classification of Accounts for Gas Utilities).
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3. BACKGROUND
On February 13, 2008, the Canadian Accounting Standards Board (AcSB)
confirmed that the use of IFRS will be required as at January 1, 2011 for publicly
accountable profit-oriented enterprises. Starting in January 2011 Canadian
Generally Accepted Accounting Principles (GAAP) as currently known and
maintained by the AcSB will be replaced by IFRS for those enterprises. IFRS is
used in over 100 countries and is maintained by the IASB.
The requirement to change from current Canadian GAAP to IFRS will apply to
many of the utilities whose rates 1 are regulated by the AUC.
In May 2008, the AUC announced the formation of an internal team to examine
the regulatory issues associated with the decision of the AcSB to adopt IFRS.
The AUC also solicited stakeholders’ interest for the establishment of a
collaborative process to address the implications of the adoption of IFRS on the
AUC’s regulatory accounting and rate making processes.
All of the stakeholders who responded indicated an interest to engage in a
collaborative process to discuss the issues arising from the adoption of IFRS.
Consequently, the AUC formed a working group comprised of industry
stakeholders, and chaired a number of working sessions from September 2008
to December 2008.
The first priority of the working group was to establish the guiding principles that
would serve as the touchstone to evaluate the outcomes of the discussions on
the IFRS specific issues. In addition, these guiding principles will be used to
evaluate any IFRS specific issues that were not addressed by the working group.
Once the guiding principles were established, the working group discussed the
IFRS specific issues that were identified as being matters of importance for the
stakeholders. For each issue discussed, AUC staff used the discussion notes to
develop a specific procedure to provide utilities with direction regarding the
regulatory reporting requirement relating to each issue.
The AUC consequently developed these IFRS Regulatory Accounting
Procedures (“IFRS Procedures”) to document the understanding reached by the
working group. These IFRS Procedures are intended to provide guidance to
utilities on accounting procedures and requirements in order to:
1. Accommodate the transition by the utilities to IFRS; and
1
The term “rate” is used in the generic sense and includes the distribution, rate regulated, and transmission
tariffs of the electric and gas utilities under the jurisdiction of the AUC.
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2. Specify the methodology and the basis of accounting for presenting
financial information in a rate application or other reporting to the AUC.
The IFRS Procedures are being developed and made available in early 2009 to
provide certainty to utilities and other stakeholders with regards to the AUC’s
expectations for the accounting information to be used in a rate application to the
AUC or when required to report financial information to the AUC.
Utilities and other stakeholders will be given the opportunity to comment upon the
draft version of these IFRS Procedures before they are received and approved
by the Commission.
The implementation date for IFRS in Canada is January 1, 2011 with a transition
date of January 1, 2010. Therefore Canadian companies will be required to
provide comparative IFRS financial statements for 2010; however these
statements will generally not be published until 2011. Canadian companies will
initially provide financial statements under Canadian GAAP for 2010.
Utilities will be allowed to adopt these IFRS Procedures effective either January
1, 2010 or January 1, 2011 to accommodate the utilities’ preferred schedule for
implementation.
During the transition period of 2009 through 2011, utilities adopting IFRS will
prepare their financial forecasts and actual financial results for filing with the AUC
as follows:
Fiscal
Year
2009
Year
Filed
2010
Actual /
Forecast
Actual
2010
2011
Actual
2011
2012
Actual
2012 &
beyond
2009 &
beyond
2011 &
beyond
2013 &
beyond
2009 to
2010
2011 &
beyond
Actual
Forecast
Forecast
Accounting / Reporting Standard to Use
Current accounting practice for other regulatory filings
(for example Rule 005). Existing Canadian GAAP
requirements for financial statements.
Current accounting practice for other regulatory filings
(for example Rule 005). Existing Canadian GAAP
requirements for financial statements.
IFRS Procedures for other regulatory filings (for
example Rule 005) complete with 2010 comparatives
prepared under AUC IFRS Procedures.
IFRS requirements for financial statements complete
with 2010 comparatives prepared under IFRS.
IFRS Procedures for all other regulatory filings.
IFRS requirements to prepare financial statements.
Utilities may elect to forecast based on IFRS Procedures
commencing with the 2011 forecast year.
IFRS procedures.
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Instances may occur where a utility’s forecast has been submitted under existing
Canadian GAAP, and the actual results submitted are under IFRS. In those
instances where the utility files a comparative report, the utility is to report the
forecast as filed under existing Canadian GAAP and to report the actual results
under IFRS. The utility is then expected to explain the impacts of differences
resulting from the two reporting standards.
Utilities not required to, or not electing to adopt IFRS will be required to file an
application with the AUC indicating the basis of accounting and reporting which
the utility plans to use when providing financial information in a rate application
and when reporting financial results to the AUC, and what affect that choice will
have on the financial information submitted to the AUC.
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4. GUIDING PRINCIPLES
The Guiding Principles as set out in this IFRS Procedures document are all
equally important and are to be viewed as a collective set of principles rather
than a list of individual statements.
•
The methodologies used by the AUC to establish just and reasonable
rates have not always been the same as those used for external financial
reporting purposes. The Commission has and will retain the authority to
establish regulatory accounting and regulatory reporting requirements and
as such, IFRS requirements will not be the sole driver of regulatory
requirements.
•
Future regulatory accounting and regulatory reporting requirements
established by the Commission will continue to be based on historical,
sound regulatory principles. Examples of these principles can be found in
statutes, regulatory and court decisions and regulatory texts and include
intergenerational equity, minimizing rate volatility and use of historical
costs rather than fair market, or any other values.
•
Future regulatory accounting and regulatory reporting requirements
established by the Commission will, in considering IFRS requirements,
balance the effects on customer rates and shareholders’ return. Any
shifting of risk between customers and shareholders will be minimized.
•
Future regulatory accounting and regulatory reporting requirements
established by the Commission will be aligned as much as possible with
IFRS. In establishing any future regulatory accounting and regulatory
reporting requirements that deviate from IFRS, the Commission will
ensure that any such deviations and their impact are in the public interest.
•
Future regulatory accounting and regulatory reporting requirements
established by the Commission will be universal and standardized for all
utilities while still recognizing that utility-specific issues can be addressed
through that utility’s applications.
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5. ACCOUNTING ISSUE DESCRIPTION AND EXPECTED REGULATORY
ACCOUNTING DISCLOSURE
5.1 IFRS Initial Adoption Adjustments
As a general rule, for rate-making purposes, utilities will disclose each IFRS
adoption adjustment separately if the adjustment has an impact on a regulatory
account. These adjustments will be included in the utility’s rates application. The
utilities will propose in their rates applications the method for settling the
adjustment (e.g. the establishment of a regulatory asset or liability). The AUC
and other interested parties will review these proposals as part of the ratemaking process.
Specific items and their proposed treatment are discussed in the following
subsections.
5.2 Specific Regulatory Accounting Items
5.2.1 Regulatory Assets and Liabilities (Deferral Accounts)
Regulatory deferral accounts will continue regardless of the IFRS reporting
standards. The utilities will maintain the existing practice of applying for deferral
accounts for the purpose of establishing regulatory assets or liabilities and
proposing the mechanism for their disposition. The AUC will continue to
determine the process that the utilities must follow in order to have their deferral
accounts approved as well as the process to have the deferral accounts
recovered in a timely and effective manner.
The Commission will consider including wording in future decisions that the
approved methodologies that gave rise to the regulatory asset or liability will
continue into the future. This will provide evidence on the high probability, subject
to future regulatory review as required, of the collection or payment of regulatory
assets and liabilities that may help utilities to record these items in their financial
statements.
5.2.2 Property Plant & Equipment
5.2.2.1
Revaluation Option
Utilities will maintain the existing accounting practice of using original costs to
record property plant and equipment accounts for rate-making purposes.
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5.2.2.2 Capitalization/Non-Capitalization of Costs: General and
Administrative Overhead
IFRS does not allow the capitalization of costs that are not ‘directly attributable’ to
the asset. On a prospective basis for rate making purposes, utilities will adhere to
the IFRS requirements. Any financial difference that arises as a result of the
adoption of the IFRS requirements is to be identified in a utility’s first rate filing
after IFRS adoption. The utility will propose in its rate application the method for
settling the difference (e.g. the establishment of a regulatory asset or liability). In
addition, the utility will file a copy of its updated capitalization policy as a part of
its first rate filing after IFRS adoption. The AUC and other interested parties will
review these proposals and capitalization policies as part of the rate-making
process.
5.2.2.3 Capitalization/Non-Capitalization of Costs: Borrowing
Costs/Equity Allowance for Funds used During Construction
(AFUDC)
For rate making purposes, utilities will maintain the existing accounting practice
of including the equity component of AFUDC when accounting for construction
work in progress and plant in service.
Utilities can submit an application to the AUC requesting approval to make their
regulatory practice the same as the practice under IFRS. This request would be
subject to review by the AUC and other interested parties as part of the ratemaking process.
5.2.2.4 Capitalization/Non-Capitalization of Costs: Depreciation of
Assets Used in the Construction of Other Assets
For rate-making purposes, utilities will adhere to the IFRS requirement of
capitalizing the depreciation of assets used in the construction of other assets.
5.2.2.5 Capitalization/Non-Capitalization of Costs: Asset Relocation
Costs
Under IFRS, the installation cost in the new location can be capitalized as long
as the costs in the old location are retired. The cost of actually relocating existing
assets has to be expensed as it is deemed to not provide future economic
benefit. On a prospective basis for rate making purposes, utilities will adhere to
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the IFRS requirements. Any financial difference that arises as a result of the
adoption of the IFRS requirements is to be identified in a utility’s first rate filing
after IFRS adoption. The utility will propose in its rate application the method for
settling the difference (e.g. the establishment of a regulatory asset or liability). In
addition, the utility will file a copy of its updated capitalization policy as a part of
its first rate filing after IFRS adoption. The AUC and other interested parties will
review these proposals and capitalization policies as part of the rate-making
process.
5.2.2.6 Capitalization/Non-Capitalization of Costs: Pre-Operating
Costs
There is potential that certain costs currently capitalized under generally
accepted accounting principles would not be capitalized under IFRS. On a
prospective basis for rate making purposes, utilities will adhere to the IFRS
requirements. Any financial difference that arises as a result of the adoption of
the IFRS requirements is to be identified in a utility’s first rate filing after IFRS
adoption. The utility will propose in its rate application the method for settling the
difference (e.g. the establishment of a regulatory asset or liability). In addition,
the utility will file a copy of its updated capitalization policy as a part of its first
rate filing after IFRS adoption. The AUC and other interested parties will review
these proposals and capitalization policies as part of the rate-making process.
5.2.2.7
Capitalization/Non-Capitalization of Costs: Training Costs
There is potential that certain training costs currently capitalized would not be
capitalized under IFRS. On a prospective basis for rate making purposes, utilities
will adhere to the IFRS requirements. Any financial difference that arises as a
result of the adoption of the IFRS requirements is to be identified in a utility’s first
rate filing after IFRS adoption. The utility will propose in its rate application the
method for settling the difference (e.g. the establishment of a regulatory asset or
liability). In addition, the utility will file a copy of its updated capitalization policy as
a part of its first rate filing after IFRS adoption. The AUC and other interested
parties will review these proposals and capitalization policies as part of the ratemaking process.
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5.2.2.8 Capitalization/Non-Capitalization of Costs: Asset
Commissioning Costs
There is potential that certain asset commissioning costs currently capitalized
under generally accepted accounting principles would not be capitalized under
IFRS. On a prospective basis for rate making purposes, utilities will adhere to the
IFRS requirements. Any financial difference that arises as a result of the adoption
of the IFRS requirements is to be identified in a utility’s first rate filing after IFRS
adoption. The utility will propose in its rate application the method for settling the
difference (e.g. the establishment of a regulatory asset or liability). In addition,
the utility will file a copy of its updated capitalization policy as a part of its first
rate filing after IFRS adoption. The AUC and other interested parties will review
these proposals and capitalization policies as part of the rate-making process.
5.2.2.9 Treatment of Gains and Losses upon Retirement or Disposal
of Assets
For rate-making purposes, utilities will maintain the existing accounting practice
of recording gains and losses. Utilities will identify and record any difference in
accounting between the IFRS reporting requirements and the regulatory
reporting requirements in a separate subsidiary accumulated depreciation
account.
5.2.2.10 Componentization: Tracking, Depreciation Rates,
Commencement of Depreciation
For rate-making purposes, utilities will maintain the existing accounting practice
and use the current depreciation rates if these rates are the same as the IFRS
requirements. If the adoption of the IFRS requirements result in a difference in
depreciation rates or a difference in the timing of commencement of depreciation,
or both, then utilities will have the opportunity to submit an application to the AUC
requesting approval to become consistent with this IFRS reporting requirement.
These proposed depreciation rates would be subject to review by the AUC and
other interested parties as part of the AUC’s regulatory process.
IFRS requires that expected major overhauls be estimated and separately
componentized upon initial recognition of an asset. This portion of the asset’s
cost would then be depreciated over a different period of time than the related
asset. On a prospective basis for rate making purposes, utilities will adhere to the
IFRS requirements. Any financial difference that arises as a result of the adoption
of the IFRS requirements is to be identified in a utility’s first rate filing after IFRS
adoption. The utility will propose in its rate application the method for settling the
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difference (e.g. the establishment of a regulatory asset or liability). In addition,
the utility will file a copy of its updated capitalization policy as a part of its first
rate filing after IFRS adoption. The AUC and other interested parties will review
these proposals and capitalization policies as part of the rate-making process.
With respect to componentization, for rate-making purposes, utilities will record
assets at the level of detail being reported under their existing accounting
practice. If the IFRS reporting requirement results in a different level of
componentization, utilities will have the opportunity to submit an application to
the AUC requesting approval to become consistent with this IFRS reporting
requirement. Such request would be subject to review by the AUC and other
interested parties as part of the rate-making process.
5.2.2.11 Asset Retirement Obligations/Future Removal and Site
Restoration Costs
For rate-making purposes, utilities will maintain their existing accounting practice.
Utilities will have the opportunity to submit an application to the AUC requesting
approval to become consistent with this IFRS reporting requirement. Such
request would be subject to review by the AUC and other interested parties as
part of the rate-making process.
5.2.2.12 Treatment of Insurance Proceeds
Under IFRS, insurance proceeds are treated as income. Currently insurance
proceeds received for a loss of an asset are considered proceeds of disposition
with the resulting gain of loss going to accumulated depreciation. On a
prospective basis for rate-making purposes, utilities will identify any insurance
proceeds and record these in a separate deferral account. Utilities will propose in
their rate application the method for settling the deferral account. The AUC and
other interested parties will review the proposal as part of the rate-making
process.
5.2.2.13 Impairment of Assets
For rate-making purposes, utilities will continue with their existing accounting
practice of having no impairment (or impairment reversal) charges included when
providing or reporting financial information to the AUC.
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5.2.2.14 Deemed Finance Leases
For rate-making purposes, utilities will continue with their existing accounting
practice.
5.2.2.15 Capital Inventories
Under IFRS, capital inventories will be classified as property plant and equipment
and amortized when available for use. For rate-making purposes, utilities will
continue with their existing accounting practice of recognizing capital inventory
and any associated depreciation.
5.2.2.16 Treatment of Customer Contributions
For rate-making purposes, utilities will continue with their existing accounting
practice of recognizing customer contributions in their Property, Plant &
Equipment accounts and including the amortization as an offset to depreciation.
5.2.3 Accounting Method for Income Taxes
For rate-making purposes, utilities will maintain their existing accounting practice
for income taxes. Utilities will include the future income tax regulatory asset or
liability in their rate applications when necessary and this future income tax
regulatory asset or liability will have no impact on the revenue requirement as it
will be offset by the future income tax liability or asset.
5.2.4 Pension Costs/Other Employment Benefits
For rate-making purposes, utilities will continue with their existing accounting
practice of recognizing pension costs and other post employment benefits.
Utilities will include the regulatory asset or liability in their rate applications when
necessary and this regulatory asset or liability will have no impact on the revenue
requirement as it will be offset by the pension liability or asset.
5.2.5 Intangible Assets
Under IFRS, software development costs and land rights will be classified as
intangible assets. For rate-making purposes, utilities will continue with their
existing accounting practice of recognizing intangible assets as part of their
Property, Plant & Equipment accounts.
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5.2.6 Debt Transaction Costs
For rate-making purposes, utilities will continue to use their existing accounting
practice for amortizing debt costs. Utilities have the opportunity as part of a future
application to the AUC to request approval to become consistent with this IFRS
requirement. This request would be subject to review by the AUC and other
interested parties as part of the AUC’s regulatory process.
5.2.7 Discount Rate
For rate-making purposes, utilities will continue with their existing accounting
practice of having no impairment (or impairment reversal) charges included when
determining rates. Consequently, the issue of differing discount rates will not
affect regulatory reporting.
5.2.8 Reserves for General Damages and Self Insurance
For rate-making purposes, utilities will continue their existing accounting practice.
5.2.9 Business Combinations
For rate-making purposes, utilities will continue with their existing accounting
practice.
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