IFRS 20 Regulatory Assets and Liabilities

IFRS 20 Regulatory Assets and Liabilities — Core Rule

IFRS 20 Regulatory Assets and Regulatory Liabilities requires an entity subject to a regulatory agreement to recognise the total allowed compensation for its regulated goods or services in the same period it supplies them, even when the regulated rate charged to customers under IFRS 15 falls in a different period (IFRS 20.1, IFRS 20.2). The standard applies to any company that is party to a regulatory agreement creating enforceable regulatory assets or regulatory liabilities (IFRS 20.3), but it does not apply to regulatory balances arising from regulated insurance premiums within the scope of IFRS 17 (IFRS 20.4).

How IFRS 20 Regulatory Assets and Liabilities Works

• Regulatory agreement and regulator (IFRS 20.5, IFRS 20.6): A regulatory agreement creates enforceable rights and obligations and prescribes how a regulator — a body required by law to set the regulated rate — determines the price an entity charges for regulated goods or services.
• Regulatory liability defined (IFRS 20.8): A regulatory liability is an enforceable present obligation to deduct an amount from a future regulated rate because part of the total allowed compensation for goods or services already supplied has been included in a rate charged in an earlier period. A regulatory asset is the mirror image — an enforceable right to add an amount to a future rate because compensation already earned has not yet been charged.
• Regulatory income and expense (IFRS 20.9, IFRS 20.10): Regulatory income and regulatory expense arise from changes in the carrying amount of a regulatory asset or regulatory liability during the period, separate from IFRS 15 revenue.
• Conditions for existence (IFRS 20.11): A regulatory asset or liability exists only where an entity and a regulator are parties to an agreement prescribing the regulated rate, and part of the total allowed compensation for goods or services supplied in a period is charged to customers in a different period.
• Interaction with other standards (IFRS 20.12, IFRS 20.13): An entity first applies other IFRS Accounting Standards — including IFRIC 12 for service concession arrangements — to the rights and obligations created by a regulatory agreement, and applies IFRS 20 only to what remains and meets the definition of a regulatory asset or liability.
• Why IFRS 15 revenue differs from total allowed compensation (IFRS 20.15, IFRS 20.16): Total allowed compensation is what an entity is entitled to charge customers for regulatory goods or services supplied in a period. IFRS 15 revenue depends on the rate actually charged, which can differ from total allowed compensation purely because of timing — this gap is exactly what IFRS 20 brings onto the balance sheet.
• Recognition (IFRS 20.19, IFRS 20.20): An entity recognises all regulatory assets and liabilities existing at the end of the reporting period, and all regulatory income and expense arising during the period, applying a more-likely-than-not existence threshold.
• Measurement (IFRS 20.32): Regulatory assets and liabilities are measured using a cash-flow-based technique — estimating all future cash flows the regulatory agreement will generate and discounting them at the regulatory interest rate (no discounting is required if the amount will be settled within one year, IFRS 20.35).
• Presentation (IFRS 20.40): Regulatory assets and regulatory liabilities are presented as separate line items in the statement of financial position, generally split between current and non-current.

IFRS 20 Regulatory Assets and Liabilities — Practical Example

A rate-regulated electricity distributor supplies $120,000,000 of total allowed compensation worth of electricity in the year, as defined by its regulatory agreement. Because of a rate-smoothing mechanism, the regulator only permits the distributor to charge customers $110,000,000 in that year — the remaining $10,000,000 will be recovered through higher rates in future periods. Under IFRS 15, the distributor recognises revenue of $110,000,000 — what it was entitled to charge customers in the period. Under IFRS 20, the $10,000,000 shortfall meets the definition of a regulatory asset (IFRS 20.8) and is recognised in addition to IFRS 15 revenue:

Combined, IFRS 15 revenue of $110,000,000 plus regulatory income of $10,000,000 equals the $120,000,000 total allowed compensation earned in the period (IFRS 20.2) — exactly the outcome IFRS 20 is designed to produce. In a future period, when the distributor charges the extra amount to customers, the regulatory asset unwinds: Dr Cash/Receivable $10,000,000; Cr Regulatory asset $10,000,000.

IFRS 20 Regulatory Assets and Liabilities — Common Pitfalls

• Treating the regulatory asset as a financial instrument: A regulatory asset is not a financial asset under IFRS 9 — it is a standalone item created by IFRS 20, measured using the cash-flow-based technique in IFRS 20.32, not amortised cost or fair value.
• Forgetting the insurance scope exception: Regulatory balances tied to regulated insurance premiums within IFRS 17's scope are excluded entirely (IFRS 20.4) — applying IFRS 20 to those balances double counts the same economics already captured under IFRS 17.
• Skipping the more-likely-than-not threshold: Not every timing difference automatically creates a regulatory asset or liability — IFRS 20.20 requires the entity to assess whether it is more likely than not that the asset or liability exists before recognising it.
• Ignoring service concession arrangements already in scope of IFRIC 12: IFRS 20.13 requires IFRIC 12 to be applied first; only the remaining rights and obligations that meet the IFRS 20 definitions are then recognised under this standard.

IFRS 20 Regulatory Assets and Liabilities — Key Paragraphs

• IFRS 20.1–20.2 — Objective and underlying principle: align recognition of total allowed compensation with the period the regulated goods or services are supplied.
• IFRS 20.4 — Scope exception for regulated insurance premiums within IFRS 17.
• IFRS 20.8–20.10 — Definitions of regulatory liability, regulatory income, and regulatory expense.
• IFRS 20.20 — Recognition threshold: more likely than not to exist.
• IFRS 20.32 — Cash-flow-based measurement technique, discounted at the regulatory interest rate.
• IFRS 20.44 — Effective date: annual periods beginning on or after 1 January 2029, early application permitted.