IFRS 20 is a new Accounting Standard that will affect companies subject to rate regulation that determines how much a company can charge customers and when it can charge them. For example, companies that supply vital services such as electricity, water and gas are often subject to this type of regulation.

As a result, where there is a difference between when a company supplies goods and services subject to rate regulation and when it charges customers, its reported revenue may not fully reflect the company’s performance, creating a gap in financial reporting. 

The new standard requires companies to account for the effects of these differences in timing in their financial statements by recognising and measuring regulatory assets and regulatory liabilities, as well as related regulatory income and regulatory expense. 

This is expected to reduce diversity in practices across companies in regulated industries, making it easier to compare performance. The core principle is for a company to recognise the total allowed compensation for regulatory goods or services in the period in which those goods or services are supplied.

“IFRS 20 will provide investors with more complete and transparent information about companies operating in these critical rate-regulated industries,” IASB Chair Andreas Barckow said.

Why it matters

Where companies are charging at a regulated rate, a difference in timing can arise when goods or services are supplied in one period, but the related compensation is charged to customers in a different period. In those circumstances, revenue reported by applying IFRS 15 may not, on its own, fully reflect the company’s performance for the period. 

Revenue recognised under IFRS 15 may not include the full amount of compensation to which a company is entitled for regulatory goods or services supplied in the first year, for example where costs incurred in one period are recovered through regulated rates in a later period. This might make performance appear weaker in one year and stronger in the next.

Sally Baker, ICAEW’s Corporate Reporting Director, said: “We welcome the publication of IFRS 20, which addresses a long-standing gap in financial reporting for rate-regulated entities. We hope the standard will help to provide a more complete picture of performance by better reflecting the effects of regulatory timing differences.”

Information required

IFRS 20 supplements existing IFRS 15 requirements by requiring companies to recognise regulatory assets, regulatory liabilities, regulatory income and regulatory expense arising from the effects of rate regulation. The aim is to help investors better understand how that rate regulation affects a company’s financial performance, financial position and its prospects for future cash flows.

Recognition, measurement and disclosure

IFRS 20 requires a company to recognise regulatory assets and liabilities that exist at the reporting date. In cases of uncertainty, regulatory assets and liabilities are recognised when it is more likely than not that they exist. For initial measurement, the standard requires all estimated future cash flows arising from a regulatory asset or regulatory liability to be included, discounted using the regulatory interest rate.

The standard also includes presentation and disclosure requirements for regulatory assets, regulatory liabilities, regulatory income and regulatory expense, alongside consequential amendments to other accounting standards. For many companies, the result will be the recognition of new assets and liabilities, as well as new items of income and expense, helping users of the accounts better understand the effects of rate regulation. 

Disclosures should include reconciliations, maturity analysis and unrecognised regulatory assets and liabilities.

How the standard was developed

IFRS 20 was developed following extensive consultation, with over 300 comment letters, more than 200 stakeholder meetings and two rounds of fieldwork conducted in 22 jurisdictions, to ensure that IFRS 20 strikes the right balance between providing useful information and practical implementation.

As part of its statutory functions, the UK Endorsement Board (the UKEB) played an active role in seeking to influence the development of the standard. In mid-2024, the UKEB wrote to the IASB raising concerns with their proposals and contributed a report on its proposed ‘top-down approach’, explained in this By All Accounts article produced by the Corporate Reporting Faculty.

Effective date and related standards

IFRS 20 is effective for annual reporting periods beginning on or after 1 January 2029. Companies may choose to apply the standard earlier.

IFRS 20 supplements the information a company provides when applying IFRS 15 Revenue from Contracts with Customers and replaces the temporary Standard IFRS 14 Regulatory Deferral Accounts.

Adoption of IFRS 20 in the UK, however, will be subject to the usual endorsement process for IFRS Accounting Standards. “ICAEW stands ready to contribute to that process, including consideration of the suitability of IFRS 20 for use in the UK and any challenges that may arise,” Baker said.