Deemed cost for assets used in operations subject to rate regulation
Entities that hold items of property, plant and equipment or intangible assets that are used, or were previously used, in operations subject to rate regulation might have capitalised, as part of the carrying amount, amounts that do not qualify for capitalisation in accordance with IFRSs. For example, when setting rates, regulators often permit entities to capitalise, an allowance for the cost of financing the asset”s acquisition, construction or production. This allowance typically includes an imputed cost of equity. IFRSs do not permit an entity to capitalise an imputed cost of equity. [IFRS 1.BC47F]. The IASB decided to permit a first-time adopter with operations subject to rate regulations to elect to use the previous GAAP carrying amount of such an item at the date of transition to IFRSs as deemed cost. [IFRS 1 Appendix D8B]. In the Board”s view, this exemption is consistent with other exemptions in IFRS 1 in that it ‘avoids excessive cost while meeting the objectives of the IFRS. [IFRS 1.BC47I].
Operations are subject to rate regulation if they provide goods or services to customers at prices (i.e. rates) established by an authorised body empowered to establish rates that bind the customers and that are designed to recover the specific costs the entity incurs in providing the regulated goods or services and to earn a specified return. The specified return could be a minimum or range and need not be a fixed or guaranteed return. [IFRS 1 Appendix D8B].
Without this exemption, a first-time adopter with operations subject to rate regulations would have had either to restate those items retrospectively to remove the non-qualifying amounts, or to use fair value as deemed cost both alternatives, the Board reasoned, pose significant practical challenges and the cost of which can outweigh the benefits. [IFRS 1.BC47G]. Typically, once amounts are included in the total cost of an item of property, plant and equipment, they are no longer tracked separately. Therefore, their removal would require historical information that, given the age of some of the assets involved, is probably no longer available and would be difficult to estimate. For many of these assets, it may be impractical to use the fair value exemption as such information may not be readily available.