Measurement (AASB20_09-26)

Except as specified in paragraph 60, an entity shall measure regulatory assets and regulatory liabilities using a cash‑flow‑based measurement technique that: 

(a) includes an up‑to‑date estimate of all future cash flows arising from the recovery of a regulatory asset or fulfilment of a regulatory liability (see paragraphs 35–44 and 52–57); and 

(b) discounts those estimated future cash flows using the regulatory interest rate (see paragraphs 45–52 and 56–57).

To apply paragraph 34(a), an entity shall include all estimated future cash flows arising from the recovery of a regulatory asset or fulfilment of a regulatory liability that are within the boundary of the regulatory agreement, and only those cash flows. Such cash flows comprise: 

(a)    cash flows for which an entity has an enforceable present right to add amounts, or an enforceable present obligation to deduct amounts, in determining the regulated rates to be charged to customers in future periods. The future periods are those in which the entity has an enforceable present right or enforceable present obligation to supply regulatory goods or services. 

(b)    cash flows for which an entity has an enforceable present right to receive, or an enforceable present obligation to pay, compensation on termination of a regulatory agreement.

Paragraphs B73–B87 set out requirements for determining the boundary of a regulatory agreement.

To estimate future cash flows, an entity shall consider all reasonable and supportable information that is available at the reporting date without undue cost or effort. The entity shall consider information about past events and about conditions existing at the reporting date. The entity shall also consider information about variables that might affect estimates of future cash flows, namely: 

(a) market variables – variables that can be observed in, or derived directly from, markets (for example, interest rates). The entity shall use assumptions about future market variables that are consistent with observable market prices at the reporting date – that is, at the reporting date, the entity shall disregard the effects of possible future changes in market variables. 

(b) non‑market variables – all other variables other than market variables (for example, the useful life of a depreciable asset). The entity shall use its expectations at the reporting date about future non‑market variables, other than future changes in the regulatory agreement or in law or regulation.

Cash flows arising from a regulatory asset or regulatory liability include cash flows from regulatory interest specified in a regulatory agreement. However, if an entity elects to apply the exemption from discounting described in paragraph 50, the entity shall, in periods for which it applies the exemption, exclude regulatory interest cash flows from the estimates of future cash flows arising from the regulatory asset or regulatory liability.

There might be uncertainty about the amount or timing of future cash flows that will arise from a regulatory asset or regulatory liability. Such uncertainty might be caused by, for example, credit risk or demand risk. The effect of credit risk and demand risk on the future cash flows depends on whether the entity or its customers bear the risk (see paragraphs B88–B91).

An entity’s estimates of future cash flows arising from a regulatory liability shall not reflect non‑performance risk of the entity (non‑performance risk is defined in AASB 13 Fair Value Measurement).

An entity shall estimate uncertain future cash flows using an unbiased range of possible outcomes incorporating the information described in paragraph 37, including outcomes in which the regulatory asset or regulatory liability does not exist, or produces no future cash flows.

An entity shall estimate uncertain future cash flows using whichever of these two methods the entity expects to better predict the ultimate cash flow that will occur after the uncertainty is resolved: 

(a) the most likely amount, which is the single most likely amount in a range of possible outcomes (that is, a range of possible cash flows). The most likely amount might better predict the ultimate cash flow if the possible cash flows are clustered around one cash flow, or if there are only two possible cash flows and they differ widely. 

(b) the expected value, which is the sum of the probability‑weighted amounts in a range of possible outcomes. The expected value might better predict the ultimate cash flow if there are many possible cash flows and they are not clustered around one cash flow.

In assessing which of the methods described in paragraph 42 would better predict the ultimate cash flow, an entity shall also assess whether a better prediction would result from: 

(a) considering separately each regulatory asset and each regulatory liability identified by the entity applying paragraph 24. An entity shall use one of the methods of estimating uncertain future cash flows for some regulatory assets or regulatory liabilities and the other method for other regulatory assets or regulatory liabilities, if the entity expects that doing so will better predict the ultimate cash flow. 

(b) considering any regulatory asset or regulatory liability together with other regulatory assets or regulatory liabilities. If such a grouping will better predict the ultimate cash flow, the entity shall apply the method that it expects will provide the better prediction to all the regulatory assets and regulatory liabilities in the group.

If regulated rates charged to customers are denominated in a foreign currency, an entity shall treat any related regulatory assets or regulatory liabilities as monetary items when applying AASB 121.

Except as specified in paragraph 50, an entity shall discount the estimated future cash flows arising from a regulatory asset or regulatory liability using the regulatory interest rate specified or implied by the regulatory agreement for that regulatory asset or regulatory liability.

For a regulatory asset or regulatory liability that arises from regulatory depreciation of a regulatory capital base, the regulatory interest rate is the rate of return that the regulatory agreement applies to the regulatory capital base (see paragraph B30).

In some cases, an entity shall derive an implied regulatory interest rate from the terms of a regulatory agreement instead of using the interest rate specified in the regulatory agreement (see paragraphs 48–50).

An entity shall derive an implied regulatory interest rate if the regulatory agreement includes any of these terms: 

(a) it specifies uneven interest rates over the life of a regulatory asset or regulatory liability. For example, a period of time might elapse between an entity recognising a regulatory asset or regulatory liability and a regulatory agreement starting to apply an interest rate to that regulatory asset or regulatory liability (see paragraph 50). 

(b) it specifies an interest rate that does not apply to regulatory interest accrued in past periods, instead of a compound interest rate. 

(c) it does not specify an interest rate but instead adjusts the amount of compensation provided or a deduction made for an item to also provide compensation or make a deduction for the time period until the recovery of the related regulatory asset or the fulfilment of the related regulatory liability. An entity shall use its judgement to determine whether a regulatory agreement provides compensation or makes a deduction for such a time period. Not all regulatory agreements specify an interest rate or provide compensation or make a deduction for such a time period, in which case the regulatory interest rate is nil.

In the cases described in paragraph 48, an entity shall determine the implied regulatory interest rate as the rate that at initial recognition discounts the estimates of future cash flows arising from a regulatory asset or regulatory liability, which include regulatory interest cash flows (see paragraph 38), back to an amount that equals the sum of the estimated future cash flows, excluding regulatory interest.

In some cases, an entity expects the period between the recognition of a regulatory asset or regulatory liability and the date when an interest rate specified in the regulatory agreement starts to apply to be one year or less. In such cases, the entity need not discount the estimated future cash flows arising from the regulatory asset or regulatory liability during that period. If the entity elects to apply that exemption, the entity shall discount the estimated future cash flows once the interest rate specified in the regulatory agreement starts to apply.

The uneven interest rates described in paragraph 48(a) do not include interest rates specified in a regulatory agreement that are linked to an interest rate benchmark. In such cases, applying paragraph 37(a), the entity shall disregard possible future changes in the interest rate benchmark until they occur, at which time the entity shall apply paragraphs 56–57.

In measuring a regulatory asset or regulatory liability after its initial recognition, an entity shall at the end of each reporting period: 

(a) update estimates of the amount and timing of future cash flows arising from the regulatory asset or regulatory liability (see paragraphs 53–57); and 

(b) continue to use the discount rate determined at initial recognition, except as described in paragraphs 56–57.

An entity shall update the estimated future cash flows arising from a regulatory asset or regulatory liability at the end of each reporting period by applying paragraphs 35–44 to reflect, for example: 

(a) recovery of part or all of the regulatory asset or fulfilment of part or all of the regulatory liability; and 

(b) any changes in estimates of the amount or timing of future cash flows because of a change in facts or circumstances or because of new information considered in accordance with paragraph 37.

Changes in facts or circumstances or new information, as described in paragraph 53(b), include: 

(a) resolution of an uncertainty – for example: 

(i) confirmation that the entity has met or not met performance criteria or confirmation of the outcome of court rulings; or 

(ii) the regulator’s agreement or disagreement with regulatory filings made by the entity or by other entities; 

(b) actions by a regulator other than those in (a)(ii) – for example, the exercise of a right to renew or terminate a regulatory agreement, causing a change in the boundary of the regulatory agreement (see paragraphs B75–B78); 

(c) changes in credit risk or demand risk (see paragraphs B88–B91); 

(d) changes in the regulatory interest rate as described in paragraph 56; or 

(e) changes in a regulatory agreement or in law or regulation.

An entity shall reassess the selected method of estimating uncertain future cash flows arising from a regulatory asset or regulatory liability – determined by applying paragraphs 42–43 – if, and only if: 

(a) facts or circumstances change or new information becomes available; and 

(b) the change or new information might alter the entity’s expectation of the method that will better predict the ultimate cash flow.

In some cases, the regulatory interest rate specified or implied by a regulatory agreement changes after initial recognition of a regulatory asset or regulatory liability because of a change in: 

(a) the regulatory agreement; or 

(b) an interest rate benchmark to which the regulatory interest rate is linked.

Such a change in the regulatory interest rate changes the future cash flows arising from a regulatory asset or regulatory liability. Consequently, when the regulatory interest rate changes as described in paragraph 56, an entity shall: 

(a) update the future cash flows estimated by applying paragraphs 35–44. 

(b) discount the estimated future cash flows using the new regulatory interest rate. The new regulatory interest rate is the new interest rate specified in the regulatory agreement or the new implied regulatory interest rate determined applying paragraph 48. The new implied regulatory interest rate discounts all the updated future cash flows to the carrying amount of the regulatory asset or regulatory liability immediately before the new rate applied.

In some cases, a regulatory agreement provides compensation for an allowable expense or makes a deduction for chargeable income in determining the regulated rates charged to customers only when an entity pays or receives the related cash, or soon after that. A regulatory asset or regulatory liability might arise if, applying Australian Accounting Standards, the entity recognises the allowable expense or chargeable income in a different reporting period.

Similarly, a regulatory asset might arise because a regulatory agreement provides compensation for credit losses in determining the regulated rates only when the regulator determines that there is no reasonable expectation of an entity receiving the related cash, instead of when the entity recognises impairment losses in its financial statements by applying AASB 9.

An entity shall measure a regulatory asset or regulatory liability described in paragraphs 58–59 by: 

(a) using the carrying amount of the related liability, related asset or related loss allowance resulting from applying Australian Accounting Standards. 

(b) adjusting that carrying amount to reflect any differences between the related liability, related asset or related loss allowance and the regulatory asset or regulatory liability. Such a difference might be caused by (i) an uncertainty present in the related liability, related asset or related loss allowance but not in the regulatory asset or regulatory liability or (ii) an uncertainty present in the regulatory asset or regulatory liability but not in the related liability, related asset or related loss allowance. Such uncertainties might arise from estimation, credit or demand risk.

An entity shall stop applying paragraph 60, and shall thereafter measure any remaining part of the regulatory asset or regulatory liability by applying paragraphs 34–57, when: 

(a) for a regulatory asset or regulatory liability described in paragraph 58 – the entity pays cash to settle the related liability, or receives cash to recover the related asset; 

(b) for a regulatory asset described in paragraph 59 – the regulator has determined there is no reasonable expectation of the entity receiving the related cash; or 

(c) for a regulatory asset or regulatory liability described in paragraph 58 or 59 – the entity derecognises the related liability, related asset or related loss allowance for any other reason.