[Case Study] Ind AS 114 | Accounting Treatment of True-Up Value arising from Rate Regulations

A company is operating under Rate Regulations for a period of 15 years. However, the regulatory authority fixes the regulatory revenue i.e. Price Cap Regulations in FY 16-17. The same year company started preparing Ind AS financial statements from previous GAAP. The company has not adopted any specific Ind AS and/or Guidance Note for the accounting treatment of regulatory deferral account balances in its financial statements previously. While transitioning to Ind AS, the company has elected not to recognise regulatory deferral accounts in its first Ind AS financial statements also.

However, confusion arises about the treatment of true up (i.e., cash outflows or inflows for over-recovery or under-recovery are spread over the control period through adjustment in revenue rate for the next control period) of Rs. 150 cr. This true-up value has to be adjusted while fixing the revenue rate of the control period. As per current tradition, the company is recognising revenue at the revenue rate determined by the Regulatory Authority for the control period without recognising the amount of true-up. The company sought the opinion of EAC on has to recognise the above-mentioned true-up value of Rs. 150 crores in the books of account.

The Expert Advisory Committee (EAC) of ICAI has noted that Ind AS 114 allows an entity to apply the Standard in its first Ind AS financial statements only if both the conditions of paragraph 5 of Ind AS 114, i.e. (a) it is carrying on rate-regulated activities, and (b) the entity had recognised regulatory deferral account balances in its financial statements as per previous GAAP, i.e., those prepared in accordance with the Guidance Note on Accounting for the Rate Regulated Activities. In case any one of the aforesaid conditions is not met, for instance, the entity had not recognised regulatory deferral account balances in its previous GAAP financial statements, Ind AS 114 is not applicable. Further, even if an entity is within the scope of this Standard, it may elect not to apply this Standard in its first Ind AS financial statements. Since, the company has neither recognised regulatory deferral account balances in its financial statements in accordance with previous GAAP nor elected to recognise regulatory deferral accounts in its first Ind AS financial statements, Ind AS 114 is not applicable to the company for recognition of true-up value adjustments.

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