Reference: Discussion Paper DP/2014/2 Reporting the Financial Effects of Rate Regulation

Transcription

1 15 January 2015 Letter nº 00001/2015/FC Internatinal Accunting Standards Bard 30 Cannn Street Lndn - United Kingdm EC4M 6XH Mr. Hans Hgervrst IASB Chairman Ms. Jane Pike (jpike@ifrs.rg) Senir Technical Manager Reference: Discussin Paper DP/2014/2 Reprting the Financial Effects f Rate Regulatin Dear Mr. Hgervrst and Ms. Pike, CPFL Energia welcmes the pprtunity t cmment n IASB s Discussin Paper Reprting the Financial Effects f Rate Regulatin, issued n 18 September 2014 with the cmment perid ending n 15 January We are a hlding cmpany that, thrugh ur subsidiaries, distributes, generates and cmmercializes electricity in Brazil. We appreciate that IASB has been wrking n this issue fr a lng time, which is a very sensitive issue fr the Brazilian Pwer Industry. We have had the pprtunity t cllabrate with the Expsure Draft and Request fr Infrmatin abut Rate regulatin prject in past pprtunities. As described in ur cntributins, regulatry assets and liabilities are a sensitive issue fr Brazilian Electricity cmpanies. In 2001, the Brazilian Gvernment implemented a mandatry ratining prgram, which mtivated a debate and, as a result, regulatry assets and liabilities were frmally cnstituted thrugh the Energy Sectr General Agreement, amng ANEEL (Brazilian Electricity Regulatry Agency), generatrs and distributin cmpanies. This agreement allwed the initial recgnitin f regulatry assets and liabilities in the financial statements f distributin and generatin cmpanies in Brazil. Since then, the weight f regulatry assets and liabilities have increased in the energy tariffs, and the recgnitin f these assets and liabilities have becme imperative t these cmpanies present an understandable financial statements fr their stakehlders. As a cnsequence, ANEEL has authrized the cnstitutin f regulatry assets and liabilities, mainly fr inflatin pass-thrugh and differences between frecasted and incurred csts. These regulatry assets and liabilities are inspected by the regulatr (ANEEL) n an annual basis and recgnized in the subsequent tariffs charged frm the custmers base. Thrugh this mechanism, revenues and expenses are recrded in accrual basis, and there is a match between revenues derived frm the regulated tariffs and expenses cnsidered in these tariffs in each reprting perid, representing mre accurate financial statements t the users f such infrmatin. Als, we understand that such financial statements represent a fair view f the ecnmic cnditin f these cmpanies. Up t 2010 the recgnitin f regulatry assets and liabilities was accepted by bth CVM (Brazilian SEC) and Independent Auditrs. Hwever, first-time IFRS adptin prcess in Brazil 1

2 caused the fully written-ff as the mainstream indicated that their recgnitin was nt in accrdance with IFRS cnceptual framewrk. Because f that, in ur view, the Financial Statements, especially f the Distributin Cmpanies, have been inaccurate since the IFRS was fully adpted in Market players share this view (such as financial institutins, regulatr and thers) and have required the Cmpanies t adjust their Financial Statements by recgnizing regulatry assets and liabilities since 2010 in rder t analyze the cmpanies financial psitin. In this cntext, many cmpanies have negtiated with financial institutins t adequate financial cvenants as if regulatry assets and liabilities were nt written-ff. Financial institutins have accepted ur suggestin, and then ur cvenants have been still calculated based n an adjusted Financial Statements. Finally, discussins abut regulatry assets and liabilities were intensified during 2014 amng Brazilian players, including ANEEL, especially due t the negative scenari f Brazilian Electricity Industry caused by the pr hydrlgical cnditins. Because f this scenari, there was a relevant increase in the balances f regulatry items in Brazil. If yu, ther members f the Bards r yur staff have questins r seek further elabratin f ur views, please feel free t cntact either Sergi Felice by phne at r e- mail at slfelice@cpfl.cm.br, r Tiag Fntanesi by phne at r at tfntanesi@cpfl.cm.br. Sincerely, Gustav Estrella Chief Financial Officer Sergi Luiz Felice Accunting Directr 2

3 Questin 1 (a) What infrmatin abut the entity s rate-regulated activities and the rate-regulatry envirnment d yu think preparers f financial statements need t include in their financial statements r accmpanying dcuments such as management cmmentary? Please specify what infrmatin shuld be prvided in: (i) the statement f financial psitin; Balances segregated by assets and liabilities when there is n legal right f cmpensatin (accrding t IAS 1 requirements) and the split between current and nn-current. (ii) the statement(s) f prfit r lss and ther cmprehensive incme; The mvement ccurred in the perid, classified as revenue. Depending n the differences between frecasted and incurred csts, these amunts can be an increase f revenue r a reductin f revenue. When incurred csts are higher than frecasted, the register will be an asset against revenues. The liability (against a reductin f revenue) arises when frecasted csts are higher than incurred. (iii) the statement f cash flws; Increase r decrease in the regulatry asset/liability balance shuld be classified as peratinal cash flws. (iv) the nte disclsures; This nte shuld disclse infrmatin abut the nature f each regulatry cmpnent, its cnditins f recvery/payment, changes/mvement f each cmpnent per perid, infrmatin abut tariff review/adjustment prcess, explanatin f significant changes in the balances, regulatry scenari f the year, changes in recent regulatin (if applicable), balances segregated between current and nn-current. (v) the management cmmentary We believe that Management Cmmentary shuld present an explanatin n the main variances f the balances when cmpared t expectatins, as well as prir perid(s). Additinally, it shuld disclse a narrative n the market impacts, and the ecnmic scenari ver the regulatry balances. (b) Hw d yu think that infrmatin wuld be used by investrs and lenders in making investment and lending decisins? Investrs and lenders use regulatry balances t prject future cash flws that reflect the cmpanies rights and bligatins and t measure the actual cmpanies perfrmance. The prhibitin f the recgnitin, under IFRS, f regulatry deferral accunt balances causes uncertainty and misunderstanding abut the real right f receiving these assets r bligatin f paying f the liability. We believe the users f ur financial statements d cnsider regulatry balances in their analysis and decisins, based n the fllwing examples: Quarterly press releases adjusting regulatry effects; Financial cvenants: negtiatin with banks r financial institutins t cmprise regulatry assets and liabilities in the cvenant rati r index, eg. EBITDA / lans; the institutins agreed t calculate based n adjusted figures; Additinal Financial Statement: due t IFRS adptin in 2010 in Brazil, ANEEL (granted authrity) has published a Reslutin which requires Cmpanies frm Pwer Industry t elabrate anther set f Financial Statements. Thse financial statements, called regulatry financial statements must cntemplate regulatry assets and liabilities beynd nt apply IFRIC 12. 3

4 Financial market analysts and credit rating agencies have been cnsidering adjustments f regulatry assets/liabilities in entities financial statements in rder t have a fair view f their financial psitin and perfrmance. We als believe that this infrmatin is imprtant nt nly fr investrs and lenders but als t the Management. Once Management disagrees with the prhibitin f regulatry assets and liabilities, it was created, in 2010, an internal set f financial statements which als cmprises the effects f regulatry issues. Questin 2 Are yu familiar with using financial statements that recgnise regulatry deferral accunt balances as regulatry assets r regulatry liabilities, fr example, in accrdance with US generally accepted accunting principles (GAAP) r ther lcal GAAP r in accrdance with IFRS 14? If s, what prblems, if any, des the recgnitin f such balances cause users f financial statements when evaluating investment r lending decisins in rate-regulated entities that recgnise such balances cmpared t: (a) nn-rate-regulated entities; and (b) rate-regulated entities that d nt recgnise such balances? We are familiar with using financial statements that allw regulatry assets and liabilities register nce this accunting practice used t be accepted n the frmer Brazilian GAAP up t full IFRS adptin in Additinally, we understand that serius prblems arise when such balances are NOT recgnized, especially when cmparing rate-regulated entities that d recgnize t thse that d nt recgnize such balances. In ur view, the fllwing issues arise when regulatry deferral accunt balances are nt recgnised in financial statements: Lack f peratinal perfrmance and financial psitin cmparability between entities, either nn-rate-regulated and rate-regulated that d nt recgnize regulatry balances; Incnsistency in entities valuatin prcess (discunted cash flw) fr purpses f cmparisn and investment ptins in the decisin making prcess f investrs. Questin 3 D yu agree that, t prgress this prject, the IASB shuld fcus n a defined type f rate regulatin (see Sectin 4) in rder t prvide a cmmn starting pint fr a mre fcused discussin abut whether rate regulatin creates a cmbinatin f rights and bligatins fr which specific accunting guidance r requirements might need t be develped (see paragraphs )? If nt, hw d yu suggest that the IASB shuld address the diversity in the types f rate regulatin summarised in Sectin 3? We agree that the IASB shuld fcus n the defined type f rate regulatin presented in Sectin 4. We believe that a fcused discussin will cllect better results and the alternative prpsed in this Discussin Paper wuld have higher chances f slving the prblem f recgnitin f regulatry assets and liabilities in the financial statement, since there is much specificity in rate regulatin arund the wrld. 4

5 Questin 4 Paragraph 2.11 ntes that the IASB has nt received requests fr it t develp special accunting requirements fr the frm f limited r market rate regulatin that is used t supplement the inefficient cmpetitive frces in the market (see paragraphs ). (a) D yu agree that this type f rate regulatin des nt create a significantly different ecnmic envirnment and, therefre, des nt require any specific accunting requirements t be develped? If nt, why nt? We agree that this type f rate regulatin des nt create different a ecnmic envirnment. Therefre, we believe that these financial statements are currently accurate and d nt require any specific accunting requirement. (b) If yu agree that this type f rate regulatin des nt require any specific accunting requirements, d yu think that the IASB shuld, alternatively, cnsider develping specific disclsure requirements? If s, what wuld yu prpse and why? We think that special disclsure requirements are nt necessary and, in ur pinin, it can be prejudicial, because it culd cause certain misunderstanding between the defined rate regulatin and the market rate regulatin. Additinally, market rate regulatin is naturally established in a cmpetitive market and therefre a mechanism f recvery f assets and liabilities in the future is nt necessary. If sme special requirement is created t this kind f regulatin, it can cause misunderstanding amng the users f infrmatin, since the real actual prblem is specific t defined rate regulatin mdels. Questin 5 Paragraphs summarise the key features f defined rate regulatin. These features have been the fcus f the IASB s explratin f whether defined rate regulatin creates a cmbinatin f rights and bligatins fr which specific accunting guidance r requirements might be develped in rder t prvide relevant infrmatin t users f general purpse financial statements. (a) D yu think that the descriptin f defined rate regulatin captures an apprpriate ppulatin f rate-regulatry schemes within its scpe? If s, why? If nt, why nt? We believe it captures the reality f the electricity distributin cmpanies in Brazil. (b) D yu think that any f the features described shuld be mdified in rder t include r exclude particular types f rate-regulatry schemes r rate-regulated activities included within the scpe f defined rate regulatin? Please specify and give reasns t supprt any mdificatins t the features that yu suggest, with particular reference t why the features may r may nt give rise t circumstances that result in particular infrmatin needs fr users f the financial statements. We believe that the descriptins in this Discussin Paper are cmplete and very detailed. We have n suggestins t better reflect the tariff mdels. (c) Are there any additinal features that yu think shuld be included t establish the scpe f defined rate regulatin r wuld yu mit any f the features described? Please specify and give reasns t supprt any features that yu wuld add r mit. We believe that the definitin f defined rate regulatin is apprpriate. 5

6 Questin 6 Paragraphs cntain an analysis f the rights and bligatins that arise frm the features f defined rate regulatin. (a) Are there any additinal rights r bligatins that yu think the IASB shuld cnsider? Please specify and give reasns. We believe that the features f defined rate regulatin are apprpriate. The discussin paper describes a brad definitin f rights and bligatins, and it fits the regulatins in Brazil fr Distributin cmpanies. The Distributin sectr is heavily regulated, s rights and bligatins are defined by the regulatr. (b) D yu think that the IASB shuld develp specific accunting guidance r requirements t accunt fr the cmbinatin f rights and bligatins described? Why r why nt? We believe that the rights and bligatins described in paragraphs d nt create a special envirnment because this is nt exclusive t entities subject t defined rate regulatin. Therefre, we believe IASB des nt need t develp specific accunting guidance fr these cases. Questin 7 Sectin 5 utlines a number f pssible appraches that the IASB culd cnsider develping further, depending n the feedback received frm this Discussin Paper. It highlights sme advantages and disadvantages f each apprach. (a) Which apprach, if any, d yu think wuld best prtray the financial effects f defined rate regulatin in IFRS financial statements and is mst likely t prvide the infrmatin that investrs and lenders cnsider is mst relevant t help them make their investing and lending decisins? Please give reasns fr yur answer? We believe that develping a specific IFRS t defer/accelerate the recgnitin f revenue is the mst cmplex ptin, but the nly ne that prvide the apprpriate answer fr the Prject. The main reasn why we suggest that ptin is that we believe these balances arise frm a specific kind f asset/liability, therefre we believe these amunts shuld be treated in a standard separately reflecting adequately its features. Furthermre, the classificatin as revenue is based n the fact that these amunts reflect verbilling r under-billing, s the adjustment shuld be in the revenue captin. Over-billing wuld reflect lwer revenues in the future, and under-billing wuld give the right f higher revenue thrugh the tariff mechanism. (b) Is there any ther apprach that the IASB shuld cnsider? If s, please specify and explain hw such an apprach culd prvide investrs and lenders with relevant infrmatin abut the financial effects f rate regulatin. We believe the develpment f a new standard (accrding ur respnse in letter (a) abve) wuld slve the prblems abut the effect f rate regulatin. (c) Are there any additinal advantages r disadvantages that the IASB shuld cnsider befre it decides whether t develp any f these appraches further? If s, please describe them. We believe the Discussin Paper has cvered all advantages and disadvantages f the ptins. 6

7 If cmmenting n the asset/liability apprach, please specify, if it is relevant, whether yur cmments reflect the existing definitins f an asset and a liability in the Cnceptual Framewrk r the prpsed definitins suggested in the Cnceptual Framewrk Discussin Paper, published in July We believe regulatry balances are in accrdance with the prpsed definitin f assets (a present ecnmic resurce cntrlled by the entity as a result f past events) and liabilities (a present bligatin f the entity t transfer an ecnmic resurce as a result f past events) f Framewrk future Expsure Draft (issuing expected fr 1Q15). We knw there are sme arguments against the recgnitin f regulatry assets are based n the fact that it depends n future sales. Hwever, we believe the current prpsal f asset definitin will be cnsistent with the regulatry assets f distributin cmpanies in Brazil. Additinally, it can be verified by the fact that the histrical realizatin f these assets are very psitive, representing a real present ecnmic resurce cntrlled by the entity. The same argument applies t the regulatry liabilities, which have been realized thrugh negative adjustments in tariffs when applicable. Therefre, we believe that distributin cmpanies d have the present bligatin f transferring resurces in the cases f existence f regulatry liabilities. Finally, the realizatin f regulatry assets and liabilities thrugh tariff increase/decrease and/r thrugh indemnificatin t be paid by Granted Authrity (Brazilian Gvernment) at the end f the cncessin perid is mandatry accrding t the Brazilian regulatins. Questin 8 Des yur rganizatin carry ut activities that are subject t defined rate regulatin? If s, what peratinal issues shuld the IASB cnsider if it decides t develp any specific accunting guidance r requirements? Yes, ur rganizatin carries ut activities that are subject t defined rate regulatin. Since these balances are already recgnized fr regulatry purpses in Regulatry Financial Statements submitted t the Brazilian Regulatr (ANEEL), we believe Brazilian distributin cmpanies wuld nt have additinal wrk in rder t prepare infrmatin t register fr IFRS purpses. Therefre, we wuld nt have peratinal issues becming a prblem t be addressed t IASB, relating amunts subject t defined rate regulatin. Questin 9 If, after cnsidering the feedback frm this Discussin Paper and the Cnceptual Framewrk prject, the IASB decides t prhibit the recgnitin f regulatry deferral accunt balances in IFRS financial statements, d yu think that the IASB shuld cnsider develping specific disclsure-nly requirements? If nt, why nt? If s, please specify what type f infrmatin yu think wuld be relevant t investrs and lenders in making their investing r lending decisins and why. Regarding Brazilian cntext, we strngly believe that regulatry assets and liabilities shuld be recgnized in entities financial statements and we are very hpeful with the psitive utcme f the cmprehensive prject (i.e. the registratin under IFRS f the regulatry deferral accunt balances). Additinally, we d believe that the disclsure-nly apprach wuld nt reflect the essence ver the frm, which is an essential characteristic brught by IFRS. 7

8 Hwever, in the case IASB decides fr the prhibitin f these balances, we suggest that IASB develps specific disclsure requirements. The types f infrmatin we believe is relevant and shuld be disclsed in this case are presented in ur respnse t Questin 1 (a). Questin 10 Sectins 2 and 6 discuss sme f the infrmatin needs f users f general purpse financial statements. The IASB will seek t balance the needs f users f financial statements fr infrmatin abut the financial effects f rate regulatin n an entity s peratins with cncerns abut bscuring the understandability f financial statements and the high preparatin csts that can result frm lengthy disclsures (see paragraph 2.27). (a) If the IASB decides t develp specific accunting requirements fr all entities that are subject t defined rate regulatin, t what extent d yu think the requirements f IFRS 14 meet the infrmatin needs f investrs and lenders? Is there any additinal infrmatin that yu think shuld be required? If s, please specify and explain hw investrs r lenders are likely t use that infrmatin. (b) D yu think that any f the disclsure requirements f IFRS 14 culd be mitted r mdified in rder t reduce the cst f cmpliance with the requirements, withut mitting infrmatin that helps users f financial statements t make infrmed investing r lending decisins? If s, please specify and explain the reasns fr yur answer. First f all, we d nt agree with the IFRS 14 scpe which permitted the right f recgnitin f such balances in sme jurisdictins. Furthermre, we believe these disclsure requirements were develped as an interim slutin. Then, if the cmprehensive prject decides t permit the registratin f regulatry balances, we suggest the develpment f specific disclsure requirements (as described in questin 1). Questin 11 IFRS 14 requires any regulatry deferral accunt balances that have been recgnised t be presented separately frm the assets and liabilities recgnised in the statement f financial psitin in accrdance with ther Standards. Similarly, the net mvements in regulatry deferral accunt balances are required t be presented separately frm the items f incme and expense recgnised in the statement(s) f prfit r lss and ther cmprehensive incme. If the IASB develps specific accunting requirements that wuld apply t bth existing IFRS preparers and first-time adpters f IFRS, and thse requirements resulted in the recgnitin f regulatry balances in the statement f financial psitin, what advantages r disadvantages d yu envisage if the separate presentatin required by IFRS 14 was t be applied? We believe these balances are assets and liabilities accrding t IFRS framewrk. Therefre, it shuld be treated the same way as ther assets and liabilities and there is n reasn t be presented separated frm the ther balances. The main disadvantage f IFRS 14 apprach is that it suggests these balances are nt an rdinary asset/liability resulting frm entities peratin, nt subject t general accunting rules. Then, we suggest specific disclsure requirements as described in questin 1. 8

9 Questin 12 Sectin 4 describes the distinguishing features f defined rate regulatin. This descriptin is intended t prvide a cmmn starting pint fr a mre fcused discussin abut whether this type f rate regulatin creates a cmbinatin f rights and bligatins fr which specific accunting guidance r requirements shuld be develped. Paragraph 4.73 suggests that the existence f a rate regulatr whse rle and authrity is established in legislatin r ther frmal regulatins is an imprtant feature f defined rate regulatin. D yu think that this is a necessary cnditin in rder t create enfrceable rights r bligatins, r d yu think that cperatives r similar entities, which perate under self-impsed rate regulatin with the same features as defined rate regulatin (see paragraphs ), shuld als be included within defined rate regulatin? If nt, why nt? If s, d yu think that such c-peratives shuld be included within the scpe f defined rate regulatin nly if they are subject t frmal versight frm a gvernment department r ther authrised bdy? First f all, it is imprtant t clarify that the c-peratives rle cannt be mixed t the regulatr rle. The c-peratives are nrmally created t strengthen their assciates against the market, and nt t prtect the custmer and set rates. Cnsequently, while a c-perative nrmally seeks t set a price flr t a given price in rder t prtect its assciates, it rarely sets a ceiling t the price. In additin, even if rights and bligatins rise between the c-perative and its assciates, such balances culd nt be treated as regulatry cmpnents due t the absence f frmal supervisin established in legislatin. Cnsidering that, we believe that the existence f a rate regulatr whse rle and authrity are established in legislatin is a mandatry cnditin t allw the creatin f enfrceable rights and bligatins. Furthermre, we believe that all entities, despites their legal frm, shuld be included in the scpe f the ptential new accunting guidance r requirement if they meet all features f defined rate regulatin, including the supervisin by a rate regulatr whse rle and authrity is established in legislatin r ther frmal regulatins. Questin 13 Paragraphs highlight sme f the issues that the IASB may cnsider if it cntinues t prgress this prject. D yu have any r suggestins n these r any ther issues that may r may nt have been raised in this Discussin Paper that yu think the IASB shuld cnsider if it decides t develp prpsals fr any specific accunting requirements fr rate-regulated activities? Several times discussins arund the recgnitin f regulatry assets and liabilities ended up r were addressed by IAS 37 Prvisins and Cntingencies. Fr instance, sme suggest these balances are cntingent assets because they are cnditined n selling gds r services in the future. The same argument applies t the liability, since the entity culd avid the payment nt making the future sales. We believe IASB shuld address the interactin with IAS 37, in rder t differentiate regulatry assets and liabilities which shall qualify t be recgnized as per the new rule frm cntingent assets and liabilities, and cnsequently retrieve them frm IAS 37 scpe. ***************** 9