IFRS 20 explained before it becomes an SBR talking point
A new IFRS Accounting Standard deserves attention for two reasons.
First, companies operating in regulated industries will need to understand how it changes their financial statements. Second, new reporting standards often become useful material for Strategic Business Reporting questions because they test whether candidates can explain the commercial problem, apply accounting principles and communicate the effect to investors.
IFRS 20 Regulatory Assets and Regulatory Liabilities was issued in May 2026. It applies to a particular type of rate regulation and becomes effective for annual reporting periods beginning on or after 1 January 2029, although earlier application is permitted. It will replace IFRS 14 Regulatory Deferral Accounts.
That date may feel distant. It is not a reason to ignore the standard.
The underlying issue is highly relevant to SBR: the timing of reported revenue does not always match the compensation a regulated company has earned by providing goods or services. IFRS 20 is designed to make that difference visible.
This article explains the standard in plain English, shows the logic behind regulatory assets and liabilities and sets out how to turn the topic into a clear, professional SBR answer.
Candidates looking to strengthen their wider approach to new standards and current reporting issues can also use the guidance provided by an experienced ACCA SBR tutor.
What IFRS 20 is trying to fix
Imagine an electricity company whose prices are controlled by a regulator.
The company cannot simply charge whatever it wants. Its rates are determined through a regulatory agreement. That agreement may allow the business to recover certain costs, earn a return on regulated investment or receive compensation for meeting performance targets.
The difficulty is that the company may provide the regulated service in one accounting period but recover the related compensation from customers in another.
For example, suppose the regulator allows a water company to recover an unexpected increase in treatment costs. The company incurs those costs during Year 1, but the customer tariff is not adjusted until Year 2.
Under IFRS 15, the additional amount charged to customers may appear as revenue in Year 2. However, economically, the compensation relates to services supplied in Year 1.
Without further accounting, Year 1 may look unusually weak and Year 2 unusually strong. Investors could misunderstand the company’s performance because the reported figures do not show which period the regulated compensation relates to.
IFRS 20 addresses this difference in timing by requiring qualifying companies to recognise regulatory assets, regulatory liabilities, regulatory income and regulatory expense.
The main principle in plain English
The central idea behind IFRS 20 is straightforward:
A company should reflect its allowed compensation in the period in which it supplies the related regulatory goods or services.
That does not mean replacing IFRS 15 revenue. The company continues to apply IFRS 15 to revenue from contracts with customers.
IFRS 20 supplements that information.
Where the amount recognised under IFRS 15 does not match the compensation related to the regulatory goods or services supplied during the period, regulatory income or regulatory expense is used to explain the timing difference.
The related right or obligation is recognised as a regulatory asset or regulatory liability.
This distinction is important. A weak exam answer may describe IFRS 20 as another revenue recognition standard. It is not. It works alongside IFRS 15 to provide a more complete picture of performance in rate-regulated activities.
What type of regulation is covered
IFRS 20 does not apply simply because a company works in a regulated industry.
Many businesses are subject to safety rules, environmental rules, licensing requirements or price monitoring. That alone does not bring them within the standard.
The company must be subject to a regulatory agreement that creates enforceable rights and obligations and prescribes how a regulator determines the rate charged to customers.
The arrangement must also create differences in timing. This happens when compensation for regulatory goods or services supplied in one period is included in customer rates in another period.
Utilities such as electricity, gas and water providers are obvious examples because their prices and permitted returns are often controlled. However, the accounting depends on the substance of the regulatory agreement rather than the industry label.
A strong SBR answer should therefore begin with scope.
Do not jump immediately to recognition. First establish whether an enforceable regulatory agreement exists and whether it creates a right to add amounts to future rates or an obligation to deduct amounts from them.
Regulatory assets explained
A regulatory asset is an enforceable present right to add an amount when determining the regulated rate charged to customers in a future period.
That right exists because some or all of the compensation for regulatory goods or services already supplied has not yet been included in IFRS 15 revenue.
In simple terms, the company has earned regulated compensation but has not yet charged customers for it.
Consider a regulated energy supplier that incurs £12 million of allowable storm-repair costs during the year. The regulator confirms that these costs can be recovered through higher customer tariffs over the following two years.
The company has already provided the relevant regulatory service and has an enforceable right to recover the amount through future rates.
That may create a regulatory asset.
The company would recognise regulatory income in the current period, reflecting the compensation associated with the service already supplied. It would also recognise a regulatory asset representing the future recovery through regulated rates.
When the amount is later included in customer bills and recognised under IFRS 15, the regulatory asset is recovered and regulatory expense is recognised.
The purpose is not to recognise the same economic benefit twice. It is to allocate the effect to the period to which the compensation relates.
Regulatory liabilities explained
A regulatory liability works in the opposite direction.
It is an enforceable present obligation to deduct an amount from future regulated rates because compensation for regulatory goods or services to be supplied in the future has already been included in IFRS 15 revenue.
In plain English, the company has charged customers now for something that belongs to a future period.
Suppose a regulator permits a network company to collect an additional amount from customers during Year 1 to fund maintenance that will take place in Year 2.
The amount may be included in IFRS 15 revenue when charged. However, the related regulatory service has not yet been supplied.
The company may therefore recognise regulatory expense and a regulatory liability in Year 1.
When the maintenance service is supplied in Year 2, the regulatory liability is fulfilled and regulatory income is recognised.
This makes performance easier to understand. The compensation is associated with the period in which the regulatory activity takes place rather than only the period in which customers are billed.
The four terms candidates must keep separate
IFRS 20 introduces four connected accounting elements:
- A regulatory asset represents a right to add an amount to future regulated rates.
- A regulatory liability represents an obligation to deduct an amount from future regulated rates.
- Regulatory income arises from changes in regulatory assets or regulatory liabilities that increase reported performance.
- Regulatory expense arises from changes in regulatory assets or regulatory liabilities that reduce reported performance.
These terms are connected, but they are not interchangeable.
The asset and liability appear in the statement of financial position. Regulatory income and regulatory expense affect financial performance.
A good SBR answer should explain both sides of the accounting. Do not describe the asset or liability and forget the related income or expense.
The official definitions focus on enforceable present rights and obligations created by the regulatory agreement. They also link those rights and obligations to amounts included in future customer rates.
A simple example of an under-recovery
Assume a regulated water company is allowed compensation of £150 million for services supplied during Year 1.
The tariff charged to customers during Year 1 produces IFRS 15 revenue of only £140 million. The regulator permits the remaining £10 million to be added to tariffs in Year 2.
There is a £10 million difference in timing.
In Year 1, the company recognises:
Regulatory income of £10 million.
A regulatory asset of £10 million.
The total reported revenue-related information for Year 1 therefore reflects the £150 million compensation associated with the services supplied during that period.
In Year 2, the additional £10 million is charged to customers and included in IFRS 15 revenue. The company then recognises regulatory expense as the regulatory asset is recovered.
This prevents the £10 million from inflating the apparent performance of Year 2.
The exam point is the connection between periods. IFRS 20 is not creating new customer revenue. It is making the effect of regulated timing differences visible.
A simple example of an over-recovery
Now reverse the facts.
Suppose the company supplies services during Year 1 for which its allowed compensation is £150 million, but the regulated tariffs produce IFRS 15 revenue of £158 million.
The regulator requires the £8 million excess to be returned to customers through lower rates in Year 2.
The company may recognise:
Regulatory expense of £8 million.
A regulatory liability of £8 million.
When customer rates are reduced in Year 2, the liability is fulfilled and regulatory income is recognised.
Again, the accounting links the compensation to the correct period.
Without the regulatory liability, Year 1 could appear stronger than it really was and Year 2 weaker. IFRS 20 helps users see through the timing of customer charges.
Recognition is based on enforceable rights and obligations
A regulatory asset is not recognised merely because management expects the regulator to approve future recovery.
There must be an enforceable present right created by the regulatory agreement.
Similarly, a regulatory liability requires an enforceable present obligation. A general intention to reduce future prices is not enough.
Management may need to consider the terms of the agreement, legislation, regulatory decisions, court rulings, previous decisions by the regulator and relevant legal advice.
Existence may involve judgement. IFRS 20 generally requires recognition when the regulatory asset or regulatory liability exists, or is more likely than not to exist. Some items are subject to additional conditions.
This creates a useful SBR discussion point.
An answer should not simply state that an asset will be recognised because a future tariff increase is possible. It should assess whether the company has a present enforceable right and whether the relevant recognition threshold is met.
The direct relationship issue
One of the more technical areas concerns regulatory depreciation and the regulatory capital base.
A regulator may allow a company to recover investment in infrastructure through regulated depreciation. However, the regulatory capital base used by the regulator may not match the assets and carrying amounts reported under IFRS Accounting Standards.
IFRS 20 requires a direct relationship before certain regulatory assets or liabilities arising from regulatory depreciation are recognised.
Broadly, the company needs to be able to track how regulatory depreciation compensates for amounts arising from related items by amount and reporting period.
This prevents recognition where the connection between the regulatory calculation and the underlying accounting items is too unclear, subjective or difficult to measure reliably.
For many SBR questions, a detailed calculation may not be required. The higher-value point is to explain the judgement:
Does the regulatory capital base have a sufficiently direct relationship with the related assets or expenses?
Can the company track the compensation to the relevant amounts and periods?
If not, recognition may not be appropriate, although additional disclosure may still be necessary.
How regulatory assets and liabilities are measured
IFRS 20 generally uses a cash-flow-based measurement technique.
The company estimates the future cash flows expected from recovering the regulatory asset or fulfilling the regulatory liability. Those estimated cash flows are then discounted using the regulatory interest rate.
Where the amount or timing is uncertain, the company uses either the most likely amount or an expected-value approach, depending on which method better predicts the ultimate cash flow.
The estimates are updated when new information becomes available or circumstances change. The discount rate determined at initial recognition generally continues to be used unless the regulatory agreement changes the regulatory interest rate.
This is fertile ground for SBR analysis because it involves:
Cash-flow estimates.
Demand risk.
Credit risk.
Timing uncertainty.
Discount rates.
Changes in estimates.
Candidates should link these points rather than listing them independently. For example, weaker future demand may delay recovery of a regulatory asset, affecting both the estimated cash flows and the maturity information disclosed to investors.
How IFRS 20 affects presentation
Regulatory assets and regulatory liabilities are presented as line items in the statement of financial position.
Where a current and non-current presentation is used, regulatory assets and liabilities are classified between current and non-current amounts.
Regulatory income and regulatory expense are generally classified as revenue. The net amount of regulatory income less regulatory expense is presented as a line item in the statement of profit or loss.
Where the related item is recognised in other comprehensive income, the related regulatory income or expense is also presented in OCI.
This matching is important. If an underlying pension remeasurement is recorded in OCI and the regulatory agreement creates a related timing difference, the corresponding regulatory effect should not be reported through profit or loss.
The presentation requirements are therefore designed to show the relationship between the regulatory accounting and the underlying item.
The disclosures are about future cash flows
The disclosure requirements are not simply a reconciliation exercise.
They are intended to help investors understand the amount, timing and uncertainty of future cash flows arising from regulatory assets and liabilities.
Companies may need to provide reconciliations from opening to closing balances, explanations of regulatory income and expense, maturity information showing expected recovery or fulfilment and information about uncertainty.
They must also explain relevant unrecognised regulatory assets and liabilities and why they were not recognised.
Where the regulatory capital base is important, disclosures explain whether it has a direct relationship with related items, the reasons for that conclusion and any change in the relationship.
This gives candidates a clear way to discuss user needs. Investors want to understand when a regulatory asset will turn into customer cash inflows, when a regulatory liability will reduce future tariffs and how uncertain those outcomes are.
Why the effective date does not mean companies can wait
IFRS 20 applies for annual periods beginning on or after 1 January 2029, with early application permitted.
Companies can apply it retrospectively under IAS 8 or use a modified retrospective approach that includes transition relief. Adjusted comparative information is required for the period immediately preceding first application.
That creates a practical implementation issue.
Companies need to identify regulatory agreements, map enforceable rights and obligations, collect historic information, assess timing differences and build processes that can track regulatory assets and liabilities.
They may also need to connect regulatory records with finance systems, IFRS 15 revenue data, asset registers, pension information and cash-flow forecasts.
The effective date may be 2029, but the work needed to produce reliable comparative information begins earlier.
That is the kind of point that earns professional marks. A board does not only need to know the accounting treatment. It needs to understand the implementation consequences.
Why IFRS 20 could become useful in SBR
SBR does not reward candidates for memorising the number of every new standard.
It rewards the ability to understand the reporting problem and explain the solution.
IFRS 20 offers several strong assessment angles.
A question could ask candidates to explain whether the company falls within the scope of the standard. It could provide a regulatory under-recovery or over-recovery and ask for the financial reporting treatment.
It could ask about recognition uncertainty, measurement using future cash flows, presentation as regulatory income or expense or the disclosures needed to help investors understand recovery.
It could also appear as a current reporting issue where candidates must advise a board on preparation for implementation.
The best preparation is therefore not to memorise pages of technical detail. It is to understand the story:
The company supplies a regulated service.
The compensation belongs to one period.
The customer charge happens in another.
The regulatory asset or liability records that timing difference.
Regulatory income or expense places the effect in the appropriate period.
How to structure an IFRS 20 exam answer
Start with scope.
State that IFRS 20 applies where a regulatory agreement creates enforceable rights and obligations and prescribes how regulated rates are determined.
Then identify the timing difference.
Has the company supplied regulatory goods or services but not yet charged the full related compensation? That may create a regulatory asset and regulatory income.
Has the company already charged an amount relating to future regulatory services? That may create a regulatory liability and regulatory expense.
Next, address recognition and measurement.
Explain whether the right or obligation is enforceable and whether the recognition threshold is met. Then discuss estimated future cash flows, uncertainty and discounting where relevant.
Finish with presentation, disclosure and a conclusion.
A board-ready conclusion might read:
“The regulatory agreement gives the company an enforceable right to recover the allowable costs through future tariffs. A regulatory asset and related regulatory income should therefore be recognised, measured using the expected future recovery cash flows and presented and disclosed in accordance with IFRS 20.”
That is direct, applied and useful.
Common mistakes to avoid
The first mistake is treating every price-controlled company as automatically within scope. The regulatory agreement must create the relevant enforceable rights, obligations and timing differences.
The second is confusing a regulatory asset with a normal trade receivable. A trade receivable is generally a right to payment from a customer. A regulatory asset is a right created by a regulatory agreement to add an amount to future regulated rates.
The third is replacing IFRS 15 with IFRS 20. IFRS 15 continues to determine revenue from contracts with customers. IFRS 20 supplements that information.
The fourth is recording regulatory income without recognising the related regulatory asset, or recording regulatory expense without the related liability.
The fifth is ignoring uncertainty. Recognition, estimated cash flows, recovery periods and discount rates may all involve judgement.
The sixth is writing only about the numbers. Strong answers explain what the information tells investors about performance and future cash flows.
A short practice scenario
A regulated electricity network incurs £6 million of emergency repair costs in December 2028. The regulatory agreement allows efficiently incurred repair costs to be recovered from customers.
In February 2029, the regulator confirms that the full £6 million can be added to tariffs over the following three years. The company is preparing its financial statements and has adopted IFRS 20.
A good answer would explain that the repairs relate to regulatory services already supplied. The regulatory agreement and regulator’s confirmation provide evidence of an enforceable right to recover the amount through future tariffs.
The company should recognise a regulatory asset and regulatory income, subject to the precise terms of the agreement and the recognition requirements.
The asset should be measured using the estimated future cash flows from tariff recovery, discounted using the appropriate regulatory interest rate. The company should update the estimate for relevant uncertainty and disclose when it expects to recover the amount.
That answer covers the issue, rule, application and conclusion without drowning in detail.
How to revise a new standard efficiently
Do not begin by memorising technical paragraphs.
Start with a one-page map containing the problem, scope, four key terms, recognition principle, measurement basis, presentation and disclosures.
Then practise explaining the standard aloud in two minutes.
After that, write a short applied answer using a regulatory under-recovery or over-recovery scenario.
Finally, practise advising a board on implementation. Mention data collection, systems, comparatives, regulatory documentation and judgement controls.
Candidates who need a more structured approach to technical standards, current issues and timed answer practice can explore an ACCA SBR course that combines technical understanding with exam application.
What to remember
IFRS 20 is easier to understand when you stop thinking of it as a collection of new labels.
It is a timing standard for a specific type of regulated activity.
The customer charge under IFRS 15 may happen in one period. The related allowed compensation may belong to another.
IFRS 20 makes that timing difference visible through regulatory assets, regulatory liabilities, regulatory income and regulatory expense.
For SBR candidates, the strongest answer will not be the one with the longest definition. It will be the one that identifies the regulatory agreement, explains the timing difference, applies the correct accounting and shows why the information matters to investors.
