Accounting for regulated activities in IFRS standards Berlin IEAF meeting 29 November 2010 CENC

ED Rate-regulated activities: Update Board developing agenda proposal for consideration in H2 2011 (Board 09/2010) The potential future steps include, but are not limited to: a disclosure only standard an interim standard, similar to IFRS 4 Insurance Contracts or IFRS 6 Exploration for and Evaluation of Mineral Resources, to grandfather previous GAAP accounting practices with some limited improvements a medium term project focused on the effects of rate-regulation a comprehensive project on intangible assets CENC

ED Rate-regulated activities: Update Proposals made by the IASB (Board 09/2010) are not satisfactory because: a disclosure only standard: IAS 1.18 A company cannot rectify inappropriate accounting policies by … notes or explanatory material an interim standard, similar to IFRS 4 Insurance Contracts or IFRS 6 Exploration for and Evaluation of Mineral Resources, to grandfather previous GAAP accounting practices with some limited improvements applicable to Europe ? a medium term project focused on the effects of rate-regulation scope issue a comprehensive project on intangible assets too long CENC

Next steps Letter to the IASB The letter will: expose the industry concerns (as developed in the next slides) propose to create a working group with the IASB, Auditors and industry* * Europe and North America Notes: Due to regulation rules, costs that as usually considered as indirect such as general administrative costs can be considered by the regulator as allowable cost and such can give rise to an asset. Some costs cannot be incorporated in the cost of some assets (eg research phase costs in an intangible asset). We think that those costs, when meeting asset recognition criteria, should be accounted for separately as “regulated assets” CENC 4

The present situation: accounting does not reflect the economics Accounting should reflect the performance of the regulation in matching sales and cost of sales Here is a “real life” example of the difference of accounted Current Operating Income in Financial Statements and Current Operating Income used for internal reporting taking into account regulated assets/liabilities. CENC 5

The present situation: an impasse In June 2005 IFRIC rejected the accounting for regulated activities “The IFRIC has noted that the US SFAS 71 accounting for the effect of certain types of regulation allowed entities to recognise regulatory assets. However the IFRIC has concluded that the recognition criteria in SFAS 71 were not fully consistent with recognition criteria in IFRSs. Thus the requirements of SFAS 71 were not indicative of the requirements of IFRSs” The wording for rejection is unclear ! The interpretation of auditors (big 4) has been very restrictive: They do not accept the accounting for any regulatory asset or liability even if the asset /liability meets the requirements of the frame work on the basis of this Wording for Rejection. An issue for Canadian utilities but not only ! Some IASB members strongly questioned this wording as it could be interpreted as saying that SFAS 71 permits to account for assets that do not qualify for asset recognition according to the US framework and standards CENC 6

Future situation: accounting should reflect the economics - points for discussion Standard or interpretation? The IASB must tackle the issue. Standard or interpretation should: be principle based reflect the sub-lying economics of the regulatory environment clarify that even outside its scope regulatory assets /liabilities could be accounted for if they qualify for asset /liability recognition according to the framework and IFRSs However entities should use their judgment in assessing recoverability of regulated asset first when measuring it and later when testing it for impairment. CENC

Future situation: accounting should reflect the economics - points for discussion Reopening of the 2005 IFRIC wording for rejection Is a specific standard or interpretation needed ? An accounting similar to what is proposed in the new ED “Revenue from contracts with customer” § 57 could be contemplated. Ie if costs do not give rise to assets eligible for recognition with another IFRS (IAS 2, IAS 16, IAS 38, IAS 39…) recognising an asset only if those costs relate directly to the regulated activity generates or enhance resource that will be used in satisfying related activity obligations in the future However the good ideas of the ED 2009/8 (regulation can give rise to assets, customer basis concept ...) should not be lost ! Notes: Due to regulation rules, costs that as usually considered as indirect such as general administrative costs can be considered by the regulator as allowable cost and such can give rise to an asset. Some costs cannot be incorporated in the cost of some assets (eg research phase costs in an intangible asset). We think that those costs, when meeting asset recognition criteria, should be accounted for separately as “regulated assets” CENC 8

Next steps GDF Suez will draft a letter to the IASB (will be circulated within IEAF working group) The letter will: expose the industry concerns (as developed in the previous slides) Propose to create a working group with the IASB, Auditors and industry* Ensure that the industry can speak with one voice ARE YOU OK WITH THE PROPOSED APPROACH ? * Europe and North America Notes: Due to regulation rules, costs that as usually considered as indirect such as general administrative costs can be considered by the regulator as allowable cost and such can give rise to an asset. Some costs cannot be incorporated in the cost of some assets (eg research phase costs in an intangible asset). We think that those costs, when meeting asset recognition criteria, should be accounted for separately as “regulated assets” CENC 9