Annual Report 2010 - AdP

the amendments introduced by DL 151/2002 of 23 May and DL 277/2009 of 2 October) conducts on the tariff to apply to the
services rendered to users and the respective annual budget.
Under this monitoring, the tariffs to applied by the companies require approval by the Awarding Body, subject to opinion from the
Regulator regarding its suitability.
Taking into account the hierarchy defined in IAS 8 and the specific circumstances of the concession contracts in force, the group
companies with regulated activities have adopted rules internationally applied to companies that operate in markets with these
characteristics (namely FAS 71, issued by FASB and ED/2009/8 issued by IASB). As such, a series of criteria have been defined for
recognizing assets and liabilities related to regulations. These rules state that a company must recognize the effects of its operating
activity on the financial statements, providing it renders services whose prices are subject to regulation.
Regulatory assets and liabilities can only be recognized if, and only if: (i) an accredited body (e.g. the Regulator) determines the price
that an entity should charge its customers for the goods or services that it provides and this price binds customers to accept it, and
(ii) the price established by the regulation (the tariff) is determined so as to recover the specific costs incurred to supply the goods
or services and obtain a particular remuneration.
The activity of multi-municipal companies from Águas de Portugal Group is regulated in so far as prices are established by a third
party entity (Ministry of the Environment), subject to an opinion issued by the Regulator (ERSAR, I.P., Entidade Reguladora dos
Serviços de Água e Resíduos, I.P.) and therefore included within the scope of this standard.
In short, a company is required to recognize regulatory assets or regulatory liabilities if the Regulator allows recovery of costs
previously incurred or reimbursement of previously charged amounts and remuneration from the regulated activities, via adjustments
to the price charged to its customers. That is to say, when there is a right to increase or the obligation to reduce tariffs in future
periods as a result of the current or expected practice of the Regulator, (i) an entity should recognize a regulatory asset in view of
recovering a previously incurred cost and obtaining a certain remuneration; or (ii) an entity should recognize a regulatory liability in
order to reimburse amounts previously collected and pay a particular remuneration. The effect of applying the requirements referred
to in the previous paragraph corresponds to the initial recognition of an asset (or liability) which would otherwise be recognized
under results as cost (or income).
The Board of Directors believes that this category includes both tariff deficit and accrued costs for contractual investment. As such,
in accordance with the rule for recognizing regulatory assets and liabilities, these assets (and/or liabilities) must be recognized in the
balance sheet, seeing as the recovery of their cost (and/or reimbursement of the liability) is obligatorily eligible for the purpose of
determining the tariff by the Regulator during subsequent periods.
2.5.2 Tariff deficit assets and liabilities
Legally speaking, affiliated companies obtain guaranteed return on the capital invested by the shareholder, as defined in the concession
contracts, which establish the criteria for establishing tariffs or guaranteed values in annual terms, ensuring complete recovery of
investment, operational and financial costs, and suitable return on the total equity of the concessionaires. Potentially speaking, this
remuneration may be accrued by a remuneration related to productivity gains.
As such, on an annual basis, the difference between the result generated by the operations and the return guaranteed on invested
shareholder capital is calculated, and the gross value is recorded under income – tariff gaps – and the tax ensuing from this is recorded
in a deferred tax account in the balance sheet under regulatory assets and liabilities.
The amount of yield on the tariff deficit corresponds to the credit or debit to apply to the yield of the regulated activities, so that it
reveals the income necessary for compliance with the contractual requirement regarding the full recovery of costs, including corporate
income tax (IRC) and annual guaranteed remuneration.
If the difference is positive (tariff practiced > necessary tariff) a negative tariff deficit is generated, which must be debited from
income. This recognition also leads to recognition of a deferred tax asset related to the correction of the tax associated with income
debit. The net effect corresponds to the correction of net income for full recovery of costs and guaranteed annual shareholder
remuneration.