Accountants' Handbook Special Industries and Special Topics 10th Edition_6

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Accountants’ Handbook Special Industries and Special Topics 10th Edition_6 31.11 OTHER SPECIALIZED UTILITY ACCOUNTING PRACTICES 31 37 •SFAS No. 106 costs and costs allowable in rates, would only be appropriate if future rate recovery ofthe regulatory asset is probable, as defined in SFAS No. 5. In order to provide authoritative guidance as to the appropriate accounting and what constitutessufficient evidence that a regulatory asset exists, the EITF created Issue No. 92-12, “Accounting forOPEB Costs by Rate-Regulated Enterprises.” The EITF reached a final consensus for Issue No. 92-12 that a regulatory asset related to SFASNo. 106 costs should not be recorded in a regulated utility’s financial statements if the regulatorcontinues to limit inclusion of OPEB costs in rates to a pay-as-you-go basis. Several EITF mem-bers noted that the application of SFAS No. 71 for financial reporting purposes requires that a rate-regulated enterprise’s rates be designed to recover the specific enterprise’s costs of providing theregulated service or product and that enterprise’s cost of providing a regulated service or productincludes SFAS No. 106 costs. Further, the EITF reached a final consensus in Issue No. 92-12 that a rate-regulated enterpriseshould not recognize a regulatory asset for financial reporting purposes for the difference betweenSFAS No. 106 costs and OPEB costs included in the regulated utility’s rates unless the company (a)determines that it is probable that future revenue in an amount at least equal to the deferred cost (reg-ulatory asset) will be recovered in rates and (b) meets all four of the following criteria: 1. The regulated company’s regulator has issued a rate order, including a policy statement or a generic order applicable to enterprises within the regulator’s jurisdiction, that allows the de- ferral of SFAS No. 106 costs and subsequent inclusion of those deferred costs in rates. 2. Annual SFAS No. 106 costs, including normal amortization of the transition obligation, should be included in rates within approximately five years of SFAS No. 106 adoption. The change to full SFAS No. 106 in rates may take place in multiple steps, but the deferral period should not exceed approximately five years. 3. The combined deferral and recovery period approved by the regulator should not exceed ap- proximately 20 years. If a regulator approves a total deferral and recovery period of more than 20 years, a regulatory asset should not be recognized for any costs not recovered by the end of the approximate 20-year period. 4. The percentage increase in rates scheduled under the regulatory recovery plan for each fu- ture year should be no greater than the percentage increase in rates scheduled under the plan for each immediately preceding year. This criterion is similar to that required for phase-in plans in paragraph 5(d) of SFAS No. 92. The EITF observed that recovery of the regulatory asset in rates on a straight-line basis would meet this criterion.(d) OTHER FINANCIAL STATEMENT DISCLOSURES(i) Purchase Power Contracts. Many utilities enter into long-term contracts for the purchase ofelectric power in order to meet customer demand. The SEC’s SAB No. 28 (currently cited as SABTopic 10D) sets forth the disclosure requirements related to long-term contracts for the purchase ofelectric power. This release states: The cost of power obtained under long-term purchase contracts, including payments required to be made when a production plant is not operating, should be included in the operating ex- penses section of the income statement. A note to the financial statements should present information concerning the terms and significance of such contracts to the utility company in- cluding date of contract expiration, share of land output being purchased, estimated annual cost, annual minimum debt service payment required and amount of related long-term debt or lease obligations outstanding. Purchasers of power under contracts that specify a level of power to be made available for aspecific time period usually account for such contracts as purchase commitments with no recogni-tion of an asset for the right to receive power and no recognition of a liability for the obligation to31 38 REGULATED UTILITIES •make payments (that is, the contracts are accounted for as executory agreements). However, somepower purchase contracts may have characteristics similar to a lease in that the contract confers tothe purchaser the right to use specific property, plant, and equipment. The determination of whether a power purchase contract is an executory agreement or a lease is ajudgmental decision based on the subs ...