Using ASC 980 and GASB 62 to Record Future Recoverable Costs - Cooking the books or reporting reality?
How can we use ASC 980 and GASB 62 to defer losses due to depreciation?
ASC 980 and GASB 62 are an approach to timing the recording in future rates with current expenses, that is the essence of future recoverable costs. This is an excerpt from our publication – “The Practical Guidebook to Utility Regulatory Accounting”. It contains valuable information to use in recording transactions to ensure rate recovery from your customers for revenues that should be tied to a corresponding event or to be recognized over a longer time-frame than that allowed under regular generally accepted accounting principles.
The use of regulatory accounting under both ASC 980 and GASB 62 is used for deferring revenues and matching revenue recognition to the related impact on customer rates. Here is an example of a common application for future recoverable costs.
Check out the full publication in our Resource Library for more examples that can be used in your utility’s approach to ratemaking through regulatory accounting under GASB 62 or ASC 980!
Recording Future Recoverable Costs is a useful tool in regulatory accounting to recognize the difference between bond principal payments on debt-financed fixed assets and the depreciation expense on those assets. The financial impact will be to offset book losses due to the difference between principal payments and depreciation expense in an asset’s early years of service and gains in the asset’s later years of service.
Why do this? If a utility has a high level of debt-financed fixed assets, these non-cash differences could be material and negatively impact the utility’s Net Position. The financial statement reader may not understand this and could infer negative issues with the utility’s current Net Position, which will improve over time.
The goal of this treatment is to level operating income, reflecting the intent to recover bond principal payments through rates, which will recover the amount financed to construct the generating unit over its useful service life.
Situation
The utility issues $20 million of revenue bonds at an interest rate of 5% to finance a substation that has a useful life of 20 years. The substation is depreciated using the straight-line method.
The annual difference between bond principal payments and depreciation expense over the asset’s useful life is as follows:
Annual and cumulative difference between bond principal payments and depreciation expense
The table details that the utility will have a cumulative negative impact of bond principal/depreciation expense of $2,407,000 in Year 10, which will be erased to zero in Year 20.
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The exit strategy
Management presents a blanket resolution to the oversight Board to approve this treatment for similar transactions. The Board approves the resolution.
Journal entries for this regulatory item
The utility makes the following journal entries over the life of this asset’s treatment for future recoverable costs.
Impact on rates
There is no impact on rates. The bond principal payments are recovered in customer rates, and depreciation expense is a non-cash item. The reason for using future recoverable costs is to mitigate negative impacts on the financial statements and reflect rate recovery from customers.
Financial statement presentation
The presentation in the financial statements is as a non-current asset.
Why do this?
Using ASC 980/GASB 62 as described in this article recognizes that your organization most likely has not changed the process and mechanism for funding recovering debt payments from your ratepayers, but newer accounting standards require you to report differently. As with any other use of regulatory accounting, the goal is to match recognition of an event to recovery from customers in their rates.
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power and utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.
Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.