# ASC 340-980-55: Other Assets and Deferred Costs — Regulated Operations — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

[Read online](https://asc.understandingaccounting.org/asc/340/980/#55-implementation-guidance-and-illustrations)

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## ASC 340-980-55: 55 Implementation Guidance and Illustrations

[Read section](https://asc.understandingaccounting.org/asc/340/980/#55-implementation-guidance-and-illustrations)

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##### [340-980-55-1](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-1)

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This Section provides guidance for application of this Subtopic to some specific situations, but does not address all possible applications of this Subtopic. All of the implementation guidance and illustrations assume that the entity meets the criteria in paragraph [980-10-15-2](https://asc.understandingaccounting.org/asc/980/10/#980-10-15-2); thus, recovery of any cost is probable if that cost is designated for future recovery by the regulator.

#### Implementation Guidance

##### [340-980-55-2](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-2)

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In some cases, a regulator may approve rates that are intended to recover an [incurred cost](https://asc.understandingaccounting.org/glossary/i/#incurred-cost "A cost arising from cash paid out or obligation to pay for an acquired asset or service, a loss from any cause that has been sustained and has been or must be paid for.") over an extended period without a return on the unrecovered cost during the recovery period.

##### [340-980-55-3](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-3)

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The regulator's action provides reasonable assurance of the existence of an asset (see paragraph [980-340-25-1](https://asc.understandingaccounting.org/asc/340/980/#340-980-25-1)). Accordingly, the regulated entity would [capitalize](https://asc.understandingaccounting.org/glossary/c/#capitalize "Capitalize is used to indicate that the cost would be recorded as the cost of an asset. That procedure is often referred to as deferring a cost, and the resulting asset is sometimes described as a deferred cost.") the cost and amortize it over the period during which it will be allowed for rate-making purposes. That cost would not be recorded at discounted present value. An exception to this general rule is provided for costs of abandoned plants. See Example 1 (paragraph [980-360-55-2](https://asc.understandingaccounting.org/asc/360/980/#360-980-55-2)) for an illustration of accounting for future revenues expected to result from the cost of an abandoned plant. If the amounts are material, the disclosures specified in paragraph [980-340-50-1](https://asc.understandingaccounting.org/asc/340/980/#340-980-50-1) would be furnished.

##### [340-980-55-4](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-4)

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Mirror construction work in progress is one means of moderating the sudden, one-time increase in rates that would otherwise result from placing a newly completed utility plant in service. Under mirror construction work in progress, increasing amounts of construction work in progress are included in the current rate base in the periods before the plant goes into service, providing the utility with a current return on a portion of its investment in construction while the construction proceeds. After the plant is placed in service, a decreasing amount of plant-in-service is excluded from the rate base each year, mirroring the pattern in which the construction was included in the rate base. The result of this procedure is to increase rates while the plant is under construction and to reduce the increase in rates in the initial years of the plant's service life.

##### [340-980-55-5](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-5)

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For rate-making purposes, no [allowance for funds used during construction](https://asc.understandingaccounting.org/glossary/a/#allowance-for-funds-used-during-construction "The cost of financing construction as financed partially by borrowings and partially by equity, capitalized as part of the cost of plant and equipment pursuant to requirements of the regulator.") is recognized on the portion of the construction that is included in the rate base while the asset is under construction, and an allowance for funds used during construction is recognized on the portion of the plant-in-service that is subsequently excluded from the rate base after the plant is placed in service. The same total amount is capitalized as if no construction had been included in the current rate base.

##### [340-980-55-6](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-6)

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The mirror construction work in progress arrangement described is not a [phase-in plan](https://asc.understandingaccounting.org/glossary/p/#phase-in-plan "Any method of recognition of allowable costs in rates that meets all of the following criteria: The method was adopted by the regulator in connection with a major, newly completed plant of the regulated entity or of one of its suppliers or a major plant scheduled for completion in the near future. The method defers the rates intended to recover allowable costs beyond the period in which those allowable costs would be charged to expense under generally accepted accounting principles (GAAP) applicable to entities in general. The method defers the rates intended to recover allowable costs beyond the period in which those rates would have been ordered under the rate-making methods routinely used prior to 1982 by that regulator for similar allowable costs of that regulated entity.") under the definition used in this Subtopic because it does not defer recovery of costs that would not have been deferred under the methods of rate making used prior to 1982. Rather, it effectively provides a temporary loan from customers to the utility during construction and requires repayment of that loan after the plant is placed in service.

##### [340-980-55-7](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-7)

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If the arrangement is known to be a mirror construction work in progress arrangement at the time of the construction (for example, if that arrangement is required by law or has been specifically ordered by the regulator), an allowance for funds used during construction should be accrued on the total cumulative construction cost in each period for financial reporting. The revenue collected as a result of inclusion of construction in the current rate base should be recorded as a liability to customers, with disclosure of the approximate timing of the repayment that will be required under the mirror construction work in progress arrangement.

##### [340-980-55-8](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-8)

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If the arrangement is not known to be a mirror construction work in progress arrangement when the construction is included in the rate base but the regulator later orders a mirror construction work in progress arrangement, the accounting described in the preceding paragraph should be implemented as soon as the nature of the arrangement becomes known. That will require an adjustment for the cumulative effect of the arrangement to date. An amount should be capitalized, with a corresponding accrual of an allowance for funds used during construction, when the mirror construction work in progress arrangement becomes known. Current revenues should be reduced by an equal amount, and a corresponding liability to customers should be recognized. That amount should be the amount that would have been capitalized if the arrangement had been known to be a mirror construction work in progress arrangement when the revenue was collected during construction. That capitalized amount should be reported in the year in which the mirror construction work in progress arrangement becomes known in the same manner as if it had been capitalized during construction.

#### Illustrations

##### [340-980-55-9](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-9)

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This Example illustrates the guidance in paragraphs

[980-340-25-2 through 25-3](https://asc.understandingaccounting.org/asc/340/980/#340-980-25-2)

.

##### [340-980-55-10](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-10)

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Utility B sells its interest in a newly completed electric generating plant for an amount equal to its cost and leases that interest back under a lease that requires equal annual payments. The arrangement would not qualify for sale and leaseback accounting in accordance with Subtopic 842-40 because the leaseback would be classified as a finance lease. However, the arrangement previously qualified as a sale and a capital leaseback in accordance with Subtopic 840-40 before the effective date of Topic 842. Therefore, Utility B continues to account for the arrangement as a sale and a leaseback. Utility B's regulator includes the lease rentals in allowable cost as they accrue. In the past, Utility B's regulator has treated other leases entered into by Utility B in the same manner, but those leases were for much less significant items of equipment—not for an interest in an electric generating plant.

##### [340-980-55-11](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-11)

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The rate-making method described is a phase-in plan under the definition in this Subtopic. Generally accepted accounting principles (GAAP) applicable to entities in general require a finance lease to be accounted for much like a purchase of the underlying asset. The resulting expense related to the lease consists of interest on the remaining lease obligation and depreciation based on the method used for similar owned assets. In the early years of a lease, the lease rentals included in allowable cost as they accrue are significantly less than the sum of interest on the lease obligation and depreciation on the leased asset. Thus, significant deferrals will result. The method also defers recognition of expenses compared with the methods of expense recognition used by Utility B's regulator for similar assets of Utility B prior to 1982 because Utility B's interests in electric generating plants were included in [allowable costs](https://asc.understandingaccounting.org/glossary/a/#allowable-costs "All costs for which revenue is intended to provide recovery. Those costs can be actual or estimated. In that context, allowable costs include interest cost and amounts provided for earnings on shareholders' investments.") in the past based on current provisions for depreciation and for the cost of capital invested in the plants. The use of this rate-making method in the past for leases of equipment does not change this conclusion. The definition is based on the method of rate-making used prior to 1982 for similar allowable costs. Similar allowable costs would be those resulting from electric generating plants.

##### [340-980-55-12](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-12)

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This Example illustrates the guidance in paragraphs

[980-340-25-2 through 25-3](https://asc.understandingaccounting.org/asc/340/980/#340-980-25-2)

.

##### [340-980-55-13](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-13)

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Utility C sells its interest in a newly completed electric generating plant for an amount equal to its cost and leases that interest back under a lease that requires equal annual payments. The arrangement qualifies as a sale and a leaseback in accordance with Subtopic 842-20. The leaseback is classified as an operating lease. Utility C's regulator includes the lease payments in allowable cost as they accrue. In the past, Utility C's regulator has treated other leases entered into by Utility C in the same manner, but those leases were not for an interest in an electric generating plant.

##### [340-980-55-14](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-14)

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The rate-making method applied to Utility C is not a phase-in plan under the definition in this Subtopic because it recognizes lease expense for rate-making purposes in the same way as that expense would be recognized for entities in general for this type of lease.

##### [340-980-55-15](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-15)

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This Example illustrates the guidance in paragraphs

[980-340-25-2 through 25-3](https://asc.understandingaccounting.org/asc/340/980/#340-980-25-2)

.

##### [340-980-55-16](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-16)

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Utility D sells its interest in a 5-year-old electric generating plant for an amount that exceeds its undepreciated cost by $500,000 and leases that interest back. The leaseback term is 20 years, and there are no renewal options. The arrangement would not qualify for sale and leaseback accounting in accordance with Subtopic 842-40 because the leaseback would be classified as a finance lease. However, the arrangement previously qualified as a sale and a capital leaseback in accordance with Subtopic 840-40 before the effective date of Topic 842. Therefore, Utility D continues to account for the arrangement as a sale and a leaseback. Utility D's regulator includes the lease payments in allowable cost as they accrue and orders Utility D to amortize the profit, for rate-making purposes, over 10 years. The sale occurred at a time when Utility D was about to place a newly completed plant in service. Utility D has not had any similar transactions in the past.

##### [340-980-55-17](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-17)

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The rate-making method described is a phase-in plan under the definition in this Subtopic. GAAP applicable to entities in general at the time of entering into this arrangement required a profit on a sale and leaseback transaction to be amortized over the term of the leaseback. Amortization of that profit, for rate-making purposes, over 10 years when GAAP applicable to entities in general at that time required amortization over the 20-year leaseback term is equivalent to a deferral of allowable costs. In view of the timing of the rate order on the sale and leaseback transaction, the presumption is that the order was issued in connection with the newly completed plant. The method cannot be compared with methods in use prior to 1982 because Utility D has had no previous transactions of this type.

##### [340-980-55-18](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-18)

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This Example illustrates the guidance in paragraphs

[980-340-25-2 through 25-3](https://asc.understandingaccounting.org/asc/340/980/#340-980-25-2)

.

##### [340-980-55-19](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-19)

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Utility E's regulator orders it to depreciate its new electric generating plant, for rate-making purposes, by using an annuity method. Under the method ordered, depreciation increases each year so that the total of depreciation and return on investment stays approximately level over the life of the plant. In the past, Utility E's regulator required the use of straight-line depreciation for electric generating plants.

##### [340-980-55-20](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-20)

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The rate-making method applied to Utility E is a phase-in plan under the definition in this Subtopic because it meets both of the following conditions:

1.  a
    
    It defers depreciation expense compared with the depreciation methods that are acceptable under GAAP applicable to entities in general (as indicated in paragraph [360-10-35-10](https://asc.understandingaccounting.org/asc/360/10/#360-10-35-10), annuity methods of depreciation are not acceptable under GAAP applicable to entities in general).
    
2.  b
    
    It defers depreciation expense compared with the method of depreciation used by Utility E's regulator for Utility E's electric generating plants prior to 1982.

##### [340-980-55-21](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-21)

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This Example illustrates the guidance in paragraphs

[980-340-25-2 through 25-3](https://asc.understandingaccounting.org/asc/340/980/#340-980-25-2)

and

[980-340-35-3 through 35-4](https://asc.understandingaccounting.org/asc/340/980/#340-980-35-3)

related to the deferral of costs before a rate order is issued when:

1.  a
    
    Utility F has deferred costs before a rate order is issued (Case A).
    
2.  b
    
    Utility F has deferred costs before a rate order is issued and has subsequent interaction with a disallowance (Case B).
    
3.  c
    
    Utility G has deferred costs before a rate order is issued and has interaction with a subsequent phase-in plan (Case C).

##### [340-980-55-22](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-22)

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Cases A, B, and C share all of the assumptions described in the following paragraph.

##### [340-980-55-23](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-23)

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Utility F completes construction of a nuclear generating plant and places that plant in service. Utility F's regulator decides that it will complete its examination of the prudence of Utility F's construction cost before rates are adjusted to reflect the cost of operating the plant. During the examination and until rates are adjusted, the regulator orders Utility F to capitalize its net cost of operating the plant (operating costs, depreciation, allocable interest cost, and an allowance for earnings on shareholders' investment, all net of savings that result from operation of the new plant).

##### [340-980-55-24](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-24)

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The resulting deferral is not a phase-in plan under the definition in this Subtopic. The regulator's order to capitalize an amount pending completion of a rate hearing is designed to protect the utility from the effects of regulatory lag in the absence of a rate order—a routine procedure on the part of regulators. Regulatory lag is the delay between a change in a regulated entity's costs and a change in rates ordered by a regulator as a result of that change in costs. A shortfall in a utility's net income can occur when regulators set rates prospectively and the estimated or test-period costs on which those rates were based are less than the actual costs that are incurred during the period covered by those rates. Regulators' actions that are designed to protect a utility from the effects of regulatory lag can occur during a rate case but before a rate order is issued, as in this Case, and when no rate case is under active consideration. An accounting order to a utility to capitalize the cost of repairing storm damage would be an example of the latter situation. Those actions can also be a part of a rate order. An example of that type of action would be a fuel adjustment clause that is intended to protect the utility from the effects of unanticipated changes in fuel costs.

##### [340-980-55-25](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-25)

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The definition of a phase-in plan in this Subtopic is not intended to encompass actions of a regulator that are designed to protect a utility from the effects of regulatory lag in the absence of a rate order, nor is it intended to encompass the regulator's subsequent treatment of any allowable costs that result from those actions.

##### [340-980-55-26](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-26)

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Under paragraph [980-340-25-1](https://asc.understandingaccounting.org/asc/340/980/#340-980-25-1), Utility F should capitalize that portion of the amount capitalized for rate-making purposes that represents incurred costs that would otherwise be charged to expense, provided that it is probable that future revenue in an amount at least equal to the capitalized cost will result from inclusion of those costs in allowable costs for rate-making purposes. Otherwise, Utility F should not capitalize those costs.

##### [340-980-55-27](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-27)

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Since the situation in this Case is neither during construction nor a phase-in plan, this Topic does not permit capitalization of an allowance for earnings on shareholders' investment. Accordingly, Utility F should not capitalize, for financial reporting, the portion of the amount capitalized for rate-making purposes that represents an allowance for earnings on shareholders' investment. If recovery of that allowance subsequently occurs, increased earnings during the recovery period will result.

##### [340-980-55-28](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-28)

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Six months after the accounting order referred to in Case A, Utility F's regulator approves part of the cost of the new plant but disallows $600,000,000—consisting of construction expenditures of $570,000,000 and amounts capitalized for rate-making purposes during this 6-month operating period prior to the rate order of $30,000,000. The recorded cost of the plant before consideration of the disallowance is $4,500,000,000. During this 6-month period, Utility F has capitalized $500,000,000 of net cost for rate-making purposes. This $500,000,000 consists of an allowance for earnings on shareholders' investment of $200,000,000 and incurred costs that would otherwise be charged to expense of $300,000,000. For rate-making purposes, the balance sheet accounts, before and after the disallowance, are as follows.

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-56069F69-1063-4D20-BC46-C30E4843DEAA-low.gif)
    
    Balance before Disallowance Disallowance (in thousands) Balance after Disallowance Plant in service " $4,500,000 " " $(570,000)" " $3,930,000 " Amounts capitalized pending rate order " 500,000 " " (30,000)" " 470,000 " Combined totals " $5,000,000 " " $(600,000)" " $4,400,000 "

##### [340-980-55-29](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-29)

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Section 980-360-35 requires a disallowance of plant costs to be recognized as a loss. Utility F should perform the following analysis to determine the loss that should be recognized and how it will be allocated:

1.  a
    
    Assuming that $300,000,000 of the $500,000,000 capitalized for rate-making purposes during the 6-month period was also capitalized for financial reporting (the $200,000,000 allowance for earnings on shareholders' investment would not be capitalized), the total loss recognized by Utility F for financial reporting should be the amount that reduces the combined total of plant in service and amounts capitalized pending rate order ($4,800,000,000) to the combined total that will be honored for rate-making purposes ($4,400,000,000). The recognizable loss is $400,000,000.
    
2.  b
    
    Utility F should allocate to plant in service the lesser of the amount of the disallowance that was allocated to plant in service by the regulator ($570,000,000) or the total disallowance recognized for financial reporting ($400,000,000), or $400,000,000.
    
3.  c
    
    Utility F should allocate the rest of the disallowance recognized for financial reporting, if any, to amounts capitalized pending rate order. In this case, no amount is allocated to that asset.

##### [340-980-55-30](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-30)

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The recognition of the disallowance and the effect of that recognition on the financial reporting balance sheet accounts are as follows.

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-B4BFDE34-C467-4D33-BF36-D415AB03CC27-low.gif)
    
    Balance before Disallowance Recognition of Disallowance (in thousands) Balance after Disallowance Plant in service " $4,500,000 " " $(400,000)" " $4,100,000 " Amounts capitalized pending rate order " 300,000 " " 300,000 " Combined totals " $5,000,000 " " $(400,000)" " $4,400,000 "

##### [340-980-55-31](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-31)

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Utility G's fact situation is identical to that of Utility F, described in Cases A and B, except that Utility G's regulator approves all of the costs related to the newly completed plant. Utility G's regulator adopts a formal phase-in plan intended to provide recovery of amounts deferred under the plan and amounts capitalized, for rate-making purposes, during the six-month period from the plant's in-service date to the date of the rate order.

##### [340-980-55-32](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-32)

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The phase-in plan does not affect the financial reporting of those previously deferred costs described in paragraphs

[980-340-55-26 through 55-27](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-26)

, nor does the existence of those previously deferred costs affect the financial reporting of the phase-in plan. Accordingly, the allowance for earnings on shareholders' investment that was not capitalized previously during the period preceding issuance of the rate order may not be capitalized upon adoption of the phase-in plan.

##### [340-980-55-33](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-33)

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This Example illustrates the guidance in paragraph [980-340-35-4](https://asc.understandingaccounting.org/asc/340/980/#340-980-35-4).

##### [340-980-55-34](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-34)

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Utility A is an electric utility that operates solely in a single-state jurisdiction. On January 1, 19X1, Utility A's new electric generating plant becomes operational. The cost of that plant is $1 billion.

##### [340-980-55-35](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-35)

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Utility A's regulator orders that the costs of the newly completed plant be phased in over a three-year period, as follows:

1.  a
    
    19X1—A portion of the return (interest and an allowance for earnings on shareholders' investment) on unrecovered investment is deferred by excluding 25 percent of the cost of the plant from the rate base.
    
2.  b
    
    19X2—All of the remaining cost of the plant is to be included in the rate base with no recovery of previously deferred amounts.
    
3.  c
    
    19X3—All of the remaining cost of the plant is to be included in the rate base. Also, additional revenue is to be provided equal to the return on unrecovered investment excluded from rates in Year 1.
    

The order does not provide for recovery in any year of a return on Utility A's investment in the deferred amounts. Utility A's weighted-average cost of capital in its latest rate case was 11 percent.

##### [340-980-55-36](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-36)

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The phase-in plan is partially a disallowance of plant costs because no return on investment is provided for the deferred amounts. That disallowance should be recognized in accordance with Section 980-360-35 when it became probable. The amount of equivalent cost disallowed should be determined as shown in Schedule 1. The recorded cost of the plant should be reduced by that amount, and a corresponding loss should be reported in 19X1.

##### [340-980-55-37](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-37)

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The disallowance will reduce revenues only in Years 1 through 3, so the depreciation charge that would otherwise be recognized for that plant in Years 1 through 3 should be reduced by the amount of the effective disallowance attributable to those years (the amount in column 4 of Schedule 1). Amounts deferred under the plan (the amount for months 1-12 in column 1 of Schedule 1) should be capitalized as a separate asset, and that asset should be amortized as recovery occurs (in months 25-36), using the amounts in column 1 of Schedule 1.

##### [340-980-55-38](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-38)

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The following table illustrates the determination of effective disallowance.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-BCE46570-EA8B-4AE2-A04F-02C032A90ABC-low.gif)
    
    Schedule 1 Utility A Determination of Effective Disallowance Return on Investment Disallowed for Amounts Deferred under Phase-in Plan (in thousands) (1) (2) (3) (4) Month Cost Deferral (Recovery) Cumulative Amount Deferred Return on Investment on Cumulative Deferral Effective Disallowance 1 " $2,292 " " $2,292 " $21 $- 2 " 2,291 " " 4,583 " 42 21 3 " 2,292 " " 6,875 " 63 41 4 " 2,292 " " 9,167 " 84 61 5 " 2,291 " " 11,458 " 105 80 6 " 2,292 " " 13,750 " 126 99 7 " 2,292 " " 16,042 " 147 118 8 " 2,291 " " 18,333 " 168 137 9 " 2,292 " " 20,625 " 189 155 10 " 2,292 " " 22,917 " 210 173 11 " 2,291 " " 25,208 " 231 190 12 " 2,292 " " 27,500 " 252 207 13 - " 27,500 " 252 224 14 - " 27,500 " 252 222 15 - " 27,500 " 252 220 16 - " 27,500 " 252 218 17 - " 27,500 " 252 216 18 - " 27,500 " 252 214 19 - " 27,500 " 252 212 20 - " 27,500 " 252 210 21 - " 27,500 " 252 208 22 - " 27,500 " 252 206 23 - " 27,500 " 252 204 24 - " 27,500 " 252 202 25 " (2,292)" " 25,208 " 231 201 26 " (2,291)" " 22,917 " 210 182 27 " (2,292)" " 20,625 " 189 164 28 " (2,292)" " 18,333 " 168 146 29 " (2,291)" " 16,042 " 147 129 30 " (2,292)" " 13,750 " 126 112 31 " (2,292)" " 11,458 " 105 95 32 " (2,291)" " 9,167 " 84 78 33 " (2,292)" " 6,875 " 63 62 34 " (2,292)" " 4,583 " 42 46 35 " (2,291)" " 2,292 " 21 31 36 " (2,292)" - - 15 Total loss to be recognized in 19X1 " $5,099 " Computations: Column (1)—Cost of plant ($1 billion) × .25 × 11% ÷ 12 Column (2)—Column (2) for prior month + Column (1) for current month Column (3)—Column (2) × 11% ÷ 12 Column (4)—Present value (at beginning of month 1) at 11% (.9167 per month) of amount in Column (3) for prior month

##### [340-980-55-39](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-39)

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This Example illustrates the guidance in paragraph [980-340-25-2](https://asc.understandingaccounting.org/asc/340/980/#340-980-25-2) and the application of the definition of a [phase-in plan](https://asc.understandingaccounting.org/glossary/p/#phase-in-plan "Any method of recognition of allowable costs in rates that meets all of the following criteria: The method was adopted by the regulator in connection with a major, newly completed plant of the regulated entity or of one of its suppliers or a major plant scheduled for completion in the near future. The method defers the rates intended to recover allowable costs beyond the period in which those allowable costs would be charged to expense under generally accepted accounting principles (GAAP) applicable to entities in general. The method defers the rates intended to recover allowable costs beyond the period in which those rates would have been ordered under the rate-making methods routinely used prior to 1982 by that regulator for similar allowable costs of that regulated entity.").

##### [340-980-55-40](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-40)

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A utility that meets the criteria of paragraph [980-10-15-2](https://asc.understandingaccounting.org/asc/980/10/#980-10-15-2) for application of this Topic constructs two generating plants on a common site and those plants share certain facilities (primarily coal handling equipment, transmission facilities, and an administrative building). One plant (Unit 1) is completed January 31, 19X1, and the other plant (Unit 2) is completed December 31, 19X1. The coal handling equipment, transmission facilities, and administrative building are completed by January 31, 19X1, and are used by Unit 1 during 19X1.

##### [340-980-55-41](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-41)

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New rates are placed in effect on February 1, 19X1, that include the effect on revenue requirements of Unit 1 and one-half of the coal handling equipment, transmission facilities, and administrative building. New rates are again placed in effect on January 1, 19X2, to include the effect on revenue requirements of Unit 2 and the other half of the coal handling equipment, transmission facilities, and administrative building.

##### [340-980-55-42](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-42)

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Consistent with the above rate treatment, the utility capitalizes interest on and does not depreciate one-half of the coal handling equipment, transmission facilities, and administrative building from January 31 to December 31, 19X1. The question is whether deferral of depreciation and continued capitalization of interest on one-half of the coal handling equipment, transmission facilities, and administrative building is a phase-in plan under Subtopic 980-340.

##### [340-980-55-43](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-43)

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This deferral represents a phase-in plan unless that rate treatment was routinely used before 1982 by that regulator for similar allowable costs of that regulated entity. The definition of a phase-in plan provides that a phase-in plan defers the rates intended to recover allowable costs beyond the period in which those allowable costs would be charged to expense under generally accepted accounting principles (GAAP) applicable to entities in general. The interest capitalization period should end and depreciation for the common facilities should begin on February 1, 19X1. Assuming the depreciation pattern for those facilities that results from the above rate-making treatment is not a rational and systematic method of depreciation that would be acceptable for an entity in general, that deferral of depreciation and interest is a phase-in plan. If the depreciation pattern for those facilities that results from the above treatment is a rational and systematic method of depreciation that would be acceptable for an entity in general, only the deferral of the interest is a phase-in plan.

##### [340-980-55-44](https://asc.understandingaccounting.org/asc/340/980/#340-980-55-44)

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Subtopic 980-340 provides an exception to the definition of a phase-in plan for the effects of regulatory lag. However, regulatory lag ends for a utility's newly completed plant with the first rate order that both:

1.  a
    
    Is effective after the in-service date of that plant
    
2.  b
    
    Addresses the costs of that plant.
    

Therefore, even if different portions of the cost of a unit of property (for example, transmission facilities) are considered for rate treatment in successive rate filings under the notion of regulatory lag, it creates a phase-in plan.