ASC

ASC 405-980

Regulated Operations

405 Liabilities

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In brief

IntermediateRecognitionDerecognitionIndustry-specificRevenue

This Subtopic explains when a regulator's rate actions create liabilities (regulatory liabilities) for an entity with regulated operations. Three mechanisms create liabilities: required refunds to customers that meet the loss-contingency accrual criteria, current rates collected to recover costs expected to be incurred in the future for which the entity remains accountable, and gains or other reductions of net allowable costs that the regulator requires be amortized to customers over future periods. A regulator's actions can eliminate a liability only if the regulator's actions imposed it in the first place.

Key points (6)
  • Rate actions of a regulator can impose a liability on a regulated entity, usually an obligation to the entity's customers (405-980-25-1).
  • Refunds required by a regulator that meet the criteria for accrual of loss contingencies in paragraph 450-20-25-2 are recorded as liabilities and as reductions of revenue or as expenses (405-980-25-1(a)).
  • When current rates are intended to recover costs expected to be incurred in the future and the regulator requires the entity to remain accountable for amounts collected but not yet expended, those amounts are recognized as liabilities rather than revenues and are taken to income only when the associated costs are incurred (405-980-25-1(b)).
  • A gain or other reduction of net allowable costs that is to be amortized over future periods for rate-making purposes is not recognized in current income; it is recorded as a liability for the expected future reductions of charges to customers (405-980-25-1(c)).
  • Actions of a regulator can eliminate a liability only if the liability was imposed by actions of the regulator (405-980-40-1).
  • Implementation example: amounts collected in rates for a regulator-directed contingency (e.g., expected future uninsured storm damage) that does not meet Subtopic 450-20 recognition criteria are recorded as liabilities, and income is recognized equal to the cost when the repair cost is incurred (405-980-55-1).

For students. This is the liability mirror image of regulatory assets: cash collected today under a regulator's rate order is not always revenue. The common misunderstanding is thinking a regulator can wipe out any liability — it can only eliminate liabilities that its own actions imposed.

regulatory liabilityrate actions of a regulatorallowable costsrefunds to customersloss contingency accrualdeferred revenue recognitionamortization of gains for rate-makingregulated operations

Machine-generated study aid for ASC 405-980. Check the source paragraphs below.

405-980-05Overview and Background

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405-980-05-1
This Subtopic provides guidance for liabilities for entities with regulated operations.

405-980-15Scope and Scope Exceptions

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Overall Guidance

405-980-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 980-10-15.

405-980-25Recognition

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Regulator-Imposed Liabilities

405-980-25-1
Rate actions of a regulator can impose a liability on a regulated entity. Such liabilities are usually obligations to the entity's customers. The following are the usual ways in which liabilities can be imposed and the resulting accounting:
  1. a
    A regulator may require refunds to customers. Refunds can be paid to the customers who paid the amounts being refunded; however, they are usually provided to current customers by reducing current charges. Refunds that meet the criteria of accrual of loss contingencies (see paragraph 450-20-25-2) shall be recorded as liabilities and as reductions of revenue or as expenses of the regulated entity.
  2. b
    A regulator can provide current rates intended to recover costs that are expected to be incurred in the future with the understanding that if those costs are not incurred future rates will be reduced by corresponding amounts. If current rates are intended to recover such costs and the regulator requires the entity to remain accountable for any amounts charged pursuant to such rates and not yet expended for the intended purpose, the entity shall not recognize as revenues amounts charged pursuant to such rates. The usual mechanism used by regulators for this purpose is to require the regulated entity to record the anticipated cost as a liability in its regulatory accounting records. Those amounts shall be recognized as liabilities and taken to income only when the associated costs are incurred. (For related implementation guidance, see paragraph 980-405-55-1).
  3. c
    A regulator can require that a gain or other reduction of net allowable costs be given to customers over future periods. That would be accomplished, for rate-making purposes, by amortizing the gain or other reduction of net allowable costs over those future periods and reducing rates to reduce revenues in approximately the amount of the amortization. If a gain or other reduction of net allowable costs is to be amortized over future periods for rate-making purposes, the regulated entity shall not recognize that gain or other reduction of net allowable costs in income of the current period. Instead, it shall record it as a liability for future reductions of charges to customers that are expected to result.

405-980-40Derecognition

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Regulator-Imposed Liabilities

405-980-40-1
Actions of a regulator can eliminate a liability only if the liability was imposed by actions of the regulator.

405-980-55Implementation Guidance and Illustrations

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Implementation Guidance

405-980-55-1
This paragraph provides guidance on implementing paragraph 980-405-25-1(b). A regulator may direct a regulated entity to include an amount for a contingency in allowable costs for rate-making purposes even though the amount does not meet the criteria in Subtopic 450-20 for recording. For example, a regulator may direct a regulated entity to include an amount for repairs of expected future uninsured storm damage. If a cost to repair storm damage is not subsequently incurred, the increased charges will have to be refunded to customers through future rate reductions. Accordingly, the regulated entity would recognize the amounts charged pursuant to such rates as liabilities rather than as revenues. If a cost to repair storm damage is subsequently incurred, the entity would charge that cost to expense and reduce the liabilities at that time by recognizing income in amounts equal to the cost.

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