ASC 470-980

Regulated Operations

470 Debt

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In brief

IntermediateDerecognition Industry-specific Subsequent measurement Debt and equity

This Subtopic modifies the general rule that gains and losses on early extinguishment of debt hit income immediately (Subtopic 470-50) for entities whose rates are set by a regulator. If the regulator will recover a reacquisition loss through future rates, the regulated entity capitalizes the excess of reacquisition price over net carrying amount as a regulatory asset; if the regulator will reduce future rates for a gain, the entity records a regulatory liability. Either amount is amortized as an adjustment of interest expense over the period reflected in rate-making.

Key points (6)

Subtopic 470-50 normally requires a gain or loss on early extinguishment of debt to be recognized in income in the period of extinguishment, but for rate-making the difference between net carrying amount and reacquisition price may be amortized as an adjustment of interest expense over a future period (470-980-40-1).
When debt is reacquired for more than its net carrying amount and the regulator increases future rates to amortize the difference, that decision gives reasonable assurance of an asset, so the entity capitalizes the excess cost (470-980-40-2; see 980-340-25-1).
The capitalized excess is amortized over the period during which it will be allowed for rate-making purposes (470-980-40-2).
When debt is reacquired for less than its net carrying amount and the regulator reduces future rates, a liability is imposed on the entity, which records the difference as a liability (470-980-40-3; see 980-405-25-1(c)).
That liability is amortized over the period during which permitted rates will be reduced (470-980-40-3).
The scope of this Subtopic is the same as the Regulated Operations Overall Subtopic scope in Section 980-10-15 (470-980-15-1).

For students. This is the classic example of rate regulation overriding normal income-statement timing: the gain or loss is deferred on the balance sheet as a regulatory asset or liability rather than recognized immediately. The common mistake is assuming deferral is automatic for any utility — it depends on the regulator actually reflecting the amount in future rates.

early extinguishment of debt regulated operations regulatory asset regulatory liability reacquisition price net carrying amount rate-making amortization of interest expense

Machine-generated study aid for ASC 470-980. Check the source paragraphs below.

470-980-05Overview and Background

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470-980-05-1

This Subtopic provides guidance for debt for entities with regulated operations.

470-980-15Scope and Scope Exceptions

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Overall Guidance

470-980-15-1

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

470-980-40Derecognition

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Early Extinguishment of Debt

470-980-40-1

Subtopic 470-50 requires recognition in income of a gain or loss on an early extinguishment of debt in the period in which the debt is extinguished. For rate-making purposes, the difference between the entity's net carrying amount of the extinguished debt and the reacquisition price may be amortized as an adjustment of interest expense over some future period.

470-980-40-2

If the debt is reacquired for an amount in excess of the entity's net carrying amount, the regulator's decision to increase future rates by amortizing the difference for rate-making purposes provides reasonable assurance of the existence of an asset (see paragraph 980-340-25-1). Accordingly, the regulated entity shall capitalize the excess cost and amortize it over the period during which it will be allowed for rate-making purposes.

470-980-40-3

If the debt is reacquired for an amount that is less than the entity's net carrying amount, the regulator's decision to reduce future rates by amortizing the difference for rate-making purposes imposes a liability on the regulated entity (see paragraph 980-405-25-1(c)). Accordingly, the entity would record the difference as a liability and amortize it over the period during which permitted rates will be reduced.