ASC

ASC 605-980

Regulated Operations

605 Revenue Recognition

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In brief

IntermediateRevenueRecognitionPresentationIndustry-specific

ASC 605-980 is the surviving remnant of the old revenue standard for entities with regulated operations (and nonutility generators), governing recognition of revenue from "alternative revenue programs" — regulator-authorized adjustments to future billings for past events. Type A programs adjust billings for weather abnormalities, broad external factors, or demand-side management; Type B programs award incentives for achieving objectives such as cost reduction or improved service. Revenue is recognized once the triggering events are complete if the program arises from a regulatory order allowing automatic rate adjustment, the amount is objectively determinable and probable of recovery, and collection occurs within 24 months after the end of the annual period of recognition (605-980-25-4).

Key points (7)
  • Alternative revenue programs fall into Type A (adjust billings for weather abnormalities, broad external factors, or demand-side management initiatives) and Type B (incentive awards for achieving objectives such as cost reduction, milestones, or improved customer service) (605-980-25-2).
  • After the specific events permitting billing are complete, additional revenue is recognized only if all three conditions in 605-980-25-4 are met: a regulatory commission order allowing automatic adjustment of future rates, an objectively determinable amount that is probable of recovery, and collection within 24 months following the end of the annual period of recognition.
  • Regulator verification of the future rate adjustment does not prevent the adjustment from being considered automatic (605-980-25-4(a)).
  • Long-term power supply contracts within the scope of Topic 842 on leases are excluded from this Subtopic (605-980-15-3); the guidance does apply to nonutility generators (605-980-15-2).
  • When a regulated entity bills requested rate increases before the regulator rules, the loss contingency criteria in 450-20-25-2 determine whether a provision for estimated refunds is accrued; a wide range of possible refund that cannot be reasonably estimated may call into question whether the provisional revenue should be recognized at all (605-980-30-2).
  • A recorded provision for estimated refunds must be adjusted subsequently as the estimate changes (605-980-35-1, referencing 980-405-25-1(a)).
  • Alternative revenue program revenue must be presented separately from revenue from contracts with customers within the scope of Topic 606 in the statement of comprehensive income (605-980-45-1), and material refunds recognized in a period other than the period of the related revenue must be disclosed with the years in which the revenue was recognized (605-980-50-1).

For students. Most of Topic 605 was superseded by ASU 2014-09, but this Subtopic survives because alternative revenue program revenue is not revenue from a contract with a customer — the counterparty right arises from the regulator's order, not the customer contract. The classic mistake is lumping it in with Topic 606 revenue on the income statement or forgetting the hard 24-month collection cutoff.

alternative revenue programtype a and type b programsautomatic rate adjustmentprobable of recovery24-month collection criterionprovisional rate increase refundsregulated operationsseparate presentation from topic 606 revenue

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605-980-00Status

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605-980-05Overview and Background

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605-980-05-1
This Subtopic provides guidance for revenue recognition in alternative revenue programs.

605-980-15Scope and Scope Exceptions

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Overall Guidance

605-980-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 980-10-15, with specific qualifications and exceptions noted below.

Entities

605-980-15-2
The guidance in this Subtopic also applies to nonutility generators as they provide many of the services of entities with regulated operations.

Transactions

605-980-15-3
The scope of this Subtopic excludes long-term power supply contracts if they are within the scope of Topic 842 on leases. For the considerations required to determine whether a long-term power sales contract arrangement contains a lease, see Subtopic 842-10.

605-980-25Recognition

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Alternative Revenue Programs

605-980-25-1
Traditionally, regulated utilities whose rates are determined based on cost of service invoice their customers by applying approved base rates (designed to recover the utility's allowable costs including a return on shareholders' investment) to usage. Some regulators of utilities have also authorized the use of additional, alternative revenue programs. The major alternative revenue programs currently used can generally be segregated into two categories, Type A and Type B.
605-980-25-2
Type A programs adjust billings for the effects of weather abnormalities or broad external factors or to compensate the utility for demand-side management initiatives (for example, no-growth plans and similar conservation efforts). Type B programs provide for additional billings (incentive awards) if the utility achieves certain objectives, such as reducing costs, reaching specified milestones, or demonstratively improving customer service.
605-980-25-3
Both types of programs enable the utility to adjust rates in the future (usually as a surcharge applied to future billings) in response to past activities or completed events.
605-980-25-4
Once the specific events permitting billing of the additional revenues under Type A and Type B programs have been completed, the regulated utility shall recognize the additional revenues if all of the following conditions are met:
  1. a
    The program is established by an order from the utility's regulatory commission that allows for automatic adjustment of future rates. Verification of the adjustment to future rates by the regulator would not preclude the adjustment from being considered automatic.
  2. b
    The amount of additional revenues for the period is objectively determinable and is probable of recovery.
  3. c
    The additional revenues will be collected within 24 months following the end of the annual period in which they are recognized.

605-980-30Initial Measurement

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Alternative Revenue Programs—Revenue Collected Subject to Refund

605-980-30-1
In some cases, a regulated entity is permitted to bill requested rate increases before the regulator has ruled on the request.
605-980-30-2
When the revenue is originally recorded, the criteria in paragraph 450-20-25-2 shall determine whether a provision for estimated refunds shall be accrued as a loss contingency. The inability to make a reasonable estimate of the amount of the obligation at the time of sale because of significant uncertainty about possible claims precludes accrual and, if the range of possible loss is wide, may raise a question about whether revenue should be recognized. Similarly, if the range of possible refund is wide and the amount of the refund cannot be reasonably estimated, there may be a question about whether it would be misleading to recognize the provisional revenue increase as income.

605-980-35Subsequent Measurement

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Alternative Revenue Programs—Revenue Collected Subject to Refund

605-980-35-1
If a provision for estimated refunds is required by the criteria in paragraph 450-20-25-2, it shall be adjusted subsequently if the estimate of the refund changes (see paragraph 980-405-25-1(a)).

605-980-45Other Presentation Matters

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Alternative Revenue Program Presentation

605-980-45-1
Revenue arising from alternative revenue programs shall be presented separately from revenue arising from contracts with customers within the scope of Topic 606 in the statement of comprehensive income.

605-980-50Disclosure

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Refunds for Previously Recognized Revenue

605-980-50-1
For refunds that are recognized in a period other than the period in which the related revenue was recognized and that have a material effect on net income, the entity shall disclose the effect on net income and indicate the years in which the related revenue was recognized. Such effect may be disclosed by including it, net of related income taxes, as a line item in the income statement.

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