ASC 810-980
Regulated Operations
810 Consolidation
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This Subtopic provides the consolidation guidance unique to entities with regulated operations. Its core rule is an exception to the normal requirement that intra-entity profit be eliminated in consolidation: profit on sales to a regulated affiliate need not be eliminated if the sales price is reasonable and it is probable that the rate-making process will produce future revenue approximately equal to that sales price from the affiliate's use of the products. Reasonableness is normally presumed when the regulator accepts or does not challenge the price.
Key points (5)
- Scope follows the Overall Regulated Operations Subtopic, Section 980-10-15 (810-980-15-1).
- Profit on sales to regulated affiliates shall not be eliminated in general-purpose financial statements if both criteria in 810-980-45-1 are met: the sales price is reasonable, and it is probable that future revenue approximately equal to the sales price will result through the rate-making process from the affiliate's use of the products.
- Both criteria must be satisfied; failing either means the normal intra-entity profit elimination applies (810-980-45-1).
- A sales price is usually considered reasonable if it is accepted or not challenged by the regulator governing the regulated affiliate (810-980-45-2).
- If the price is challenged, reasonableness is judged in light of the circumstances, for example by the return on investment earned by the manufacturing or construction operations or by comparing transfer prices with prices available from other sources (810-980-45-2).
For students. This is a rare industry exception to the bedrock consolidation rule that all intra-entity profit must be eliminated — worth remembering because it is counterintuitive. The common misunderstanding is thinking regulator silence alone is enough; you still need the separate probability that rates will recover revenue approximately equal to the sales price.
Machine-generated study aid for ASC 810-980. Check the source paragraphs below.
810-980-05Overview and Background
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810-980-15Scope and Scope Exceptions
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Overall Guidance
810-980-45Other Presentation Matters
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Affiliated Sales
- aThe sales price is reasonable.
- bIt is probable that, through the rate-making process, future revenue approximately equal to the sales price will result from the regulated affiliate's use of the products.
810-980-S00StatusSEC
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| Paragraph | Action | Accounting Standards Update | Date |
| 980-810-S45-1 | Superseded | Accounting Standards Update No. 2018-04 | 03/09/2018 |
| 980-810-S99-1 | Superseded | Accounting Standards Update No. 2018-04 | 03/09/2018 |
810-980-S45Other Presentation MattersSEC
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Financing Through Construction Intermediaries
810-980-S50DisclosureSEC
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Financing Through Construction Intermediaries
810-980-S99SEC MaterialsSEC
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SEC Staff Guidance
- Facts: Some electric utility companies finance construction of a generating plant or their share of a jointly owned plant through the use of a "construction intermediary" which may be organized as a trust or a corporation. Typically the utility assigns its interest in property and other contract rights to the construction intermediary with the latter authorized to obtain funds to finance construction with term loans, bank loans, commercial paper and other sources of funds and that may be available. The intermediary's borrowings are guaranteed in part of the work in progress but more significantly, although indirectly, by the obligation of the utility to purchase the project upon completion and assume or otherwise settle the borrowings. The utility may be committed to provide any deficiency of funds which the intermediary cannot obtain and excess funds may be loaned to the utility by the intermediary. (In one case involving construction of an entire generating plant, the intermediary appointed the utility as its agent to complete construction.) On the occurrence of an event such as commencement of the testing period for the plant or placing the plant in commercial service (but not later than a specified date) the interest in the plant reverts to the utility and concurrently the utility must either assume the obligations issued by the intermediary or purchase them from the holders. The intermediary also may be authorized to borrow amounts for accrued interest when due and those amounts are added to the balance of the outstanding indebtedness. Interest is thus capitalized during the construction period at rates being charged by the lenders; however, it is deductible by the utility for tax purposes in the year of accrual.
- Question: How should construction work in progress and related liabilities and interest expense being financed through a construction intermediary be reflected in an electric utility's financial statements?
- Interpretive Response: The balance sheet of an electric utility company using a construction intermediary to finance construction should include the intermediary's work in progress in the appropriate caption under utility plant. The related debt should be included in long-term liabilities and disclosed either on the balance sheet or in a note.
- The amount of interest cost incurred and the respective amounts expensed or capitalized shall be disclosed for each period for which an income statement is presented. Consequently, capitalized interest included as part of an intermediary's construction work in progress on the balance sheet should be recognized on the current income statement as interest expense with a corresponding offset to allowance for borrowed funds used during construction. Income statements for prior periods should also be restated. The amounts may be shown separately on the statement or included with interest expense and allowance for borrowed funds used during construction.
- A note to the financial statements should describe briefly the organization and purpose of the intermediary and the nature of its authorization to incur debt to finance construction. The note should disclose the rate at which interest on this debt has been capitalized and the dollar amount for each period for which an income statement is presented.