ASC

ASC 835-980

Regulated Operations

835 Interest

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In brief

IntermediateInitial measurementInventory and PP&EIndustry-specificPresentation

This Subtopic governs how entities with regulated operations account for the financing cost of construction — the allowance for funds used during construction (AFUDC), which includes both a computed interest component and a designated cost of equity funds. When a regulator requires such capitalization, the rate-making amount (not the amount computed under Subtopic 835-20) is capitalized for financial reporting purposes, but only if subsequent inclusion in allowable costs for rate-making purposes is probable. The credit is reported in the income statement as other income, a reduction of interest expense, or both.

Key points (7)
  • A regulator may require capitalization, as part of plant and equipment cost, of the cost of financing construction funded by both borrowings and equity — the allowance for funds used during construction (835-980-25-1).
  • When a regulator requires capitalization, the amounts capitalized for rate-making purposes (computed interest plus a designated cost of equity funds), rather than the amount under Subtopic 835-20, are capitalized for financial reporting, and net income is increased correspondingly (835-980-30-1).
  • AFUDC is capitalized only if its subsequent inclusion in allowable costs for rate-making purposes is probable (835-980-30-1).
  • If AFUDC is not capitalized because inclusion in the future rate base is not probable, the entity may not instead capitalize interest cost under Subtopic 835-20 (835-980-25-2).
  • If completion of a plant is only reasonably possible and the regulator routinely disallows accumulated AFUDC on abandoned plants, previously capitalized amounts are not written off (disallowance is not probable), but further capitalization is not warranted (835-980-25-3).
  • Where a prudence investigation makes disallowance reasonably possible over a range with no point more likely than another, further AFUDC capitalization is discontinued on an amount of costs equal to the maximum amount in the range (835-980-25-4).
  • After construction is complete, the capitalized cost including AFUDC is the basis for depreciation and unrecovered investment for rate-making purposes (835-980-35-1), and the income statement must present the credit as other income, a reduction of interest expense, or both (835-980-45-1).

For students. The key exam trap is that AFUDC includes an equity return component and boosts current net income — unlike ordinary capitalized interest under 835-20 — and that it is an either/or choice: if AFUDC fails the "probable" recovery test, the entity cannot fall back on normal interest capitalization.

allowance for funds used during constructionregulated operationscapitalized interestcost of equity fundsprobable inclusion in allowable costsrate-makingprudence disallowanceabandoned plant

Machine-generated study aid for ASC 835-980. Check the source paragraphs below.

835-980-05Overview and Background

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835-980-05-1
This Subtopic provides guidance on accounting for interest for entities with regulated operations.

835-980-15Scope and Scope Exceptions

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Overall Guidance

835-980-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 980-10-15.

835-980-25Recognition

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Construction Financing Cost Capitalization

835-980-25-1
In some cases, a regulator requires an entity subject to its authority to capitalize, as part of the cost of plant and equipment, the cost of financing construction as financed partially by borrowings and partially by equity. This cost of financing construction is referred to as an allowance for funds used during construction.
835-980-25-2
If the specific criteria in paragraph 980-835-35-1 are met but an allowance for funds used during construction is not capitalized because its inclusion in the cost that will become the basis for future rates is not probable, the regulated entity may not alternatively capitalize interest cost in accordance with Subtopic 835-20.
835-980-25-3
If completion of a plant under construction is reasonably possible but no longer probable, and the regulator in the governing jurisdiction routinely disallows accumulated allowance for funds used during construction on abandoned plants, the criteria required to write off such previously recognized amounts are not met since disallowance is not probable; thus, such previously capitalized amounts shall not be written off. However, because inclusion of allowance for funds used during construction in the cost allowed for future rates is no longer probable, further capitalization of such amounts is not warranted.
835-980-25-4
Assume that a prudence investigation is in process or has taken place, and a disallowance of cost (including subsequent allowance for funds used during construction on those costs) is reasonably possible, and that the range of such disallowance is from zero to some maximum amount, with no point within the range being more likely than any other. In that situation, because a disallowance of the maximum amount in the range is reasonably possible and thus inclusion of that amount in rates is no longer probable, subsequent capitalization of allowance for funds used during construction shall be discontinued for an amount of costs equal to the maximum amount that is within the range.

835-980-30Initial Measurement

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835-980-30-1
If a regulator requires an entity to capitalize certain costs as discussed in paragraph 980-835-25-1, a computed interest cost and a designated cost of equity funds are capitalized, and net income for the current period is increased by a corresponding amount. In such cases, the amounts capitalized for rate-making purposes as part of the cost of acquiring the assets shall be capitalized for financial reporting purposes instead of the amount of interest that would be capitalized in accordance with Subtopic 835-20. Those amounts shall be capitalized only if their subsequent inclusion in allowable costs for rate-making purposes is probable.

835-980-35Subsequent Measurement

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835-980-35-1
After construction is completed, the resulting capitalized cost, including the allowance for funds used during construction, is the basis for depreciation and unrecovered investment for rate-making purposes.

835-980-45Other Presentation Matters

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835-980-45-1
The income statement shall include an item of other income, a reduction of interest expense, or both, in a manner that indicates the basis for the amount of construction financing cost capitalized as required by paragraph 980-835-25-1.

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