Regulated Operations

ASC 980 provides incremental GAAP for entities whose rates are cost-based and set by an independent regulator, on the theory that the economic effects of rate regulation — not regulation itself — justify departing from general GAAP. Under 980-10, operations meeting all three criteria of 980-10-15-2 (independent third-party regulator sets rates, rates designed to recover the specific entity's costs, and rates can reasonably be charged to and collected from customers) recognize regulatory assets and liabilities when a regulator shifts cost recovery to a different period, treating a recoverable incurred cost like a cost reimbursable under a cost-reimbursement-type contract (980-10-05-5, 05-6). ASC 980-20 is the mirror image: when operations (or a separable portion, such as a jurisdiction or customer class) cease to meet 980-10-15-2, the entity eliminates regulatory assets and liabilities that entities in general could not recognize, leaves plant, equipment, and inventory carrying amounts alone unless impaired under 360-10, and reports the net adjustment in income of the period of discontinuation, separately within continuing operations as an unusual or infrequently occurring item (980-20-40-2, 40-4). The key idea: regulatory assets and liabilities exist only so long as cost-based recovery is probable, and they disappear — through income — when that regulatory support ends.

Subtopics

1. 10Overall21 ¶

   ASC 980-10 sets the overall scope and framework for accounting by entities with rate-regulated operations. Because regulators sometimes allow costs into rates in a period different from when an unregulated entity would expense them, the rate-making process can create assets (regulatory assets), reduce assets, or create liabilities; an incurred cost the regulator permits to be recovered in a future period is accounted for like a cost reimbursable under a cost-reimbursement-type contract (980-10-05-5, 05-6). The Topic applies only to operations meeting the three criteria in 980-10-15-2 and provides incremental industry guidance that overrides conflicting guidance elsewhere in the Codification.

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2. 20Discontinuation of Rate-Regulated Accounting37 ¶

   ASC 980-20 governs what happens when an entity's operations (or a separable portion of them) stop meeting the criteria in 980-10-15-2 for rate-regulated accounting — because of deregulation, a shift away from cost-based rate-making, or competition/rate resistance. On discontinuation, the entity eliminates from its balance sheet all regulatory assets and liabilities that entities in general could not recognize, but does not adjust the carrying amounts of plant, equipment, and inventory unless impaired under Subtopic 360-10. The net adjustment goes to income of the period of discontinuation, classified separately within income from continuing operations as an unusual or infrequently occurring item.

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