ASC

ASC 980-10

Overall

980 Regulated Operations

Download JSONDownload Markdown21 paragraphs · 7 sectionsIncludes SEC contentJump to summary

Source downloaded: .Record version db832df2bca0. Effective date must be checked in the source.

In brief

IntermediateIndustry-specificRecognitionSubsequent measurement

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.

Key points (7)
  • The Topic applies to general-purpose external financial statements of operations meeting all three criteria in 980-10-15-2: rates are set or approved by an independent third-party regulator (or an empowered governing board), rates are designed to recover the specific entity's costs, and it is reasonable to assume cost-based rates can be charged to and collected from customers given demand and competition.
  • Regulators' inclusion of costs in allowable costs in a period other than when an unregulated entity would expense them can create assets, reduce assets, or create liabilities for the regulated entity (980-10-05-5).
  • An incurred cost for which a regulator permits recovery in a future period is accounted for like an incurred cost reimbursable under a cost-reimbursement-type contract (980-10-05-6).
  • A regulatory accounting order not tied to rate treatment causes no economic effects and does not justify departing from general GAAP; the economic effect of regulatory decisions, not the mere existence of regulation, is the pervasive factor (980-10-05-7, 05-8).
  • If only some of an entity's operations are regulated and meet the criteria, the Topic is applied only to that portion of the operations (980-10-15-4).
  • Other Codification Topics still apply to regulated entities, but ASC 980 is applied instead of conflicting provisions—for example, capitalizing R&D costs meeting 980-340-25-1 despite Subtopic 730-10 (980-10-15-5).
  • The Topic does not apply to emergency/inflation price controls, to an entity's regulatory (statutory) accounting records, or to contractual arrangements where the government or another party viewed as a regulator is a party to the contract and is the entity's principal customer (980-10-15-7).

For students. Utilities and similar rate-regulated entities recognize regulatory assets and liabilities that would not exist under general GAAP; the common misunderstanding is thinking any regulatory accounting order justifies deferral—only rate actions with real economic effects (probable future recovery through rates) do.

rate-regulated operationsallowable costsregulatory assets and liabilitiescost-based ratescost-reimbursement-type contract analogyindependent third-party regulatoraccounting ordersscope criteria

Machine-generated study aid for ASC 980-10. Check the source paragraphs below.

980-10-00Status

Source downloaded: .Record version 976268c44c48. Effective date must be checked in the source.

980-10-00-1
The following table identifies the changes made to this Subtopic.
Paragraph Action Accounting Standards Update Date
980-10-05-1 Amended Maintenance Update 2016-05 (PDF) 04/12/2016
980-10-05-1 Amended Accounting Standards Update No. 2014-09 05/28/2014
980-10-15-6 Superseded Accounting Standards Update No. 2014-10 06/10/2014

980-10-05Overview and Background

Source downloaded: .Record version 5d39a77954f6. Effective date must be checked in the source.

980-10-05-1
The Regulated Operations Topic includes the following Subtopics:
  1. a
    Overall
  2. b
    Discontinuation of Rate-Regulated Accounting
  3. c
    Accounting Changes and Error Corrections
  4. d
    Other Assets and Deferred Costs
  5. e
    Intangibles—Goodwill and Other
  6. f
    Property, Plant, and Equipment
  7. g
    Liabilities
  8. h
    Asset Retirement and Environmental Obligations
  9. i
    Contingencies
  10. j
    Debt
  11. k
    Revenue Recognition—Alternative Revenue Programs
  12. l
    Compensation—General
  13. m
    Compensation—Retirement Benefits
  14. n
    Income Taxes
  15. o
    Consolidation
  16. oo
    Derivatives and Hedging
  17. p
    Interest
  18. q
    Leases.
980-10-05-2
The Overall Subtopic provides guidance on the accounting and reporting for entities with regulated operations.

Effect of Regulatory Accounting

980-10-05-3
Regulation of an entity's rates (also referred to as prices) is sometimes based on the entity's costs. Regulators use a variety of mechanisms to estimate a regulated entity's allowable costs, and they allow the entity to charge rates that are intended to produce revenue approximately equal to those allowable costs. Specific costs that are allowable for rate-making purposes result in revenue approximately equal to the costs.
980-10-05-4
In most cases, allowable costs are used as a means of estimating costs of the period during which the rates will be in effect, and there is no intent to permit recovery of specific prior costs. The process is a way of setting prices—the results of the process are reported in general-purpose financial statements in accordance with the same accounting principles that are used by unregulated entities.
980-10-05-5
Regulators sometimes include costs in allowable costs in a period other than the period in which the costs would be charged to expense by an unregulated entity. For the regulated entity, that procedure can do any of the following:
  1. a
    Create assets (future cash inflows that will result from the rate-making process)
  2. b
    Reduce assets (reductions of future cash inflows that will result from the rate-making process)
  3. c
    Create liabilities (future cash outflows that will result from the rate-making process).
980-10-05-6
For general-purpose financial reporting, an incurred cost for which a regulator permits recovery in a future period is accounted for like an incurred cost that is reimbursable under a cost-reimbursement-type contract.
980-10-05-7
Accounting requirements that are not directly related to the economic effects of rate actions may be imposed on regulated businesses by orders of regulatory authorities and occasionally by court decisions or statutes. This does not necessarily mean that those accounting requirements conform with generally accepted accounting principles (GAAP). For example, a regulatory authority may order an entity to capitalize and amortize a cost that would be charged to income currently by an unregulated entity. Unless capitalization of that cost is appropriate under this Topic, GAAP requires the regulated entity to charge the cost to current income.
980-10-05-8
Unless an accounting order indicates the way a cost will be handled for rate-making purposes, it causes no economic effects that would justify deviation from the GAAP applicable to business entities in general. The mere issuance of an accounting order not tied to rate treatment does not change an entity's economic resources or obligations. In other words, the economic effect of regulatory decisions—not the mere existence of regulation—is the pervasive factor that determines the application of GAAP.

980-10-15Scope and Scope Exceptions

Source downloaded: .Record version eb4ef3e5a005. Effective date must be checked in the source.

Overall Guidance

980-10-15-1
The Subtopics within the Regulated Operations Topic only provide incremental industry-specific guidance for the entities defined in this Scope Section, or as further defined in the Scope Sections of the individual Regulated Operations Subtopics. Entities within the scope of this Topic shall also comply with the applicable guidance not included in this Topic.

Entities

980-10-15-2
The guidance in the Regulated Operations Topic applies to general-purpose external financial statements of an entity that has regulated operations that meet all of the following criteria:
  1. a
    The entity's rates for regulated services or products provided to its customers are established by or are subject to approval by an independent, third-party regulator or by its own governing board empowered by statute or contract to establish rates that bind customers.
  2. b
    The regulated rates are designed to recover the specific entity's costs of providing the regulated services or products. This criterion is intended to be applied to the substance of the regulation, rather than its form. If an entity's regulated rates are based on the costs of a group of entities and the entity is so large in relation to the group of entities that its costs are, in essence, the group's costs, the regulation would meet this criterion for that entity.
  3. c
    In view of the demand for the regulated services or products and the level of competition, direct and indirect, it is reasonable to assume that rates set at levels that will recover the entity's costs can be charged to and collected from customers. This criterion requires consideration of anticipated changes in levels of demand or competition during the recovery period for any capitalized costs. This last criterion is not intended as a requirement that the entity earn a fair return on shareholders' investment under all conditions; an entity can earn less than a fair return for many reasons unrelated to the ability to bill and collect rates that will recover allowable costs. For example, mild weather might reduce demand for energy utility services. In that case, rates that were expected to recover an entity's allowable costs might not do so. The resulting decreased earnings do not demonstrate an inability to charge and collect rates that would recover the entity's costs; rather, they demonstrate the uncertainty inherent in estimating weather conditions. This requirement must also be evaluated in light of the circumstances. For example, if the entity has an exclusive franchise to provide regulated services or products in an area and competition from other services or products is minimal, there is usually a reasonable expectation that it will continue to meet the other criteria. Exclusive franchises can be revoked, but they seldom are. If the entity has no exclusive franchise but has made the very large capital investment required to provide either the regulated services or products or an acceptable substitute, future competition also may be unlikely.
980-10-15-3
In some cases, the rates set by state regulatory agencies are accepted for Medicare and Medicaid reimbursement purposes. There is some disagreement about the extent to which such rates are based on a provider's costs. If regulatory agencies in those states base rates on the provider's costs and adopt a permanent system of regulation, health care providers in those jurisdictions could be subject to the provisions of this Topic. However, the criterion in (c) in the preceding paragraph also would have to be considered to determine whether this Topic applies to the entity.
980-10-15-4
If some of an entity's operations are regulated and meet the criteria of paragraph 980-10-15-2, this Topic shall be applied to only that portion of the entity's operations.
980-10-15-5
Guidance in other Codification Topics that applies to entities in general also applies to regulated entities. However, entities subject to this Topic shall apply it instead of any conflicting provisions of other parts of the Codification. For example, a regulator might authorize a regulated entity to incur a major research and development cost because the cost is expected to benefit future customers. The regulator might also direct that cost to be capitalized and amortized as an allowable cost over the period of expected benefit. If the criteria of paragraph 980-340-25-1 are met, the entity shall capitalize that cost even though Subtopic 730-10 requires such costs to be charged to income currently. That Subtopic shall still apply to accounting for other research and development costs of the regulated entity, as shall the disclosure requirements of that Subtopic.

Transactions

980-10-15-7
The guidance in the Regulated Operations Topic does not apply to any of the following transactions:
  1. a
    Accounting for price controls that are imposed by governmental action in times of emergency, high inflation, or other unusual conditions, or accounting for contracts in general. However, if the terms of a contract between an entity and its customer are subject to regulation and the criteria of paragraph 980-10-15-2 are met with respect to that contract, the guidance in this Topic shall apply.
  2. b
    An entity's regulatory accounting. Regulators may require regulated entities to maintain their accounts in a form that permits the regulator to obtain the information needed for regulatory purposes. This Topic neither limits a regulator's actions nor endorses them. Regulators' actions are based on many considerations. Accounting addresses the effects of those actions. This Topic merely specifies how the effects of different types of rate actions are reported in general-purpose financial statements.
  3. c
    The criterion in paragraph 980-10-15-2(a) is intended to exclude contractual arrangements in which the government, or another party that could be viewed as a regulator, is a party to a contract and is the entity's principal customer.

980-10-S00StatusSEC

Source downloaded: .Record version 8c992cdbebda. Effective date must be checked in the source.

980-10-S00-1
No updates have been made to this subtopic.

980-10-S45Other Presentation MattersSEC

Source downloaded: .Record version 5bd80d9fce82. Effective date must be checked in the source.

Income Statement Presentation

980-10-S45-1
See paragraph 220-10-S99-2, Regulation S-X Rule 5-03.1, for the income statement presentation requirements for a public utility company.

Cost of Power Obtained Under Long-Term Purchase Contracts

980-10-S45-2
See paragraph 980-10-S99-1, SAB Topic 10.D, for SEC Staff views on the presentation of cost of power obtained under long-term purchase contracts.

980-10-S50DisclosureSEC

Source downloaded: .Record version 121d2b629a60. Effective date must be checked in the source.

Cost of Power Obtained Under Long-Term Purchase Contracts

980-10-S50-1
See paragraph 980-10-S99-1, SAB Topic 10.D, for SEC Staff views on the disclosure requirements for cost of power obtained under long-term purchase contracts.

980-10-S99SEC MaterialsSEC

Source downloaded: .Record version 4c0238cfa480. Effective date must be checked in the source.

SEC Staff Guidance

980-10-S99-1
The following is the text of SAB Topic 10.D, Long-Term Contracts for Purchase of Electric Power.
  • Facts: Under long-term contracts with public utility districts, cooperatives or other organizations, a utility company receives a portion of the output of a production plant constructed and financed by the district or cooperative. The utility has only a nominal or no investment at all in the plant but pays a proportionate part of the plant's costs, including debt service. The contract may be in the form of a sale of a generating plant and its immediate lease back. The utility is obligated to pay certain minimum amounts which cover debt service requirements whether or not the plant is operating. At the option of other parties to the contract and in accordance with a predetermined schedule, the utility's proportionate share of the output may be reduced. Separate agreements may exist for the transmission of power to the utility's system. FN2.
    • FN2 Registrants are reminded that the arrangement may contain a guarantee that is within the scope of Interpretation 45 [Topic 460]. Further, registrants should consider the guidance of Interpretation 46 [Topic 810]. Also, registrants would need to consider whether the arrangement contains a derivative that should be accounted for according to Statement 133 [Topic 815].
  • Question: How should the cost of power obtained under long-term purchase contracts be reflected on the financial statements and what supplemental disclosures should be made in notes to the statements?
  • Interpretive Response: The cost of power obtained under long-term purchase contracts, including payments required to be made when a production plant is not operating, should be included in the operating expenses section of the income statement. A note to the financial statements should present information concerning the terms and significance of such contracts to the utility company including date of contract expiration, share of plant output being purchased, estimated annual cost, annual minimum debt service payment required and amount of related long-term debt or lease obligations outstanding.
  • Additional disclosure should be given if the contract provides, or is expected to provide, in excess of five percent of current or estimated future system capability. This additional disclosure may be in the form of separate financial statements of the vendor entity or inclusion of the amount of the obligation under the contract as a liability on the balance sheet with a corresponding amount as an asset representing the right to purchase power under the contract.
  • The note to the financial statements should disclose the allocable portion of interest included in charges under such contracts.

Related subtopics