# ASC 980-10-05: Regulated Operations — Overall — 05 Overview and Background

Source: FASB Accounting Standards Codification, Basic View

[Read online](https://asc.understandingaccounting.org/asc/980/10/#05-overview-and-background)

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## ASC 980-10-05: 05 Overview and Background

[Read section](https://asc.understandingaccounting.org/asc/980/10/#05-overview-and-background)

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##### [980-10-05-1](https://asc.understandingaccounting.org/asc/980/10/#980-10-05-1)

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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](https://asc.understandingaccounting.org/asc/980/10/#980-10-05-2)

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The Overall Subtopic provides guidance on the accounting and reporting for entities with regulated operations.

#### Effect of Regulatory Accounting

##### [980-10-05-3](https://asc.understandingaccounting.org/asc/980/10/#980-10-05-3)

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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](https://asc.understandingaccounting.org/glossary/a/#allowable-costs "All costs for which revenue is intended to provide recovery. Those costs can be actual or estimated. In that context, allowable costs include interest cost and amounts provided for earnings on shareholders' investments."), 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](https://asc.understandingaccounting.org/asc/980/10/#980-10-05-4)

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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](https://asc.understandingaccounting.org/asc/980/10/#980-10-05-5)

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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](https://asc.understandingaccounting.org/asc/980/10/#980-10-05-6)

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For general-purpose financial reporting, an [incurred cost](https://asc.understandingaccounting.org/glossary/i/#incurred-cost "A cost arising from cash paid out or obligation to pay for an acquired asset or service, a loss from any cause that has been sustained and has been or must be paid for.") 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](https://asc.understandingaccounting.org/asc/980/10/#980-10-05-7)

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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](https://asc.understandingaccounting.org/glossary/c/#capitalize "Capitalize is used to indicate that the cost would be recorded as the cost of an asset. That procedure is often referred to as deferring a cost, and the resulting asset is sometimes described as a deferred cost.") 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](https://asc.understandingaccounting.org/asc/980/10/#980-10-05-8)

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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.