rate-regulated operations

ASC 410-980 explains how rate-regulated entities apply the asset retirement obligation (ARO) model of Subtopic 410-20. Because rate regulation may allow recovery of retirement costs on a timing pattern different from GAAP ARO cost recognition, a regulated entity that meets the requirements of Topic 980 recognizes a regulatory asset or regulatory liability for that timing difference. Capitalized asset retirement cost is included in long-lived asset impairment testing on the same basis as for any other entity.

This subtopic addresses loss contingencies for entities with regulated operations (rate-regulated utilities). Its core rule: when a regulator allows an entity to recover an amount for a contingency in rates even though the amount does not meet the accrual criteria of 450-20-25-2, and the regulator requires the entity to remain accountable for amounts collected but not yet spent for the intended purpose, the increased charges to customers give rise to a liability rather than income.

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.

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.