regulatory asset

This subtopic governs when a rate-regulated entity may capitalize incurred costs as regulatory assets (deferred costs) and, in particular, how to account for phase-in plans — rate-making arrangements that defer part of the rate increase caused by placing a newly completed plant in service in order to avoid a "rate spike." A cost is capitalized only if it is probable that future revenue at least equal to the cost will result from including it in allowable costs and that revenue is intended to recover the previously incurred cost rather than fund similar future costs (980-340-25-1). Amounts deferred under a phase-in plan may be capitalized only for plants completed or substantially constructed before January 1, 1988, and only if the plan meets four strict criteria (980-340-25-3).

This subtopic applies Topic 350's goodwill and intangibles guidance to entities with regulated operations. Its core rule is that goodwill is not amortized and is tested for impairment under Topic 350 unless a regulator permits amortization of goodwill as an allowable cost for rate-making purposes, in which case the regulator's action provides reasonable assurance of a regulatory asset that is amortized over the period allowed for rate-making. It also addresses long-term power sales contracts acquired in a business combination and the need to review such contracts for loss-contract status.

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 modifies the general rule that gains and losses on early extinguishment of debt hit income immediately (Subtopic 470-50) for entities whose rates are set by a regulator. If the regulator will recover a reacquisition loss through future rates, the regulated entity capitalizes the excess of reacquisition price over net carrying amount as a regulatory asset; if the regulator will reduce future rates for a gain, the entity records a regulatory liability. Either amount is amortized as an adjustment of interest expense over the period reflected in rate-making.

This Subtopic addresses compensated absences and other compensation-related costs for entities with regulated operations. Even though a regulator may allow such compensation in rates only when paid, the entity must still accrue the liability under Topic 710 because regulator rate actions cannot eliminate obligations the regulator did not impose. Because the cost will be recoverable in future rates as paid, the entity simultaneously records a regulatory asset representing the probable future increased revenue.

ASC 715-980 tells rate-regulated entities how to account for the difference between net periodic pension cost (715-30) or net periodic postretirement benefit cost (715-60) and the amounts of those costs allowed for rate-making purposes. The regulator's actions create a regulatory asset (deferred cost whose recovery is probable) or a liability (unearned revenue collected for future costs), which changes only the timing of expense recognition, not the underlying 715-30/715-60 measurement. Deferral of 715-60 costs as a regulatory asset is permitted only if strict criteria about the rate order, five-year phase-in, roughly 20-year deferral-recovery period, and non-increasing rate escalation are met.

This subtopic applies ASC 740 to entities whose rates are regulated and that meet the criteria in 980-10-15-2. It prohibits net-of-tax accounting, requires a deferred tax liability for tax benefits flowed through to customers and for the equity component of the allowance for funds used during construction (AFUDC), and requires deferred taxes to be adjusted for enacted changes in tax law or rates. When it is probable that a regulator will allow recovery from (or require refund to) customers of those future tax amounts, the entity recognizes a separate regulatory asset or liability, which is itself a temporary difference generating additional deferred tax.

This subtopic formerly provided lease guidance specific to regulated operations (rate-regulated utilities) under the old lease model in ASC 840 — for example, how capital lease accounting interacted with regulator-prescribed rate-making treatment. Every paragraph in every section (05, 15, 25, 35, 45, 55) has been superseded by ASU 2016-02 (Leases (Topic 842)), so the subtopic contains no operative guidance. Lessees and lessors in regulated operations now apply ASC 842, together with the regulated-operations guidance in ASC 980 (including ASC 842-10 and 980-340/980-405 concepts on regulatory assets and liabilities).

This Subtopic addresses how rate-regulated entities account for leases when the regulator's rate-making treatment differs from Topic 842. Lease classification for financial reporting follows Topic 842 regardless of how the regulator treats the lease, but the timing of expense (or income) recognition is modified to conform to the rate treatment, with timing differences capitalized or accrued as regulatory assets or liabilities. Sale-and-leaseback timing differences are handled either as part of a phase-in plan under Subtopic 980-340 or by conforming recognition to the Regulated Operations Topic.