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12.4 Maintenance, including major maintenance
Publication date: 19 Jan 2024
us Utilities guide
Maintenance is a significant activity for utilities and power companies. Maintenance programs may involve the use of internal resources or a third-party maintenance provider. Furthermore, third-party agreements may be stand-alone service agreements or embedded in a power purchase agreement. All routine maintenance should be expensed as incurred.
PPE 1.4 provides general guidance for accounting for maintenance, including major maintenance activities, and specific considerations when the services are provided through a long-term service agreement or lease. This section also includes consideration for how the selected accounting method for planned major maintenance impacts the balance sheet and income statement. Refer to FSP 6.8.15 for considerations related to the treatment of major maintenance in the statement of cash flows. The following sections highlight specific considerations related to major maintenance for transactions common in the power and utilities industry.
12.4.1 Accounting for major maintenance
PPE 1.4.1 discusses the general guidance on accounting for major maintenance and includes references to the Airline Guide, which provides the principal source of guidance on accounting for major maintenance activities.
In the Airline Guide, FinREC states its belief that the direct expense (expense as incurred) method is preferable to the other methods, although any of the three methods may generally be used (see Question UP 12-9). The method used to recognize major maintenance expense is an accounting policy election that should be applied consistently for all similar projects.
Question UP 12-9
Can the deferral or built-in overhaul methods of accounting for major maintenance be used when the group or composite method of depreciation is used?
Can the deferral or built-in overhaul methods of accounting for major maintenance be used when the group or composite method of depreciation is used?
PwC response
No. Reporting entities may apply a group or composite method of depreciation, in which case depreciation is applied to a pool of assets based on the average useful life of the assets. The application of the deferral or built-in overhaul method of accounting for major maintenance requires separately accounting for maintenance costs associated with component assets. Once the group or composite method of depreciation is applied, individual assets lose their individual identity and the pool is in effect one component. Therefore, any amounts related to major maintenance would need to be accounted for using the expense as incurred method.
12.4.2 Long-term service agreements
Refer to PPE 1.4.2 for general guidance on accounting for long-term service agreements (LTSAs). Refer to PPE 1.4.2.1 for guidance on accounting for fixed-price long-term service agreements and PPE 1.4.2.2 for guidance on accounting for variable price long-term service agreements.
Application examples — long-term service agreement for power and utility companies
The following examples provide guidance on how reporting entities should account for maintenance and capital spares obtained through an LTSA. Example UP 12-3 illustrates the accounting for an LTSA that includes capital spares.
EXAMPLE UP 12-2
Accounting for a long-term service agreement
Accounting for a long-term service agreement
Ivy Power Producers (IPP) enters into a 15-year, long-term service agreement with Service Provider for planned maintenance services on the natural gas and steam turbine generating units at the Maple Generating Station. The service agreement calls for a fixed monthly fee of $50,000 and other payments to be made as follows:
- Variable monthly turbine fee based on fired hours estimated to be $100,000 per month.
- A payment of $5,000,000 at each date a milestone is achieved based on fired hours.
IPP determines that the fixed monthly fee is entirely related to routine maintenance, based on discussion with and review of documentation provided by Service Provider. IPP also determines that the variable monthly turbine fee includes an expense maintenance component (amount related to routine maintenance) of $25,000 and capitalizable maintenance components (including labor and parts) of $75,000. Finally, IPP concludes that the milestone payments are capital in nature and relate solely to major maintenance activities.
How should IPP account for the payments made to Service Provider?
Analysis
The routine maintenance expenses (the monthly fee and the expense portion of the variable turbine fee) would be expensed as paid. The capital component of the monthly fee and the milestone payments could be accounted for under any of the permitted methods for major maintenance as follows:
- Direct expensing
IPP would establish a prepaid asset as the variable turbine monthly (capital portion only) and milestone payments are made and would recognize the expense when the major maintenance is performed. At the time of major maintenance, rather than expensing the entirety of the payment, it may be appropriate to classify any portion of payments relating to prepaid capital parts within materials and supplies inventory until the parts are used.
- Deferral method
IPP would record an asset as the variable turbine monthly (capital portion only) and milestone payments are made, and would begin to amortize the amounts after the first major maintenance event occurs.
- Built-in overhaul method
Upon purchase of components of the Maple Generating Station subject to periodic maintenance, a portion of the purchase price would be allocated to maintenance and amortized through the date of the initial overhaul. The accounting for the payments under the LTSA would then follow the deferral method.
Under all three scenarios, IPP would consider whether it is receiving any maintenance services in advance of payments made or whether amounts represent prepayments for future services. For example, this may arise if the milestone payments are higher or lower than the underlying cost of the maintenance provided. In such cases, IPP would estimate the actual amount of expense and record a prepaid or a payable for the difference from its actual payments.
EXAMPLE UP 12-3
Accounting for a long-term service agreement that includes capital spares
Accounting for a long-term service agreement that includes capital spares
Ivy Power Producers (IPP) has a contract with a maintenance provider to perform major maintenance inspections on the Camellia Generating Station after certain fired-hour intervals. The major maintenance provider is a subsidiary of the original equipment manufacturer, and the contract requires that IPP purchase a portfolio of capital spares to be kept “on the shelf” in storage during the period of the contract for use during major maintenance.
The parts may not be resold or used for any purpose other than major maintenance activities. IPP will have title to the parts when purchased, but title to any remaining parts in storage when the maintenance contract expires will transfer to the equipment manufacturer.
How should IPP account for the payment made for capital spares?
Analysis
The cost of the capital spare parts would be capitalized. As IPP has to return any unused capital spares at the expiration of the contract, the payment for capital spares represents an additional service payment and should be amortized over the term of the contract.
12.4.3 Maintenance included in leasing arrangements
Refer to PPE 1.4.3 for guidance on accounting for maintenance activities included in leasing arrangements. Refer also to PPE 1.4.3.1 for the accounting treatment of maintenance deposits under leasing arrangements for lessees and lessors.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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