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14.2 Accounting for uranium contracts
Publication date: 19 Jan 2024
us Utilities guide
Uranium is the most widely used nuclear fuel. The creation of nuclear fuel from naturally occurring uranium deposits involves three key steps. Figure UP 14-1 depicts these steps at a high level.
Figure UP 14-1
Creation of nuclear fuel
Creation of nuclear fuel
Reporting entities that own nuclear generating units typically obtain uranium through long-term contracts with suppliers. The title to the uranium generally transfers to the purchaser when it is delivered. The accounting considerations for contracts for uranium are similar to those for power, natural gas, or other commodities.
A reporting entity that enters into a contract for the purchase of uranium should apply the commodity contract accounting framework to determine the appropriate accounting model, which will significantly impact initial and subsequent recognition and measurement (see UP 1). Under the framework, after identifying the deliverables and the unit of accounting, a reporting entity should first determine whether the uranium agreement is or contains a lease. If lease accounting does not apply, a reporting entity should next assess whether the contract is a derivative in its entirety. If the contract is not a derivative in its entirety, the reporting entity should consider whether it contains any embedded derivatives requiring separation from the host contract. If neither lease nor derivative accounting apply, the reporting entity should account for the agreement as an executory contract (i.e., on an accrual basis).
14.2.1 Uranium contracts: lease accounting under ASC 842
ASC 842 provides guidance for determining whether an arrangement that transfers the right to use identified property, plant, and equipment should be accounted for as a lease. As discussed in Question UP 2-2, ASC 842-10-15-1(b) explicitly excludes “Leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources.” Since uranium is a naturally occurring mineral, arrangements for the exploration or use of uranium would qualify for this scope exception and would not be accounted for as leases.
The scope exception in ASC 842-10-15-1(b) would not apply to contracts for nuclear fuel which could be the subject of a lease. See UP 14.3.1 for further discussion.
14.2.2 Uranium contracts: derivative accounting
Assuming a contract for the delivery of uranium does not contain a lease, the reporting entity should evaluate whether it is a derivative in its entirety in accordance with ASC 815-10-15-83. Figure UP 14-2 highlights the derivative evaluation for a typical uranium purchase contract.
Figure UP 14-2
Does a typical forward contract for the delivery of uranium meet the definition of a derivative?
Does a typical forward contract for the delivery of uranium meet the definition of a derivative?
Notional amount and underlying
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Met
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No initial net investment
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Met
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Net settlement
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It depends
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As noted in Figure UP 14-2, typically a forward contract for physical delivery of uranium may meet the definition of a derivative if it meets the condition of net settlement.
Net settlement. The contract can be settled net by any of the following means:
- Its terms implicitly or explicitly require or permit net settlement.
- It can readily be settled net by a means outside the contract.
- It provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement.
The following are considerations in assessing whether a forward contract for physical delivery of uranium has the characteristic of net settlement. See UP 3.2.3 for further information on the overall application of the net settlement criterion.
Net settlement under contract terms
When evaluating whether the net settlement criterion is met, a reporting entity should first consider whether the contract terms explicitly or implicitly provide for net settlement of the entire contract. Forward contracts for physical delivery of uranium typically require physical delivery and do not permit explicit net settlement. However, the reporting entity should review the contract’s terms to ensure that there are no implicit net settlement terms or liquidating damage provisions that may imply that the contract could be net settled.
Net settlement through a market mechanism
In this form of net settlement, one of the parties is required to deliver an asset, but there is an established market mechanism that facilitates net settlement outside the contract. ASC 815-10-15-110 through ASC 815-10-15-116 provide indicators to consider in assessing whether an established market mechanism exists. A key aspect of a market mechanism is that one of the parties to the agreement can be fully relieved of its rights and obligations under the contract.
We are not aware of any markets for net settlement of forward contracts for the physical delivery of uranium in the United States in which a provider has the ability to be relieved of its full rights and obligations under a previously executed contract.
Net settlement by delivery of an asset that is readily convertible to cash
Whether there is an active spot market for the particular product being sold under the contract is the key factor in assessing whether an asset is readily convertible to cash. Reporting entities should always consider current market conditions in this analysis. To be deemed an active spot market, a market should have transactions with sufficient frequency and volume to provide pricing information that is readily available on an ongoing basis (i.e., quoted prices are readily available). See UP 3.2.3.3 for further information on the determination of whether a market is active.
At the time of release of this guide, we understand that there are quoted prices for the physical purchase of certain types of uranium at limited locations; however, transaction volume is thin. In addition to the activity in the market, reporting entities should consider the following factors in evaluating whether the uranium in a specific contract is readily convertible to cash:
- Transportation costs
The guidance in ASC 815-10-15-125 through ASC 815-10-15-127 requires a reporting entity to consider conversion costs in determining whether assets are readily convertible to cash. Therefore, in evaluating a uranium contract, a reporting entity may need to consider potential transportation costs, depending on the location of purchase. If the estimated transportation costs are 10 percent or more of the gross sale proceeds (based on the spot price at the inception of the contract), the costs are considered significant, and the asset would not meet the definition of readily convertible to cash.
- Transaction volume
In assessing whether an asset is readily convertible to cash, a reporting entity should separately assess the expected quantity in each contract. ASC 815-10-55-100 states that a reporting entity is required to consider each separate increment available.
Excerpt from ASC 815-10-55-10
Contracts shall be evaluated on an individual basis, not on an aggregate-holdings basis.
Therefore, if a reporting entity purchases 50,000 tons daily in five separate 10,000-ton contracts, it should consider each contract separately in relation to the daily market transaction volume.
- Contract duration
ASC 815-10-55-116 further clarifies when an asset would meet the definition of readily convertible to cash.
Excerpt from ASC 815-10-55-116
[If] an active spot market for the commodity exists today and is expected to be in existence in the future for each delivery date ... under the multiple delivery supply contract.
As previously noted, there are currently limited spot transactions for the physical purchase of uranium and limited quoted forward prices. Therefore, if a reporting entity concludes that there is an active spot market that is sufficient to absorb the daily contract quantity, it should further consider the duration of the contract, which may span multiple years.
- Type of uranium
The reporting entity should also assess whether the type and quality of the uranium are consistent with the type and quality transacted in the spot market.
Overall conclusion
Based on these factors and our current understanding of the uranium markets, we believe that forward contracts for the physical delivery of uranium are not readily convertible to cash. Thus, we believe that derivative accounting is generally not applicable to these contracts. However, a reporting entity should evaluate all facts and circumstances in concluding on the appropriate accounting for a specific nuclear fuel contract. In addition, a reporting entity should monitor its conclusion periodically as markets may evolve, potentially rendering this type of contract a derivative. Finally, if the contract is an executory contract, the reporting entity should evaluate it to determine if there are any embedded derivatives that require separation.
14.2.2.1 Conditionally designating contracts as normal purchases and normal sales
A reporting entity may also consider conditionally designating uranium contracts under the normal purchases and normal sales scope exception if physical delivery is probable throughout the life of the contract and the other criteria for application of this exception are met (ASC 815-10-15-22 through ASC 815-10-15-51, as applicable).
If a contract conditionally-designated as a normal purchases and normal sales contract meets the definition of a derivative at a later date, it would be accounted for as normal (i.e., as an executory contract) after it meets the definition of a derivative. Absent such a designation, the reporting entity would be required to record the contract at its fair value at the time it becomes a derivative. See Questions UP 3-20 and UP 3-21 for further information on conditional designation of commodity contracts as normal purchases and normal sales.
14.2.3 Uranium contracts: executory contract accounting
If neither derivative nor lease accounting are applicable, a forward contract for the physical delivery of uranium should be accounted for as an executory contract. In such cases, reporting entities should evaluate whether there are any embedded derivatives that require separation from the host contract (see UP 3.4 for information on evaluating embedded derivatives).
In accounting for an executory contract for the forward purchase of uranium, the cost of uranium purchases should be capitalized as nuclear fuel in progress when title passes (generally when the uranium is received).
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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