An owner of an undivided interest in a plant may enter into a power purchase arrangement to sell the output from its undivided interest or may otherwise enter into a legal-form lease of its undivided interest. Such arrangements may be for all, or a portion of, the undivided interest. In such situations, a question arises as to whether an undivided interest in a plant can be the subject of a lease under ASC 842.

ASC 842 does not address whether an undivided interest or a pro rata portion of property, plant, and equipment could be the subject of a lease. However, ASC 842-10-15-16 indicates that a physically distinct portion of an asset can be the subject of a lease if the other relevant criteria are met.

As discussed in UP 15.2, practice in the utility and power industry is to account for undivided interests in joint plant using proportionate consolidation. This method requires a reporting entity to account for an undivided interest as if it were a separate unit of property (e.g., the reporting entity records plant and related depreciation expense representing its undivided interest in the plant).

Lease accounting applies to separate units of property. Therefore, because joint plant is accounted for in a manner that depicts the interest as a separable portion of property, we believe lease accounting is applicable for either (1) a lease of an undivided interest or (2) an arrangement pertaining to an undivided interest (such as a power purchase agreement) that would otherwise meet the criteria to be accounted for as a lease under ASC 842. In addition, if there is a sale-leaseback of an undivided interest, the sale-leaseback guidance would apply.

See UP 2 for further information on leases of power plants.

Yes. A joint plant operator may enter into a contract with a third party related to the operations of the joint plant (e.g., supply contracts, land easements, power sales agreements). The joint plant operator is typically the primary obligor in these arrangements and should apply the appropriate accounting to such arrangements, including evaluation of whether the arrangement is or contains a lease under ASC 842.

The fact that the operator has a joint operating arrangement with the non-operators does not alter the arrangement between the operator and the third party. However, the joint plant arrangement will need to be evaluated to determine if it creates a sublease between the operator and the non-operator owners.

Each joint plant owner is responsible for determining the appropriate accounting for its pro rata share of any supply or other contractual arrangements involving the joint plant for purposes of its separate financial statements. If there is a sublease between the operator and a non-operator, each owner should account for its pro rata share of the lease by applying lessee accounting. If lease accounting does not apply, the owners should account for reimbursements related to the arrangement in accordance with other applicable US GAAP.

The disposal of a joint plant interest that is accounted for following proportionate consolidation is treated as if the investor is directly disposing of its pro rata share of the individual assets of the joint plant. Various derecognition models may be applicable for this type of transaction depending on the specific facts and circumstances. Key factors include the following:

Figure UP 15-2 summarizes the applicable accounting guidance for certain types of joint plant disposals and where the applicable guidance is further discussed in other PwC guides.

Figure UP 15-2
Sale of an undivided interest in joint plant

There is no explicit guidance that addresses the sale of joint plant assets that are (1) not a business and (2) include nonfinancial assets to a non-customer. The sale of nonfinancial assets may be within the scope of ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets. However, ASC 610-20-15-4k explicitly scopes out all investments in ventures that are proportionately consolidated.

We believe the scope exception in ASC 610-20-15-4k includes investments in which there is not a legal entity (such as joint plant arrangements).

Because a reporting entity applying proportionate consolidation is specifically excluded from applying ASC 610-20, it should look to authoritative GAAP for similar transactions. ASC 810-10-40 provides derecognition guidance of a legal entity by a parent, and it does not specifically scope out a transfer of an investment in a venture that is accounted for by proportionately consolidating the assets, liabilities, revenue, and expenses of the venture. As such, we believe it would be appropriate for a reporting entity to apply the guidance in ASC 810-10-40 to account for the sale of an interest (that is not a business) in a joint plant venture comprised of nonfinancial assets (that is not a legal entity) to a non-customer.

In applying the guidance in ASC 810-10-40, a reporting entity would recognize a gain or loss in net income, measured as the difference between the fair value of consideration received and the carrying amount of its pro-rata share of the assets and liabilities of the joint plant sold in the period in which the reporting entity loses control of its interest.