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15.4 Proportionate consolidation accounting
Publication date: 20 Jul 2016
us Utilities guide 15.4
When applying the proportionate consolidation model, a reporting entity should record its basis in the assets, liabilities, revenues and expenses of the joint plant in an amount equal to its proportionate share of each item. Common considerations in applying proportionate consolidation to joint plant are discussed in this section.
15.4.1 Joint plant assets, liabilities, and contractual arrangements
Each owner should record its share of the assets and liabilities associated with the joint plant. Although there may be transactions or accounting considerations related to the assets and liabilities that apply broadly to the group of investors, each is individually responsible for making decisions related to their own accounting. Examples of accounting decisions and considerations may include:
• Developing capitalization policies
• Establishing depreciable lives and methods
• Evaluating potential impairments
• Developing assumptions related to asset retirement obligations
• Evaluating contingent liabilities
• Determining the appropriate accounting for supply contracts or other contractual arrangements such as power purchase agreements (e.g., treatment as a lease, derivative, or executory contract)
• Valuing contracts accounted for as derivatives
This list is not all-inclusive. Reporting entities accounting for joint plant using proportionate consolidation should consider how to account for any balance or transaction relating to its interest. It is common for individual owners to account for joint plant interests differently, depending on their accounting policies and intentions with respect to their interest.
15.4.2 Leasing considerations
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 ASC 840 applies to the contractual arrangement.
ASC 840 specifically states that it 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 840-10-15-4 indicates that a physically distinguishable portion of property, plant, or equipment can be the subject of a lease if the relevant criteria are met.
Question 15-1
Can an undivided interest in a plant be the subject of a lease?
Can an undivided interest in a plant be the subject of a lease?
PwC response
Yes. 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 (i.e., the reporting entity records plant and related depreciation expense representing its undivided interest in the plant). Furthermore, if a reporting entity disposes of its interest in a joint plant, it applies the sales guidance in ASC 360-20 for real estate (see UP 15.4.3).
Lease accounting applies to separate units of property, plant, or equipment. 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 840. In addition, if there is a sale-leaseback of an undivided interest, the sale-leaseback guidance in ASC 840 would apply.
See UP 2 for further information on leases of power plants.
15.4.3 Disposal of joint plant
Most joint plant is real estate as defined in the accounting literature (see UP 2 for further information). The guidance applicable to the sale of real estate is contained in ASC 360-20. Figure 15-2 summarizes the applicable guidance for potential sale transactions involving the sale of an undivided interest in a plant.
Figure 15-2
Sale of an undivided interest in a plant
Ownership interest
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Transaction
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Guidance
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Ownership of an entire plant
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Sale of an undivided interest in the plant
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Partial sales guidance in ASC 360-20-40-46 through 40-49
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Ownership of an undivided interest in a plant
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Sale of the entire undivided interest
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General sales guidance in ASC 360-20
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Ownership of an undivided interest in a plant
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Sale of a portion of the undivided interest
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Partial sales guidance in ASC 360-20-40-46 through 40-49
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The accounting for the sale and any potential gain or loss recognition will depend on the guidance applied, in particular the conclusions regarding the transfer of risks and rewards.
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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