The accounting for a government grant or other assistance received by a regulated utility will depend on how the regulator treats the grant. If the regulator treats the grant as a reduction of utility plant to be recovered through rate base, in general, we believe the reporting entity should apply the asset-based grant model in IAS 20, Accounting for Government Grants and Disclosures of Government Assistance, by analogy. In such cases, the grant should usually be recognized as a reduction of utility plant, which reduces depreciation over the life of the property.

In some situations, however, the regulator may continue to provide for full recovery of the utility plant, while requiring separate return of the grant to the ratepayers. Return of the grant may occur over the same time period as recovery of the related plant or it may be accelerated (e.g., a regulator may require return of the grants over 5 years, compared to a 20-year life for the underlying property). In these situations, the regulator has effectively decoupled the grant from the related asset: the regulated utility is still recovering the full cost of the underlying capital asset plus return over the life of the asset, and the benefit provided from the grant is being viewed by the regulator as a gain to be used to reduce other costs of service.

If the regulator separates return of the grant from recovery of the plant, we believe the grant should be treated as a separate unit of account and accounted for under a separate recognition model. In such cases, the regulator has treated the benefit of the grant as a liability owed to customers, separate from the capital asset. As a result, recognition of the grant as an offset to depreciation would no longer accomplish the IAS 20 objective of offsetting the costs for which the grant is intended to compensate, and the reporting entity would no longer apply the guidance in IAS 20. Instead, because of the intervention of the regulator, we believe the grant would be subject to regulatory accounting as a regulatory liability (a gain that the regulator mandates be given to customers). Prior to the Codification, this was addressed in the Basis for Conclusions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), paragraph 79(c).

Consistent with the guidance in ASC 980-405-25-1(c), discussed in UP 17.4, the subsequent recognition of the regulatory liability should occur over the period during which the grant is returned to customers. The interaction of regulatory accounting with the receipt of grants is complex and the outcome is highly dependent on the specific facts and circumstances. In addition, the fact that a grant will be flowed through to customers will not always be transparent in rate orders or other regulator communications.