One of the primary areas in which accounting by regulated utilities differs from unregulated entities is regulated utilities’ ability to defer certain expenditures as regulatory assets that would otherwise be expensed under US GAAP. Specific criteria exist for the recognition and measurement of regulatory assets as summarized in Figure UP 17-3.
Figure UP 17-3
Key areas of accounting consideration for regulatory assets
Initial recognition and measurement (UP 17.3.1)
  • Incurred costs may be capitalized as a regulatory asset if the amounts are probable of recovery through rates.
  • Regulatory assets are initially measured as the amount of the incurred cost.
  • If a cost does not meet the criteria for deferral as a regulatory asset at the date incurred, it should be expensed; a regulatory asset may subsequently be recorded if and when the criteria for recognition are met.
Subsequent measurement (UP 17.3.2)
  • Regulatory assets are typically amortized over future periods consistent with the period of recovery through rates.
  • If all or part of an incurred cost recorded as a regulatory asset is no longer probable of being recovered, the amount that will not be recovered should be written off to earnings.
  • If a regulator subsequently allows recovery of costs that were previously disallowed, a new asset is recorded; classification of the new asset depends on how the asset would have been classified had it been previously allowed.
View table
The accounting framework for recognition and measurement of regulatory assets is discussed in the following sections, including consideration of specific types of common regulatory assets. See UP 17.8 for further information on presentation and disclosure considerations related to regulatory assets.

17.3.1 Initial recognition and measurement

ASC 980-340-25-1 states that an entity should defer all or part of an incurred cost that would otherwise be charged to expense if it is probable that the specific cost is subject to recovery in future revenues. Incurred cost

When considering whether to capitalize a cost that would otherwise be expensed, it is important to understand the distinction between incurred costs and allowable costs, as only incurred costs qualify for capitalization as regulatory assets under ASC 980-340-25-1.

Definitions from ASC 980-10-20

Incurred Cost: A cost arising from cash paid out or [an] obligation to pay for an acquired asset or service, a loss from any cause that has been sustained and has been or must be paid for.
Allowable Cost: All costs for which revenue is intended to provide recovery. Those costs can be actual or estimated. In that context, allowable costs include interest cost and amounts provided for earnings on shareholders’ investments.

The terms “allowable cost” and “incurred cost” are not interchangeable. By their nature, allowable costs are broader than incurred costs, and not all allowable costs will meet the definition of an incurred cost. Examples of allowable costs that are not incurred costs include:
  • A component for earnings on rate base (except as specifically allowed for allowance for funds used during construction)
  • A provision for recovery of similar costs that will be incurred in the future
  • Compensation for opportunity costs (such as margin on lost revenue)
These costs do not meet the definition of incurred costs because they do not result from a past event, transaction, or loss that will require payment in cash.
Question UP 17-3
Are costs that would be recorded in other comprehensive income absent rate-regulated accounting considered incurred costs?
PwC response
Yes. In considering the definition of an incurred cost, the key point is that it represents “a loss from any cause that has been sustained and has been or must be paid for.” Amounts deferred in other comprehensive income (such as an unrecognized net loss on a pension obligation, unrealized losses on available-for-sale securities, and derivative losses on cash flow hedges) all represent obligations of the reporting entity arising from past events. The classification of these expenses as part of other comprehensive income (or loss) instead of net income (or loss) does not change their underlying nature.
Consistent with this conclusion, mark-to-market accounting for securities classified as available-for-sale should not render results on the balance sheet for unrealized gains or losses that are different from the impact of realized gains or losses. If future regulatory rates will be adjusted to reflect investment experience, then the impact of applying ASC 320 should have a corresponding impact to an associated regulatory asset or liability, rather than adjusting earnings or other comprehensive income. We believe this premise is also applicable to other types of amounts deferred in other comprehensive income.
Question UP 17-4
Are unrealized losses on derivative contracts considered incurred costs?
PwC response
Yes. We believe unrealized losses qualify as incurred costs because the losses are recognized within the carrying value of the derivative recorded on the balance sheet and would be sustained by the reporting entity if the contract were to be terminated at the measurement date. Furthermore, we believe unrealized gains may represent a liability that should be returned to the ratepayer.
The evaluation of unrealized gains and losses on derivatives should follow the conclusion reached for realized gains and losses on the related contracts. If a reporting entity concludes that commodity costs qualify for deferral under a regulatory mechanism, it should also defer unrealized gains and losses instead of immediately recognizing such amounts in income.
Question UP 17-5
Can a regulated utility recognize the equity component of a carrying charge as a regulatory asset?
PwC response No. ASC 980-340-25-5 explicitly prohibits the recognition of the equity component of the return as a regulatory asset because such shareholder return does not qualify as an incurred cost that would otherwise be charged to expense.

Excerpt from ASC 980-340-25-5

If specified criteria are met, paragraph 980-340-25-1 requires capitalization of an incurred cost that would otherwise be charged to expense. An allowance for earnings on shareholders’ investment is not an incurred cost that would otherwise be charged to expense. Accordingly, such an allowance shall not be capitalized pursuant to that paragraph.

Therefore, the regulated utility should compute the carrying charge on regulatory assets by using only the debt component.
We believe that there are three acceptable approaches to calculate the appropriate carrying charge on regulatory assets. The method selected should be applied consistently to similar regulatory assets.
  • Calculate return using the debt component of the approved weighted average cost of capital
The approved weighted average cost of capital includes a debt and equity component. The carrying charges applied to the regulatory assets should be calculated based on the debt component of this regulator-approved rate. Proponents of this view believe it represents the debt cost rate approved by regulators, and therefore represents the amount of carrying charges that are recoverable from ratepayers.
  • Use the utility’s actual weighted average cost of debt rate
The carrying charges applied to the regulatory assets should be based on the regulated utility’s actual weighted average cost of debt. They prefer to use the actual average cost of debt as opposed to a derivation from the WACC because of ASC 980’s prohibition against recognition of shareholder return (because it is not an incurred cost that would otherwise be charged to expense).
  • Use the utility’s incremental borrowing rate
The carrying charges applied to the regulatory assets should be calculated based on the regulated utility’s incremental borrowing rate. Proponents of this view believe that a regulated utility’s regulatory assets are financed with the “last dollar” received (i.e., the regulated utility does not issue equity or debt specifically for the purpose of financing regulatory assets; instead, any required funds are obtained through incremental borrowing).
The equity return on regulatory assets will be recognized when it is collected through rates.
Capitalization of equity return
Although ASC 980 specifically prohibits recognition of equity return as part of the carrying charge on a regulatory asset, there are two circumstances when recognition is permitted: (1) as part of a qualifying alternative revenue program (see UP or (2) in property plant and equipment as part of the allowance for funds used during construction (see UP 18.3). Recovery of the incurred cost is probable

In evaluating whether an incurred cost is eligible for deferral as a regulatory asset, a regulated utility should determine whether the cost is probable of being recovered through future revenue from rates that the regulator allows to be charged to customers.

ASC 980-340-25-1(a)

It is probable (as defined in Topic 450) that future revenue in an amount at least equal to the capitalized cost will result from inclusion of that cost in allowable costs for rate-making purposes.

Determining whether rate recovery of an incurred cost is probable is a matter of judgment and management should evaluate the preponderance and quality of all evidence available. Different forms of evidence will provide varying degrees of support for management’s assertion that a regulatory asset is probable of recovery; not all forms of evidence will be sufficient in isolation or in combination to make such an assertion. A specific rate order specifying the nature of the cost and the timing and manner of recovery generally provides the best evidence that recovery is probable. However, the nature of the regulatory process does not always allow a utility to obtain a rate order prior to issuing its financial statements. As a result, management should consider all relevant forms of evidence when assessing the appropriateness of recognizing a regulatory asset. Potential sources of evidence that may support the recognition of a regulatory asset include:
  • The regulated utility receives a rate order specifying that the costs will be recovered in the future.
  • The incurred cost has been treated by the regulated utility’s regulator as an allowable cost of service item in prior regulatory filings.
  • The incurred cost has been treated as an allowable cost by the same regulator in connection with another entity’s filing.
  • It is the regulator’s general policy to allow recovery of the incurred cost.
  • The regulated utility has had discussions with the regulator (as well as its primary intervener groups) with respect to recovery of the specific incurred cost and has received assurances that the incurred cost will be treated as an allowable cost (and not challenged) for regulatory purposes.
  • A majority of other regulators have treated the specific incurred cost (or similar incurred cost) as an allowable cost and the same or similar costs have not been specifically disallowed by the regulated utility’s regulator.
  • The regulated utility has obtained an opinion from outside legal counsel outlining the basis for the incurred cost being probable of being allowed in future rates.
Prior to concluding that recognition of a regulatory asset is appropriate, a regulated utility should also consider other relevant factors, such as:
  • The regulatory principles and precedents established by law
  • The political and regulatory environment of the jurisdiction (e.g., does further regulation occur in the courts)
  • The magnitude of the incurred costs to be deferred and the related impact on ratepayers if such costs are allowed (taking into account the length of the recovery period)
  • Whether ratepayers or others may intervene in an attempt to deny recovery
Some regulated utilities have costs that may benefit customers in several jurisdictions. Because recovery is based on a regulator’s action, the regulated utility should separately consider the probability of recovery in each regulatory jurisdiction. If it cannot support regulatory recovery across all jurisdictions due to different rate structures or differing fact patterns, the regulated utility should establish a regulatory asset only for those amounts attributable to jurisdictions that meet the criteria for deferral.
Question UP 17-6
Does an accounting order (without a rate order) provide sufficient support for recognition of a regulatory asset or liability?
PwC response
It depends. The best evidence for a regulatory asset is a rate order, but the timing of the regulatory process sometimes does not enable the regulated utility to obtain one prior to issuing its financial statements. Establishing the probability of recovery is more difficult absent a rate order, especially when evaluating unusual or nonrecurring costs. An accounting order is an order by a regulatory authority on the accounting treatment for transactions in ratemaking and regulatory reporting. Generally, an accounting order alone will not provide sufficient evidence to support the recognition of a regulatory asset.
Reporting entities should exercise caution when placing reliance on accounting orders. An accounting order to amortize a regulatory asset or other cost with no impact on revenues does not provide the cause and effect relationship between costs and revenues required to create a regulatory asset. Similarly, an accounting order that indicates the costs may be deferred for consideration in a future rate case, with no assurance of recovery, does not provide sufficient evidence that future recovery is probable.
If a regulated utility obtains an accounting order, it should assess whether a cause and effect relationship is achieved. An accounting order along with supporting evidence, such as historical precedence or an opinion from rate counsel, may provide adequate support that recovery of the specific cost in the future is probable, allowing recognition of a regulatory asset. Recovery of previously incurred costs

When an incurred cost is evaluated for potential deferral, one of the key considerations is whether the regulator will approve future revenue to recover the past costs.

ASC 980-340-25-1(b)

Based on available evidence, the future revenue will be provided to permit recovery of the previously incurred cost rather than to provide for expected levels of similar future costs. If the revenue will be provided through an automatic rate-adjustment clause, this criterion requires that the regulator’s intent clearly be to permit recovery of the previously incurred cost.

A rate increase intended to recover future costs would not support deferral. Determining whether future revenue will be provided for recovery of previously incurred costs may require significant judgment. Factors to consider in assessing whether this criterion is met include:
  • State regulatory history
    What is the history of recovery of regulatory assets in the state? Have amounts been disallowed in the past? Is the regulator approving current rates at a level to recover current costs? If not, what evidence supports that the regulator will authorize recovery within a reasonable time period?
  • Projected costs
    Are the regulated utility’s costs expected to continue to increase? If costs continue to increase, is it probable that the regulator will be willing to approve sufficient rate increases to recover these past costs as well as current costs?
In particular, the regulated utility should consider whether there is a pattern of increasing costs and deferral of recovery to future periods. This may suggest that it will be difficult to recover the previously incurred costs through future rates, absent a rate order that specifies recovery.

17.3.2 Subsequent measurement

Subsequent actions of a regulator can either reduce or eliminate the value of a previously recognized regulatory asset or, alternatively, may provide sufficient support for recognition of amounts previously expensed. Regulated utilities should reassess the probability of a recovery each reporting period, considering the impact of any changes or events during the period. Subsequently allowed recovery

An incurred cost that does not meet the recognition criteria in ASC 980-340-25-1 at the date the cost is incurred should be recognized as a regulatory asset if and when it meets those criteria at a later date.

ASC 980-340-35-2

If a regulator allows recovery through rates of costs previously excluded from allowable costs, that action shall result in recognition of a new asset. The classification of that asset shall be consistent with the classification that would have resulted had those costs been initially included in allowable costs.

ASC 980-340-35-2 requires that a new asset be recorded for the amount that becomes allowed. Prior to the Codification, FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, paragraph B61 provided further guidance on the classification of the new asset.

Excerpt from FAS 144, paragraph B61

The Board decided that previously disallowed costs that are subsequently allowed by a regulator should be recorded as an asset, consistent with the classification that would have resulted had those costs initially been included in allowable costs. Thus, plant costs subsequently allowed should be classified as plant assets, whereas other costs (expenses) subsequently allowed should be classified as regulatory assets. . . . The Board decided to restore the original classification because there is no economic change to the asset—it is as if the regulator never had disallowed the cost. The Board determined that restoration of cost is allowed for rate-regulated enterprises in this situation, in contrast to other impairment situations, because the event requiring recognition of the impairment resulted from actions of an independent party and not management’s own judgment or determination of recoverability.

Consistent with this guidance, if a reporting entity determines that recovery of an incurred cost is now probable, it should record a new regulatory asset, unless the amount relates to a disallowance of utility plant. The regulated utility should classify plant costs that are initially disallowed and for which the regulator subsequently provides recovery as part of utility plant when the costs are restored. See UP 18.7.3 for further information on the subsequent recovery of plant disallowances and impairments. Impairment of existing regulatory assets

A regulated utility should charge a regulatory asset to earnings if it no longer meets the criteria for recognition in ASC 980-340-25-1.

ASC 980-340-40-1

If at any time an entity’s incurred cost no longer meets the criteria for capitalization of an incurred cost (see paragraph 980-340-25-1), that cost shall be charged to earnings.

Impairment of a regulatory asset may occur due to (1) a change in the reporting entity’s assessment of the probability of recovery or (2) actions of the regulator. ASC 980-340-35-1 requires that if a regulator later excludes from allowable costs all or a part of a cost that was capitalized as a regulatory asset, the regulated utility should reduce the carrying amount of the regulatory asset by the excluded cost.
Question UP 17-7
Is it appropriate to recognize a regulatory asset pertaining to a disallowed cost that the utility is litigating?
PwC response
Generally, no. The ratemaking process can span many months and include recommendations by public service commission staff, consumer advocates and other interveners, administrative law judges, and the commissioners themselves. In some cases, requests for reconsideration or court appeals routinely follow final rate orders. At other times, there are stipulated settlements for which it is impossible to track the exact determination of a particular element of the rate setting process. Precisely where in this spectrum a regulatory asset may cease to be or become probable of recovery is a matter of facts and circumstances requiring judgment. Given the uncertain outcome of litigation of final rate orders, it would be rare for costs subject to an unfavorable decision in a rate order, and for which a regulated utility intends to pursue recovery through the courts, to meet the current probable recovery tests necessary for deferral.

17.3.3 Specific considerations for certain types of regulatory assets

The  recognition and measurement of regulatory assets should be evaluated within the framework described in UP 17.3.1 and UP 17.3.2 and by incorporating a regulated utility’s facts and circumstances. However, there are specific considerations for certain types of regulatory assets as discussed in the following sections (i.e., alternative revenue programs, pension and other postemployment benefit plans, and debt). Alternative revenue programs

In addition to traditional billing based on cost-of-service revenue, the evolution of regulatory mechanisms (e.g., formula rates, trackers) have led regulators to authorize alternative revenue programs, as defined in ASC 980-605. For example, these may include decoupling programs that are intended to make the regulated utility whole from a revenue perspective by providing incremental billings intended to compensate it for lost sales volume (resulting from its pursuit of energy efficiency goals or driven by weather volatility).
Figure UP 17-4 summarizes considerations in the evaluation of alternative revenue programs.
Figure UP 17-4
Alternative revenue program considerations
Indicators that a mechanism represents an alternative revenue program
Indicators that a mechanism does not represent an alternative revenue program
  • Purpose is to authorize additional revenues in specified circumstances
  • Nature of the program is consistent with the description of an alternative revenue program described in ASC 980-605
    • Incremental revenue to be recognized is driven by factors outside the regulated entity’s control (e.g., weather), or as a result of the achievement of certain objectives (e.g., reduction of sales through demand side management programs or achieving customer service targets)
  • All three criteria in ASC 980-605-25-4 are explicitly met
  • Purpose is to provide timely recovery of a cost of service (or changes to cost of service)
  • Nature of the program is inconsistent with the description of an alternative revenue program
    • Structured to address rate lag and/or items included (or to be included) in rate base
  • Costs incurred (and to be recovered) represent costs controlled by the regulated entity
  • There is uncertainty as it relates to one or more of the three criteria in ASC 980-605-25-4
View table
Improper characterization of a regulatory mechanism established by regulators as an alternative revenue program could lead to accelerated revenue and/or the premature recognition of shareholder return. Therefore, it is important to evaluate the nature and purpose of each regulatory mechanism and assess whether the substance of the program is, in fact, an alternative revenue program. To do so, the regulated utility should perform two steps.
Step one
When analyzing whether a particular program meets the criteria to qualify as an alternative revenue program, a regulated utility should begin by assessing the program’s purpose. Programs that are consistent with the core principle of traditional regulatory accounting regarding the timing of collection of an incurred cost may not qualify as an alternative revenue program. We believe this is evident based on the language in ASC 980, which distinguishes between two different types of revenue.

ASC 980-605-25-1

Traditionally, regulated utilities whose rates are determined based on cost of service invoice their customers by applying approved base rates (designed to recover the utility’s allowable costs including a return on shareholders’ investment) to usage. Some regulators of utilities have also authorized the use of additional, alternative revenue programs. The major alternative revenue programs currently used can generally be segregated into two categories, Type A and Type B. [Emphasis added]

ASC 980-605-25-2 describes Type A and Type B programs and lists examples of each type. Qualifying programs are not usually cost-driven (i.e., the program should not be a cost recovery mechanism or a cost tracker) but instead should be additions to revenue/billings driven by broad external factors, such as changes in customer behavior that leads to changes in the demand for the commodity (Type A program) or incentive awards that are incremental to cost recovery (Type B program).
  • Type A
    Rate normalization plans that adjust billings for the effects of weather abnormalities, broad external factors, or to compensate the regulated utility for demand-side management initiatives. For example, many states have rate decoupling programs in place that provide the regulated utility with the right to a fixed amount of revenue for the year or a fixed amount per customer, irrespective of usage (or some variation), to address fluctuations in revenue due to weather or consumption.
  • Type B
    These are incentive programs that provide for additional billings (incentive awards) if the regulated utility achieves certain objectives, such as reducing costs, reaching specified milestones, or improving customer service.
Both types of programs enable regulated utilities to adjust rates in the future (usually as a surcharge applied to future billings) in response to past activities or completed events. These programs can reduce volatility in earnings (important to regulated utilities and their investors) and rates (important to ratepayers) and can be tailored to accommodate specific objectives.
ASC 980-605-25-1 through 25-4 address the accounting for these programs and provide for current recognition of revenue under certain limited circumstances.
The programs must qualify as Type A or Type B before proceeding to Step two.
Step two
Once deemed to be a qualifying program, a utility should evaluate the program against the three criteria in ASC 980-605-25-4.

ASC 980-605-25-4

Once the specific events permitting billing of the additional revenues under Type A and Type B programs have been completed, the regulated utility shall recognize the additional revenues if all of the following conditions are met:
  1. The program is established by an order from the utility’s regulatory commission that allows for automatic adjustment of future rates. Verification of the adjustment to future rates by the regulator would not preclude the adjustment from being considered automatic.
  2. The amount of additional revenues for the period is objectively determinable and is probable of recovery.
  3. The additional revenues will be collected within 24 months following the end of the annual period in which they are recognized. [Emphasis added]

These conditions establish a high threshold to recognize revenue prior to billing and collecting amounts from customers. Due to the specificity of the guidance, a program must comply with all of the criteria to permit revenue recognition. For example, we believe recognition by a regulated utility would be precluded if it does not have a specific rate order providing for the alternative revenue program. An assessment that it is probable the regulator will adopt an alternative revenue program based on historical practice would not be sufficient to support recognition.
Similarly, a regulated utility should assess the amount of revenue to be collected under a program and the collection period in concluding on the appropriateness of revenue recognition. The condition for recognition indicates that “revenues will be collected.” If there is any uncertainty about whether the amounts will be collected, this criterion would not be met.
Question UP 17-8
ASC 980-605-25-4(c) requires collection of the additional revenue within 24 months following the end of the annual period in which the revenue is recognized. What is the impact on recognition if collections extend beyond those 24 months?
PwC response
In some cases, an alternative revenue program may explicitly provide for the collection of revenues over a period that extends beyond 24 months following the end of the regulated utility’s fiscal year. Other programs may allow for future collection of amounts that were not initially collected within 24 months.
We believe there are alternative ways to account for the revenue under a regulator-approved alternative revenue program that includes collections extending beyond 24 months after the end of the regulated utility’s fiscal year, but that otherwise meets the recognition criteria in ASC 980-605-25-4. We believe any of these approaches detailed in Figure UP 17-5 are acceptable when accounting for revenue from an alternative revenue program. The choice of approach is a policy decision that should be consistently applied and disclosed (if material).
Figure UP 17-5
Summary of approaches to accounting for alternative revenue programs when revenues are collected over a period greater than 24 months
All or nothing
  • Because all the criteria are not met at inception of the program, revenue is not recognized until billed.
Supporters of this approach believe that the guidance in ASC 980-605-25 is prescriptive in nature, requiring all of the criteria to be met at the inception of the program. They believe recognition under the alternative revenue guidance is not permitted if any recovery extends beyond the period specified in the guidance. As such, revenue should be recorded as amounts are billed to the customers. This approach may be appropriate when there is uncertainty about the timing of collection.
Partial revenue recognition
  • Recognize revenue for amounts that will be collected within 24 months of the end of the annual period.
  • Amounts that will be collected beyond 24 months are recognized when billed or when the criteria for alternative revenue programs are met (i.e., when collection will occur within 24 months of the end of the annual period).
Supporters of this approach believe that the specific collections that occur in the 24-month period meet the criteria for recognition. Amounts to be collected in the third and fourth year would be recognized as billed or, alternatively, when the amounts qualify.
Hybrid approach
  • Revenue is recognized as billed until all of the criteria for recognition are met (i.e., recognize as billed until the time when all amounts remaining will be collected within 24 months following the end of the annual period).
Similar to the all or nothing approach, supporters of this view focus on the specific requirements under the guidance in ASC 980-605-25. However, under the hybrid approach, revenue would be recognized once all of the criteria are met, even if that occurs after the program has begun. For example, if the program provides for amounts to be collected over four years, amounts would be recognized when billed during the first two years. Amounts to be collected within the third and fourth year would be recognized once they will be collected within 24 months of the fiscal year-end (i.e., at the beginning of the third year).
View table
Question UP 17-9
How should a regulated utility consider undercollections or other changes in the timing of collections in determining revenue recognition under an alternative revenue program in which collections are expected to occur beyond 24 months?
PwC response
As described in Question UP 17-8, there are several acceptable approaches to accounting for an alternative revenue program when collections are expected to occur beyond 24 months. Unless the “all-or-nothing” approach is applied, regulated utilities should closely monitor the potential for “stacking” of undercollections (due to multiple years of decoupling) or extended periods of undercollections.
If collections are delayed beyond the original period, regulated utilities should assess whether amounts continue to qualify for recognition and whether adjustment to any existing regulatory asset balances is required. In addition, an extended period of rollover due to lower than anticipated collections may impact a regulated utility’s ability to continue to recognize amounts prior to billing and collection in the future.
Question UP 17-10
Should a regulated utility reassess the criteria in ASC 980-605-25-4 if a regulator changes the conditions of an existing alternative revenue program by lengthening the collection period?
Yes. In order for a regulated utility to recognize revenue from an alternative revenue program prior to billing to and collecting amounts from customers, the program must meet the criteria in ASC 980-605-25-4, which includes a requirement that amounts will be collected within 24 months following the end of the annual period in which they are recognized.
If a regulator lengthens the expected collection period and the regulated utility had previously recognized revenue (and recorded a corresponding regulatory asset) because either (a) it expected to collect all amounts within 24 months following the end of the annual period of recognition or (b) it expected to collect some amounts within 24 months and applied the partial revenue recognition model, the utility should reassess whether the program continues to meet the criteria outlined in ASC 980-605-25-4. Further, the regulated utility should consider whether a write down of  existing regulatory asset balances is required to reflect the impact of the extended recovery period. The change in the recovery period may also impact the regulated utility’s ability to recognize additional amounts in advance of billing and collection. Pension and other postemployment benefit plans

ASC 715, Compensation—Retirement Benefits, provides guidance on employers’ accounting for defined benefit pension and other postemployment benefit (OPEB) plans, and requires full balance sheet recognition of the funded status of those plans with an offset to accumulated other comprehensive income for any deferred amounts (i.e., unrecognized prior service cost and unrecognized actuarial gains and losses). ASC 715 is applicable to all reporting entities, including regulated utilities. See PEB 1.3 and PEB 1.9  for information on accounting by employers for defined benefit pension and OPEB plans, respectively.
In accounting for pension and OPEB plans, a regulated utility should consider whether it is appropriate to record a regulatory asset to offset the liability recognized as a result of applying ASC 715 (in lieu of recognizing a charge to other comprehensive income).
Positive factors
Examples of factors that may support recognition of a regulatory offset for pension and OPEB liabilities include:
  • Current rate recovery of pension and OPEB costs that is consistent with expense recognition under ASC 715-30 and ASC 715-60 (i.e., ASC 715 costs under US GAAP form the basis for pension and OPEB amounts recovered in rates)
  • Existence of a regulatory tracker mechanism or reconciliation process specified in a rate order with comparison of actual annual ASC 715 cost to costs included in rates, with short-term recovery of the difference
  • Historical consistency and clarity in the regulator’s approach to rate recovery
  • No indication of uncertainty or potential changes in the jurisdiction regarding the rate recovery approach to costs consistent with ASC 715-30 and ASC 715-60 combined with general stability in the jurisdiction’s approach to traditional cost of service (i.e., there is no existing legislation or substantive discussion to deregulate any aspect of a regulated utility’s operations)
  • Existence or issuance of a rate order providing that regulatory asset treatment for the unfunded liability is appropriate or required and that recovery of the unfunded costs will be provided in future rates; a rate order provides the best evidence, but consideration may also be given to staff accounting orders and policy statements
Strong indicators of probable recovery include cost recovery on an accrual basis consistent with US GAAP and the implementation of a tracker mechanism by the regulator. The existence of one of the positive indicators may or may not by itself support a probable recovery conclusion. However, regulated utilities will likely find the existence of more than one of these factors helpful in reaching a conclusion that recording a regulatory asset is appropriate.
Negative factors
In contrast, we believe the following conditions could be viewed as negative factors that may cause management to conclude that recovery of the unfunded pension or OPEB liability is not probable:
  • Current rate recovery of pension or OPEB costs on a “pay-as-you-go,” cash funding, Employee Retirement Income Security Act (ERISA) minimum funding, or some other basis
  • Previous specific disallowance of either pension or OPEB costs
  • Substantive historical inconsistency in the regulator’s approach to rate recovery for pension and OPEB costs
The existence of one of the indicators that regulatory treatment might not be appropriate may or may not by itself prevent a regulated utility from concluding that recovery is probable. However, the existence of more than one of these factors will make it difficult to conclude recovery is probable.
Furthermore, ASC 980-715-25-3 through 25-7 specify additional criteria for recognition of a regulatory asset for OPEB costs, including a satisfactory rate order that allows for recovery of those costs within 20 years, and no backloading of cost recovery on a percentage basis. That guidance also specifically precludes recognition of a regulatory asset if costs are recovered on a pay-as-you-go basis, even if other factors indicate that future recovery of OPEB costs is probable.

ASC 980-715-25-4

For continuing postretirement benefit plans, a regulatory asset related to Subtopic 715-60 costs shall not be recorded if the regulator continues to include other postretirement benefit costs in rates on a pay-as-you-go basis. The application of this Topic requires that a rate-regulated entity’s rates be designed to recover the specific entity’s costs of providing the regulated service or product. Accordingly, an entity’s cost of providing a regulated service or product includes the costs provided for in Subtopic 715-60.

Question UP 17-11
If a plan is settled or curtailed, is specific regulatory action allowing recovery of the cost of the curtailment or settlement necessary to recognize a pension or OPEB-related regulatory asset?
PwC response
No. We do not believe the lack of a specific regulatory action allowing recovery of costs incurred in connection with a pension plan settlement or curtailment accounted for in accordance with ASC 715 will preclude a regulated utility from concluding that the costs are probable of recovery from ratepayers. However, a previous specific disallowance of a settlement or curtailment may raise a question as to the recoverability of all pension and OPEB costs.
Question UP 17-12
How should a regulated utility account for a change in the assessment of regulatory recovery of pension and OPEB costs?
PwC response
As discussed in UP, an incurred cost that does not initially meet the recognition criteria in ASC 980-340-25-1 should be recognized as a regulatory asset if it meets those criteria at a later date.
If subsequent regulatory actions result in a regulated utility’s ability to assert that recovery of pension or OPEB costs is probable, then the regulated utility should first understand the impact of regulatory recovery on the benefit-related amounts recognized in accumulated other comprehensive income. The regulated utility should assess whether all previously recognized amounts are now probable of recovery through future rates. In addition, the reversal of amounts previously recorded in accumulated other comprehensive income but that are now expected to be recovered through rates should be recognized in other comprehensive income in the current period. This evaluation should also consider whether over-collected amounts would be returned to ratepayers (i.e., creating a regulatory liability).
Question UP 17-13
Can a parent company record an offsetting regulatory asset if the ASC 715 liability is not recorded in the regulated subsidiary’s separate financial statements?
PwC response
Yes, if the criteria for recognition are met. When a parent company has a pension or OPEB plan that covers employees of its regulated and unregulated subsidiaries, ASC 715 indicates that the plan should be accounted for as a single-employer plan in the parent company’s consolidated financial statements. If a subsidiary issues separate financial statements and participates in its parent company’s plan, the subsidiary, in its separate financial statements, should generally account for its participation in the plan as participation in a multi-employer plan in accordance with ASC 715-30-55-64. This guidance typically results in the subsidiary recording expense based on its required contribution for the period, with recognition of a liability only for contributions that remain unpaid as of the period end (see ARM 4270.3621 for further information).
We believe a parent company can record a regulatory asset in consolidation equal to the regulated subsidiary’s unfunded or underfunded liability if the criteria for recognition under ASC 980 are met. The factors considered should follow the analysis that would have been performed if the ASC 715 obligations had been recorded by the subsidiary. Any unfunded or underfunded amounts that do not meet the regulatory asset criteria as well as liabilities related to the unregulated subsidiaries would be recorded through a charge to other comprehensive income. Debt

Certain costs associated with debt may also be deferred as a regulatory asset if they meet the criteria included within ASC 980. Specific considerations related to debt are detailed in ASC 980-450; the items addressed include early extinguishment gains or losses and costs for reacquired debt.

ASC 980-470-40-1

Subtopic 470-50 requires recognition in income of a gain or loss on an early extinguishment of debt in the period in which the debt is extinguished. For rate-making purposes, the difference between the entity’s net carrying amount of the extinguished debt and the reacquisition price may be amortized as an adjustment of interest expense over some future period.

Additionally, ASC 980-470-40 indicates that the difference between reacquisition costs and the net carrying costs for reacquired debt should be capitalized as a regulatory asset or recorded as a liability if the regulator decides to increase or decrease future rates by amortizing the difference for rate-making purposes.
Debt issuance costs
In accordance with ASC 835-30-45-1A, debt issuance costs should be recognized as a direct deduction to the face value of the related debt. However, rate-regulated entities are often permitted to recover the costs of issuing debt instruments in rates. If the costs meet the qualification for recognition under ASC 980 the regulated utility should recognize these costs as regulatory assets in lieu of reducing the face value of the debt.
1 This guidance is not superseded by ASC 606.
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