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17.10 Regulated operations presentation and disclosure requirements
Publication date: 31 Aug 2023
us Utilities guide 17.10
Regulated utilities are subject to the overall presentation and disclosure requirements applicable to reporting entities in general. However, due to the nature of their operations, regulated utilities also have additional presentation and disclosure considerations.
17.10.1 Presentation
Because of the regulatory process and resulting economic effects, the presentation of the financial statements of a regulated utility may differ from entities in general. Common differences and other considerations for the financial statements of regulated utilities are highlighted in Figure UP 17-9.
Figure UP 17-9
Common considerations in financial statement presentation for regulated utilities
Common considerations in financial statement presentation for regulated utilities
Financial statement |
Common presentation considerations |
|---|---|
Balance sheet |
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Income statement |
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Statement of cash flows |
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In addition to the items highlighted in Figure UP 17-9, regulated utilities should consider the presentation matters related to specific accounts described in the following sections.
17.10.1.1 Regulatory assets and liabilities
The presentation of regulatory assets and liabilities on the balance sheet is primarily dependent on the regulatory jurisdiction for which rates are being collected or refunded, as well as the method and timing of recovery. ASC 210-20-45-1 provides relevant guidance in assessing whether regulatory assets and liabilities within a specific jurisdiction may be offset.
A right of setoff exists when all of the following conditions are met:
- Each of two parties owes the other determinable amounts.
- The reporting party has the right to set off the amount owed with the amount owed by the other party.
- The reporting party intends to set off.
- The right of setoff is enforceable at law.
If these conditions do not exist, regulatory assets and liabilities should be reported on a gross basis. Although the regulator may consider regulatory assets and liabilities together as part of the regulatory process, in general, such amounts are not offset. Therefore, we would expect netting of regulatory assets and liabilities on the balance sheet to be limited.
Furthermore, regulatory assets and liabilities should never be reported “net of tax.” Deferred income taxes and regulatory assets and liabilities that are recorded in respect of those deferred income taxes should be presented on a gross basis. See UP 19.7 for further discussion of “net of tax” reporting.
ASC 980 does not specifically discuss the classification of regulatory assets or liabilities as current versus noncurrent. However, if a regulated utility presents a classified balance sheet (i.e., separate classification of current assets and current liabilities), it should consider the classification of regulatory accounts as current versus noncurrent. While many regulatory assets and liabilities are recovered or passed back over a longer period, entities may have some assets or liabilities that are recovered or refunded within an operating cycle. For example, some jurisdictions have established fuel or purchased power cost recovery mechanism whereby over or under collections are included in rates in the subsequent month or quarter. In these instances, it is appropriate to classify the regulatory asset or liability as current. If a regulatory asset or liability will only be partially recovered or refunded in the next year, a reporting entity may consider the entire regulatory asset or liability to be the unit of accounting and classify it as non-current.
17.10.1.2 Presentation of capital
Regulated utilities often follow a “total capitalization” aggregation on the balance sheet. The SEC staff has permitted this presentation; however, in certain filing reviews, the SEC staff has expressed a view that regulated utilities should provide separate subtotals for any mandatorily redeemable preferred stock and debt. Further, the SEC staff has indicated that an additional subtotal that aggregates common stock and mandatorily redeemable securities is not permitted.
17.10.2 Discontinuation of regulated accounting for a separable portion of the business
When recording the results of a total or partial discontinuation of ASC 980, no restatement of prior period information is permitted. The SEC staff has required registrants to report the write-off in the current quarter in which a final agreement or rate order occurs. This is consistent with ASC 980-20-40-6, which requires that the discontinuation of ASC 980 be applied when deregulatory legislation is passed or when a rate order that contains sufficient information to reasonably determine the impact of deregulation has been issued.
In addition, once a regulated utility discontinues the application of ASC 980 to a portion of the business, it should consider the presentation of the unregulated activities. ASC 980-20-45-1 requires that the activities related to the separable portion of the business that no longer applies ASC 980 be separately presented in the financial statements either on the face of the financial statements or in the footnotes.
17.10.2.1 Reapplication of ASC 980
A regulated utility that reapplies ASC 980 to all or a portion of its operations should report the net adjustment resulting from the reapplication in the income statement within results of operations.
17.10.2.2 Parent company investments in subsidiaries
ASC 980-810-S99-1 provides guidance pertaining to disclosure about a parent company’s investments in its subsidiaries. Specifically, if there is a difference between the carrying amount of the parent’s investment in its subsidiaries and the book equity of the subsidiaries at the respective dates they were acquired, that amount should be presented in the consolidated balance sheet.
Classification and measurement of subsidiary preferred shares
Public utility holding companies sometimes have subsidiaries that have issued preferred shares. In such cases, the parent company and the subsidiary will need to consider whether there are specific classification requirements related to those preferred shares (i.e., as debt or equity) pursuant to ASC 480-10-S99. It is common in the industry for preferred shares issued by a public utility holding company’s subsidiaries to have the following provisions:
- The shares are callable by the subsidiary
- The shares allow the holders to gain control of the subsidiary’s board if it does not pay dividends for a certain number of consecutive periods
These provisions, if exercised, provide the preferred security holders with the ability to effectively put the shares by forcing the subsidiary to exercise the call option if the subsidiary does not pay dividends in accordance with the share agreement. Although all facts and circumstances should be considered, generally such shares are considered redeemable outside the control of the subsidiary and should be classified as temporary equity. See FG 4 for information on how such shares should be classified by the subsidiary and the parent company.
17.10.3 Disclosure
Regulated utilities are subject to the same disclosure requirements as entities in general and also have supplemental requirements that arise as a result of applying ASC 980. Figure UP 17-10 summarizes the regulatory-specific disclosure requirements as stipulated in ASC 980.
Figure UP 17-10
Summary of disclosures required by ASC 980
Summary of disclosures required by ASC 980
Area |
Required disclosures |
|---|---|
Regulatory assets |
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Revenue subject to refund (ASC 980-605-50-1) |
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Reapplication |
ASC 980 does not include specific disclosure requirements related to reapplication of regulatory accounting. Depending on the significance of reapplication to the financial statements, regulated utilities should consider disclosing:
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The impact of regulation on a regulated utility cannot be overemphasized. Therefore, the regulated utility should consider prominent disclosure of the effects of regulation.
17.10.4 Environmental obligations
Regulated utilities often have significant environmental clean-up costs. These types of costs may be incurred over a long period. The determination of whether to accrue a liability for these costs depends on the facts and circumstances and the guidance in ASC 410-30 and ASC 450-20 should be followed.
SAB Topic 10.F, Presentation of Liabilities for Environmental Costs (codified in ASC 980-410-S99-1), also provides specific guidance related to the potential impact of regulatory recovery on the accounting for environmental remediation liabilities:
- A regulated utility may not present estimated liabilities for environmental costs net of probable future revenue resulting from the inclusion of such costs in allowable costs for ratemaking.
- A regulated utility may not delay recognition of a probable and estimable liability for environmental costs while a regulator debates potential recovery of the costs.
The SEC guidance indicates that an environmental remediation liability may be an allowable cost that qualifies for recognition as a regulatory asset. However, consistent with the overall model for application of the impact of regulation, a reporting entity should evaluate, measure, and record environmental remediation liabilities in accordance with the US GAAP guidance for entities in general. Any potential regulatory recovery should be evaluated and recognized in accordance with the criteria in ASC 980-340-25-1.
17.10.5 Disclosure considerations when return is capitalized only for ratemaking
ASC 980-340-50-3 requires disclosure of any allowance on shareholder investment capitalized for ratemaking purposes but not recognized for financial reporting.
17.10.6 Other suggested regulated operations disclosures
In addition to the disclosure requirements of ASC 980 for regulated operations, disclosures about the effects of regulation continue to be an area of SEC attention. Regulatory environments differ significantly among states, regions, and entities. As such, reporting entities may want to consider whether their regulatory disclosures provide readers with a comprehensive understanding of their current regulatory environment and the related impact on their businesses. Regulated utilities should consider providing the following disclosures about rate-regulated activities in SEC filings:
- Whether the financial statements have been prepared in accordance with ASC 980 and the basis for the continued application of regulatory accounting, particularly when it has been an unusually long period since the last rate case
- The nature, amount, and basis of regulatory assets deferred, and the recovery period when the amount is classified on the balance sheet, and whether a return is being earned
- The impact of regulation on the business (e.g., for recent rate orders received, an explanation of the impact the new rate orders had on the period reported, and the impact new rates are expected to have on the business in the future)
- The existence of and associated impact of stabilization mechanisms or disallowances
- The nature of significant deferrals created by the regulatory process (e.g., plant abandonment or other stranded costs, deferred fuel costs, environmental remediation costs)
- Pending rate cases and their potential future effects on operations
Reporting entities may also want to consider disclosing the extent to which changes are taking place that may lead to a future conclusion that all or a portion of the business may not qualify in the future for continued application of regulatory accounting.
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