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18.10 Intercompany plant sales
Publication date: 22 Nov 2023
us Utilities guide
BCG 7 provides guidance on the accounting and reporting for common control transactions. However, there are unique considerations in accounting for common control transactions if a recipient of the assets or a business is a regulated utility. This section addresses common control transactions involving a regulated utility.
18.10.1 Common control transactions with a regulated utility
Generally, the sale of a plant between entities under common control is accounted for in accordance with ASC 805-50, with any excess paid over the parent’s historical basis in the asset being recognized in equity. Transactions between entities under common control that involve the transfer of a business ordinarily will result in a change in reporting entity for the receiving entity, which requires retrospective combination for all periods presented as if the combination had been in effect since inception of common control.
However, when a plant is sold from a non-regulated entity to a regulated entity under common control, ASC 980-810-45 states that profit on sales to regulated affiliates should not be eliminated provided that the sales price is reasonable and it is probable that revenue approximately equal to the sales price will result from the regulated entity’s use of the product. Accordingly, a gain on sale from a non-regulated affiliate to a regulated affiliate may be recognized within the consolidated financial statements if both of the criteria in ASC 980-810-45 are met.
In some cases, the sale of a plant by a non-regulated affiliate to a regulated affiliate is considered the transfer of a business; however, because such plant does not become part of the regulated affiliate’s rate base until the transaction is approved by the regulator, retrospective combination for all periods presented as if the combination had been in effect since inception of common control is generally not appropriate. Therefore, the sale of a plant (that is considered the transfer of a business) by a non-regulated affiliate to a regulated affiliate is generally accounted for on a prospective basis subsequent to the transfer.
Similarly, a regulated entity may be required to record a loss if a regulator disallows the full sales price in connection with the acquisition of a plant by a regulated entity from a non-regulated affiliate. Under this circumstance, the regulated utility should account for the disallowed cost of the acquired plant in accordance with ASC 980-360.
Excerpt from ASC 980-360-35-12
When it becomes probable that part of the cost of a recently completed plant will be disallowed for rate-making purposes and a reasonable estimate of the amount of the disallowance can be made, the estimated amount of the probable disallowance shall be deducted from the reported cost of the plant and recognized as a loss.
As noted in Question UP 18-8, we believe it is reasonable to consider “recently completed plant” to include utility plant or an addition to utility plant which has been placed in service but has not yet been through an initial rate case. Accordingly, it is appropriate to consider disallowances of plant acquired by a regulated affiliate from a non-regulated affiliate in the context of ASC 980-360-35-12 and recognize a loss in accordance with this guidance.
18.10.2 Intercompany sales of plant to a non-regulated entity
Unlike a sale of plant from a non-regulated entity to a regulated entity, ASC 980 does not provide specific guidance for situations in which a regulated entity sells a plant or an interest in a plant to a non-regulated entity under common control. Accordingly, the plant sales from a regulated entity to a non-regulated entity are subject to the guidance for transactions between entities under common control included in ASC 805-50. When accounting for such transactions in the regulated entity’s financial statements, given the effect of the regulatory environment, the regulated entity would generally record a regulatory asset or liability for the difference between the net book value of the plant and the cash received (assuming approval of such treatment by the utility’s regulator) in the period in which the transaction occurred, with an offsetting amount recognized in the income statement.
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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