Public utility holding companies often have regulated and unregulated subsidiaries that issue stand-alone financial statements. The regulated subsidiaries may be separate SEC registrants and, thus, are required to report on a stand-alone basis.

ASC 740-10-30-27 requires allocation of consolidated current and deferred income taxes among members of a group, but does not specify the use of any single allocation method. However, the method adopted should be systematic, rational, and consistent with the broad principles established by ASC 740. There are two approaches regulated utilities commonly use to compute tax expense in their stand-alone financial statements: (1) the separate return method and (2) the benefits-for-loss modification of the separate return method. See TX 14.1 for information and guidance on applying these methods.

Regulators often approve intercompany tax sharing arrangements and may scrutinize the regulated utility’s allocation of consolidated income tax expense items. Some regulators may require utilities to use an overall effective tax rate for the entire affiliated group filing a consolidated return. Others may require that losses in the consolidated group be allocated to the entities that have gains, reducing either directly or indirectly the income tax component of rates for those entities when determining revenue requirements. Reporting entities should carefully consider whether to follow the allocation arrangement adopted for ratemaking as a number of these methods may not meet the broad principles of ASC 740. In addition, the SEC staff has expressed a preference that public companies use the separate return method.

If there are differences between the method of allocation under a tax sharing arrangement approved by the regulator and what would be allowable under ASC 740, the regulated utility would treat the resulting difference in amounts the regulated utility paid or received under the tax sharing arrangement as a dividend or capital contribution. See TX 14 for information on allocating income taxes of a consolidated group.