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Utilities and power companies enter into a variety of contracts to purchase or supply goods or services (e.g., power purchase agreements, contracts to construct generation facilities, right-of-way agreements). While these contracts may not necessarily be documented, in form, as leases, they may include the right to control the use of an asset, and therefore be subject to the lease accounting guidance. When analyzing these arrangements to determine if they contain leases, reporting entities will need to first identify the unit(s) of account as discussed in UP 1. The analysis as to whether a contract is or contains a lease should be performed at contract inception for each identified unit of account. Depending on the rights and obligations conveyed in a contract, the unit of account may be a single contract, part of a contract, or even multiple contracts combined. See UP 1 for further information on identifying the unit(s) of account.
This chapter provides guidance on evaluating power purchase agreements (PPAs) to determine whether they are or contain a lease and details the accounting for those that do, including the allocation of contract consideration, lease classification, and modifications and remeasurements. Similar considerations would apply to the evaluation of leases in other contracts common in the utility and power industry, such as transmission agreements, natural gas storage contracts, and transportation agreements. Additional lease accounting issues specific to regulated utilities are addressed in UP 18.9.
Utilities and power companies that transact with a governmental body, or an entity to which the responsibility for the public service has been delegated, should assess whether these arrangements are within the scope of ASC 853, Service Concession Arrangements (ASC 853), as such arrangements are outside the scope of ASC 842.
The guidance in this chapter is only applicable to reporting entities that have adopted ASC 842 and supplements the information in PwC’s Leases guide.
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