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Utilities and power companies enter into a variety of arrangements that may be in the form of or contain a lease (e.g., power purchase agreements, third-party contracts to construct generation facilities, right-of-way agreements). In determining the appropriate accounting for a contractual arrangement to purchase or supply goods or services, reporting entities should first consider whether the arrangement contains a lease. See UP 1 for further information on the overall contract evaluation framework.
The analysis as to whether an arrangement contains a lease and, if so, the determination of the appropriate lease classification, may require considerable judgment. This chapter provides guidance on evaluating power purchase agreements to determine whether they contain a lease. It also addresses other leasing issues applicable to leases of power plants, including the allocation of contract consideration, lease classification, and presentation and disclosure. Similar consideration with regard to the existence of a lease would also apply to other arrangements common in the utility and power industry, such as transmission agreements, natural gas storage contracts, and transportation agreements. This chapter focuses on power purchase agreements due to their prevalence in the industry.
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 consider the guidance in ASC 853, Service Concession Arrangements to determine whether an arrangement involving infrastructure is within the scope of lease accounting.
This chapter supplements PwC’s Accounting and Reporting Manual 4650 and does not address all aspects of the authoritative lease guidance contained in ASC 840. Rather, it focuses on leasing issues unique to utilities and power companies. See UP 18.9 for information on lease accounting issues specific to regulated utilities.
Note about ongoing standard setting
The FASB issued ASC 842, Leases, in February 2016, which amends the guidance discussed in this chapter. The amended guidance will be effective for public companies for annual reporting periods beginning after December 15, 2018. Non- public companies have an additional year.

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