Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Evolution or Revolution? Dismantling the FASB Standard on Decommissioning Costs

Fortnightly Magazine - May 15 1996

related to general environmental remediation that might arise from "improper operation," such as "unintentional environmental discharges or industrial accidents."3 However, the proposal would cover both legal and "constructive" obligations (em i.e., those obligations that the firm has "little or no discretion to avoid," such as when the actions or representations of management have "directly influenced the reasonable expectations or actions of those outside" the firm.4

The obligations and costs addressed by the exposure draft include those that the Uniform Systems of Accounts promulgated by utility regulators define as the cost of removal of depreciable assets. Cost of removal in this context is a generic term that refers to the costs incurred to remove or safely abandon facilities, not for purely physical removal. The proposed standard would establish financial reporting practices for cost of removal that differ from existing utility accounting practices, which are based primarily upon regulatory requirements. These differing practices will require more timely periodic information about these costs and, in the absence of conforming changes to regulatory practices, maintenance of separate records for purposes of financial reporting and regulatory accounting and disclosure of differences between the two.

The effects of the proposed standard should prove quite significant for electric and gas utilities, as their assets produce much more cost of removal than salvage. This fact is true even for underground facilities that are usually abandoned in place, because safely doing so involves costs that are large relative to the original cost of the facilities. Further, the proposed standard carries significant implications as to how well the recording of depreciation-related asset costs will reflect asset usage or consumption. Implementation for obligations that qualify for liability treatment should prove more straightforward for companies that practice the "item concept" of depreciation than for regulated entities that are required to practice the "group concept."

New Accounting Treatment

The proposed standard requires either of two treatments: 1) a liability, or 2) a current cash expense. Under the first treatment, the company would record costs as liabilities and capitalize an equal amount as a component of the depreciable balance. Costs that do not qualify for liability treatment would be recorded as expenses when they occur, to the extent the costs exceed salvage proceeds. (Utilities currently treat the costs of such obligations as a component of depreciation for both financial reporting and regulatory accounting purposes.)

Liability Treatment. Under liability treatment, the company would recognize the obligation as it occurs (at construction, for most utility property). However, it would recognize the liability at the inservice date, and record the liability on a present-value basis using a risk-free discount rate (see sidebar, "Liability Treatment"). For new property, however, the company would also capitalize an amount equal to the liability on the balance sheet as a component of the depreciable investment. Thus, in a manner somewhat the equivalent of sinking fund depreciation, the new liability treatment will create two expense

components: 1) pro rata depreciation, which remains constant; and 2) the liability, discounted to present value.

Importantly, liability treatment will tend to cause a backloading of expenses, because the liability