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Evolution or Revolution? Dismantling the FASB Standard on Decommissioning Costs
treatment appears as a mirror image of the change in reserve, because the only application adjustment is the reversal of the cost-of-removal portion of the existing accumulated provision for depreciation.
Table 3 compares depreciation-related expenses to depreciation amounts that reflect existing depreciation rates. These estimates indicate that, on average, the new FASB statement should produce different effects on depreciation-related expenses for electric and gas utilities: 1) liability treatment (em a small increase for electrics, a small decrease for gas; and 2) cash treatment (em a small decrease for electrics, a substantial decrease for gas.
However, the ranges demonstrate that some companies could face substantial changes. The cash treatment increases are somewhat understated, and the decreases somewhat overstated, because the estimates do not include amounts for expending any excess cost of removal that may be incurred during any one period.
Under the proposed standard, companies must expect to modify recorded construction costs, acquisitions costs, or liability amounts whenever circumstances dictate. Financial reporting needs would dictate making the studies to determine whether modifications are needed more frequently than has historically been necessary for regulatory purposes to test the continued validity of depreciation rates. Site-specific demolition cost estimates may be required for some types of assets because past experience may be lacking or may prove inadequate.
Other Transition Issues
Nuclear Trust Funds. Many utilities use trust funds for all aspects of nuclear decommissioning. However, trust-fund contributions are determined through an annuity calculation (em that procedure differs from the present-value calculation specified in the exposure draft. Thus, after-tax fund earnings and discount rates will vary. Also, the current contribution amounts to nuclear trust funds will diverge from the recorded depreciation-related expenses, and the market value of existing trust funds will vary from the recorded liability amounts.
For property other than nuclear generating plants, the extent of differences arising under the proposed standard will depend upon whether the costs qualify for liability treatment, and the extent to which removal or abandonment obligations have been reflected in depreciation in the past.
Reserve Adjustments. Table 3 suggests that, on average, the regulatory backloading for electric and gas distribution companies is about the same as liability treatment backloading, but that regulatory backloading is less than cash treatment backloading. However, unique circumstances and accounting practices cause substantial variations from the averages for individual companies. Moreover, electric and gas utilities may find it necessary to reverse some portion of their existing accumulated depreciation. The Table thus suggests substantial reserve adjustments for some companies.
Asset Groups. Because utilities typically follow the group concept in depreciation practice, assigning an averaged useful life across large groups of related properties, they may find it appropriate to adopt the same type of simplification in assigning cost-of-removal obligations under the proposed statement.
A typical electric utility (excluding nuclear facilities) will employ 15 or more depreciable asset groups with a large cost of removal relative to original cost. A typical gas local distribution company (LDC) will have five or more such groups. The number of asset inservice years reflected in each group will reach 50 or more. Thus, for