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Evolution or Revolution? Dismantling the FASB Standard on Decommissioning Costs

Fortnightly Magazine - May 15 1996

costs that require liability treatment, the calculations will likely prove extensive and complex.

The actual pace of property retirements adds to the problem. Under the group concept, regulators typically use depreciation rates that assume that all assets in a group retire at an age equal to the average life and all normal retirements are recorded as fully depreciated. The intent is that early and late retirements will eventually offset each other. However, in practice, utility property is commonly much younger than its average life, and utilities typically retire items at an average dollar age less than average asset life. One-fourth to one-third of the average life is typical for electric transmission and distribution property; one-third to one-half for gas LDC property. This situation may complicate the adjustments required upon initial application of the FASB standard, and upon periodic reassessments of recorded liabilities.

Flaws and Blessings

As a depreciation specialist, I view positively any sign that the proposed statement from FASB will increase understanding of removal or abandonment obligations for utility assets. However, I see the proposal as flawed, because removal or abandonment obligations will be recorded in a manner inconsistent with the usage of the underlying assets. The exposure draft claims that its handling of cost of removal is systematic and rational. But if handling the depreciable investment, salvage, capitalized closure or removal amounts, and cost of removal offsetting salvage proceeds on a straight-line basis is "systematic and rational," as defined by the American Institute of Certified Public Accountants (AICPA), then how can backloading the rest of cost of removal also be systematic or rational?

A National Association of Regulatory Utility Commissioners publication, Public Utility Depreciation Practices, offers an eloquent argument for using traditional accrual accounting for cost of removal:

"The intent of the present concept (accrual of original cost and net salvage over the life of an asset) is to allocate the net cost of an asset to annual accounting periods, making due allowance for the net salvage, positive or negative, that will be obtained when the asset is retired. This concept carries with it the thought that ownership of property entails the responsibility for its ultimate abandonment or removal. Hence if current users of the property benefit from its use, they should pay their pro rata share of the costs involved in the abandonment or removal of the property."

[This treatment of salvage appears in harmony with generally accepted accounting practices and tends to remove from the income statement fluctuations caused by erratic, although necessary, abandonment and uneconomical removal operations. It also adds the advantage that current consumers will pay a fair share, even though estimated, of the costs associated with the property devoted to their service. (author's explanation)]

Financial accounting would be well served by the regulatory matching concept known as intergenerational customer equity, whereby all asset costs (including those for the eventual abandonment or removal of the facilities from which they take service) are borne by the generation of customers causing the costs to be incurred. While this regulatory concept is too often more words than deeds, providing