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Evolution or Revolution? Dismantling the FASB Standard on Decommissioning Costs
the best possible consumption/recording match should be no less important than providing the best possible service/cost match.
The simplest solution would come from specifying that the AICPA definition referred to in the exposure draft should mean net salvage (em not gross salvage (em thereby requiring that all cost of removal is handled on a straight-line basis through depreciation. Nevertheless, the last column in Table 3 suggests that this solution would cause substantial increases in utility depreciation provisions. Regulators probably would not allow utilities to charge increases to customers.
A more limited solution would match only the investment component of depreciation to asset consumption. Both salvage and cost of removal would be handled through present value calculations. But this solution would add an interesting twist: The new calculations would lead to frontloaded salvage.
One last alternative would
allow any company practicing group-concept depreciation to employ an annuity calculation (sinking-fund depreciation) for all cost of removal or for the cost of removal of assets that qualify for liability treatment. This approach would produce a backloading of depreciation expenses similar to the pattern of depreciation-related expenses under liability treatment, and should also involve most of the exposure draft disclosures. In the past the FASB has looked unfavorably upon sinking-fund depreciation, but its current proposal (em which produces backloading in a manner similar to a sinking fund (em may denote a change of heart.
In any case, the proposed standard is more revolution than evolution. I question whether this revolution will produce more meaningful financial statements. t
John S. Ferguson is a former principal of Deloitte & Touche, LLP, and a frequent contributor to PUBLIC UTILITIES FORTNIGHTLY.
The exposure draft defines obligations that qualify for liability treatment:
Cost. For such obligations, the company would record the cost as a liability (em i.e., cost of removal preducted for the future date when the cost will be incurred. (For new property, the company would also capitalize an equal amount on the balance sheet as a component of the depreciable investment.)
Discounting. The company must discount the liability using a risk-free rate (the rate on a U.S. Government bond with a maturity similar to that of the obligation). This rate is determined as of the date the assets are placed in service. (A composite rate for all asset vintages may prove more practical for assets existing at the time the proposed standard is adopted.)
These liabilities carry strict disclosure requirements: The company must update the liability: 1) by recalculating the estimated future cost as circumstances change, and 2) by recalculating the liability's present value, applying the constant, risk-free discount rate determined at the inservice date.
By contrast, under current utility practice, the typical depreciation disclosure would describe only a composite depreciation rate, plus a statement that cost of removal is recorded in accumulated provision for depreciation.
Systematic and Rational?
Q. If approved, will the new FASB standard create a regulatory asset totrack timing differences in recognition of cost of removal?
A. The answer may depend upon the AICPA definition of "depreciation" and "salvage."