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Treats cost of removal as component of depreciation, under rules and definitions from American Institute of Certified Public Accountants (AICPA) and Uniform System of Accounts: Depreciation denotes "loss in service value"; service value means "difference between original cost and net salvage value"; net salvage value is "salvage value of property less the cost of removal." AICPA describes depreciation as a "systematic and rational" process of allocation.
FASB Standard. As proposed, however, the FASB statement would discount, and thus backload, cost of removal under its liability treatment (cash treatment makes backloading even worse). This backloading lies at odds with typical usage patterns (constant or declining) for energy utility property.
Rationalization. The exposure draft would reconcile this conflict by claiming that the term salvage, as used in the AICPA definition of "depreciation," denotes only "gross salvage," without offset for cost of removal.
*The exposure draft acknowledges the problem: "The amounts charged to customers for costs of closure or removal may differ from the expense recognized in accordance with this Statement" (Exposure Draft, para. 22, pp. 6-7).
1 Exposure Draft, Proposed Statement of Financial Accounting Standards, Accounting for Certain Liabilities Related to Closure or Removal of Long-lived Assets, No. 158-B, Feb. 7, 1996, para. 6, p. 2 (Financial Accounting Standards Board).
2 Id., para. 4, p. 2.
3 Id., para. 5, p. 2.
4 Id., para. 7, pp. 2-3.
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