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Far From Closure: No Consensus Yet on Accounting Proposal for Decommissioning

Fortnightly Magazine - September 15 1997

obligations" prior to issuing the exposure draft, deciding not to offer a strict definition. However, it has since expressed an intent to provide some additional guidance.

Without a strict definition, companies would enjoy considerable flexibility in deciding between liability and cash treatment. This choice may become obvious when liability treatment involves acceptance of the legal implications of declared unavoidable obligations and extensive implementation efforts, while cash treatment does not. Other benefits of cash treatment (em higher earnings or lower revenue requirements and the ability to control when costs are recorded (em may also influence decisions. However, regulated entities will need to balance the advantages of cash treatment against an important risk. They may have trouble recovering from customers any costs for which recording is deferred.

Some alleged they were blindsided by the expansion of scope beyond nuclear decommissioning. One letter claimed a lack of due process. Many others saw inconsistencies with current practices that provide more meaningful financial statements, i.e., depreciation (by the utilities), and SFAS 19 (by the industrials). In general, however, one should not be surprised that the FASB would encounter difficulty in keeping such a radical change in accounting practices consistent with other standards and pronouncements.

I believe the board should heed concerns that liability treatment will not provide information useful for making business and economic decisions, because this fear suggests the proposal is not reflective of economic circumstances.

It also appears that reporting entities will have to deal with depreciable lives that will differ from the useful lives over which occur the accretion of liability. The obligations of nonregulated entities will undoubtedly be satisfied later than the conservative depreciable lives typically adopted to reduce or eliminate recording of losses and differences between book and tax depreciation. With the exception of replacement of transmission and distribution system components, regulated entities are unlikely to remove facilities when they are closed. Therefore, the depreciable lives of these facilities would be less than the lives used to calculate liability and accretion amounts.

Income volatility stems from the mismatch of revenues with use or consumption of assets. Regulated entities should be able to mitigate income volatility by application of SFAS 71, by recording regulatory assets and recognizing liabilities for differences between financial accounting and regulatory accounting treatment.

As for contingencies, confusion may exist between a reserve, on one hand, and the legitimate and necessary component of engineering estimates, on the other. Contingencies in estimates recognize the costs of activities that will occur, but which are handled in composite rather than as specific line items. Such contingencies are appropriate for inclusion in engineering estimates, and should not be excluded for accounting purposes under liability treatment.

Lastly, the concerns seen about matching revenues with asset use highlight three important aspects of the FASB's exposure draft: 1) backloading of the liability accretion, which stems from discounting under liability treatment, 2) more extensive backloading, from cash treatment, and 3) closure or removal activities that occur after the end of depreciable or actual asset lives.

The backloading inherent in the annuity calculation to be used for discounting under