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Ready for IFRS?

International reporting standards are coming for U.S. public companies.

Fortnightly Magazine - January 2009

Instruments and Hedging Activities (as amended for U.S. GAAP purposes), and IAS 39, Financial Instruments: Recognition and Measurement, generally are comparable, some fundamental differences merit utilities’ consideration. Review of contractual language and details will be key: Reevaluating contracts will allow utilities to determine the proper accounting treatment in accordance with IFRS.

IFRS uses the “own-use” definition to exempt contracts that were entered into and continue to be held for the purpose of receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements. Certain hedging relationships—or the concept of normal purchases and normal sales—might be treated differently under U.S. GAAP than they are under IFRS and its related own-use determination. Under IFRS, it’s also possible to hedge components (portions) of risk that give rise to changes in fair value. The overall valuation of financial instruments (specifically, considering the definition of fair value as set forth in the literature) and the accounting for day-one gains also may result in differing accounting results under the two standards.

Accounting for joint ventures: Currently, IFRS states that investments in associated companies are accounted for using the equity method, and investments in jointly controlled entities are accounted for under the equity method or proportionate consolidation. However, the treatment of joint ventures, including jointly-controlled assets, operations and entities, and the use of pro rata consolidation currently allowed under IFRS, are under review. This is another challenging area that likely will affect certain operating structures in place in the U.S. power and utilities industries. While varying structures allow companies to account for such joint ownership in the United States, some companies also have used the pro rata consolidation concept in U.S. GAAP-based financial statements to account for ownership interests in plants and related assets.

Emissions: Due to a worldwide focus on climate change, emissions generated by power and utility companies have received a lot of attention, and this also has raised accounting awareness. In addition, the recent District of Columbia Circuit Court of Appeals ruling in July 2008 striking down the U.S. Environmental Protection Agency’s Clean Air Interstate Rule raised valuation and potential impairment issues related to nitrogen oxide and sulphur dioxide trading programs. This ruling has affected companies that began installing certain emissions-reduction control equipment at their plants. While both the Financial Accounting Standards Board (FASB) and IASB have accounting for emission allowances as current projects, neither U.S. GAAP nor IFRS currently sheds much light on any specific method of accounting for these allowances, resulting in at least two different methods of accounting. The two methods primarily focus on whether the emission allowances should be recorded as inventory or intangibles with the valuation question focused on whether to carry the allowances at historical cost or fair value. A related question arises as to whether an obligation should be recorded, and as of what date, related to a company’s emissions.

IFRIC previously issued Interpretation 3 related to accounting in this area, but that interpretation was withdrawn, leaving unanswered questions about accounting for emissions. However, IASB recently added an Emission Trading