When regulators grant changes to utility rates of return, they estimate growth on the basis of gross domestic product (GDP). But do utilities have any chance of growing at the same pace as GDP?...
Saving Depreciation Accounting
Avoiding ‘earnings management’ requires transparency in reporting standards.
The Securities and Exchange Commission (SEC) is taking steps toward substituting International Financial Reporting Standards (IFRS) for U.S. Generally Accepted Accounting Principles (GAAP). The most recent is publication last November for public comment of a proposed substitution process that the SEC refers to as a “roadmap.” Having certainty surrounding existing utility asset and depreciation accounting practices enhances the ability to use financial statements to accurately depict the results of operations and financial status of reporting entities.
These practices deserve to survive such a substitution, as they are consistent with the SEC’s roadmap statement that “it is important that the accounting standards produced are capable of improving the accuracy and effectiveness of financial reporting and the protection of inves-tors” (Nov. 14, 2008 SEC Release No. 33-8982, p. 23) . If these practices don’t survive, regulators, their jurisdictional entities, and the investors in these entities might find the changes disturbing, and the SEC will not have accomplished its intended purpose.
A significant aspect of the potential for changes to utility accounting practices from this substitution is the recent recommendation by the SEC’s Advisory Committee on Improvements to Financial Reporting that accounting guidance not allow industry-specific exceptions. An example of the industry-specific guidance the Committee has in mind is SFAS 71, Accounting for the Effects of Certain Types of Regulation , that allows qualifying entities to utilize accounting practices not available to non-qualifying entities. Qualification requires that prices for service be set by an independent body or its governing board, be based on cost, and be charged to, and collected from, ratepayers, which limits SFAS 71 to being applicable to price-regulated entities. SFAS 71 is important because it is what allows the accuracy-enhancing accounting practices referred to above, and international standards contain no equivalent. However, last December the International Accounting Standards Board decided to add a project to its agenda that is intended to result in an accounting standard similar to SFAS 71, which marks a substantive departure from its practice of providing only transaction-specific guidance.
U.S. GAAP is recognized as being rules-based, but this wasn’t always the case, because it shifted from being principles-based as a consequence of the principles not being defined tightly enough for courts to determine whether entities were complying with them. Tightening the definitions resulted in rules. International standards are perceived as being principles-based, but are shifting toward being rules-based as a consequence of rules being issued in the form of interpretations. Principles are recognized as allowing more flexibility than do rules, which makes the judgments behind accounting-treatment decisions quite important. The SEC’s advisory committee recognizes the importance of accounting and audit judgments, and has recommended that the SEC and the Public Company Accounting Oversight Board adopt policy statements concerning the exercise of these judgments,