Over the next year (or years), companies in Canada and the U.S. will make the transition towards adopting International Financial Reporting Standards (IFRS). These standards will have a...
Letters to the Editor
note that Figure 3 of the article shows ratepayers as being charged $3.98 for each dollar spent on investment for 60-year property and as receiving a credit of $2.79 for each dollar spent on removal.
“Main Street Gold Mine” asserts “[I]nflated cost-of-removal ratios have resulted in accumulated depreciation balances far greater than required for capital recovery over the life of the capital assets,” which seems to be interpreting capital recovery as being limited to investment. However, in the context of regulatory accounting, capital recovery has a broader meaning, as it includes investment, salvage, and removal.
“Main Street Gold Mine” asserts that paragraph B.73 of Statement of Financial Accounting Standard 143, “Accounting for Asset Retirement Obligations” (SFAS 143), requires utilities to classify removal costs as a regulatory liability. SFAS 143 identifies its paragraph “B” section as being “Background Information and Basis for Conclusions.” All paragraph B.73 does is acknowledge that enterprises qualifying for SFAS 71, “Accounting for the Effects of Certain Types of Regulation,” can reflect regulatory accounting in their income statements, provided they disclose any differences from financial accounting in their balance sheets as regulatory assets or liabilities. Therefore, contrary to the article, paragraph B.73 does not specify the accounting for removal costs.
“Main Street Gold Mine” states that the International Accounting Standards Board (IASB) in July 2009 issued for comment an exposure draft on rate-regulated activities that could result in something similar to SFAS 71. Whether this will happen remains to be seen, because the comments received did not disclose any consensus, there is no consensus among the IASB members, and the IASB’s staff has since asserted that existing International Financial Reporting Standards (IFRS) do not permit recognition of regulatory assets and liabilities.
“Main Street Gold Mine” refers to my October 2008 Fortnightly article, “ Fixing Depreciation Accounting ,” as confirming that “[T]he SEC’s impending move to IFRS poses a question regarding the disposition of the utilities’ cost-of-removal liability… Ferguson proposed that when these companies move to IFRS, they should transfer the regulatory liabilities to their equity accounts.” [Editor’s note: Erroneous reference to “November 2008” omitted.] My October article addresses whether the book reserve should be shown on the left side of the balance sheet as a contra-asset or on the right side as a source of capital, and does not address how the removal cost portion of book reserves should be dealt with if the SEC adopts IFRS as U.S. GAAP without there being an IFRS equivalent to SFAS 71.
Debt is recorded on the right side of the balance sheet in recognition that it is a source of capital, but users of financial statements recognize that it is not cash. Likewise, users of financial statements would recognize that moving the book reserve to the right side would not cause it to suddenly become cash.
–John Ferguson, CDP
The Author Responds:
Mr. Ferguson wrongly asserts “‘Main Street Gold Mine’ views the accumulated provision for depreciation (book depreciation reserve) as being cash that is readily available for financing capital expenditures.” Nothing could be further from the truth. “Main