Are you required to follow governmental accounting standards? If so, how will GASB 62 impact your financial statements?
Is your utility required to follow governmental accounting standards? If so, you may have some questions with the issuance of the Governmental Accounting Standards Board’s (GASB) Statement No. 62, effective for financial statements for periods beginning after December 15, 2011. GASB 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, may have you asking questions like, “Does this impact our financials?" “If we’ve been using FAS 71/ASC 980 for regulatory accounting, can we continue to do so?"
Public utility industry accounting practices and GASB Statement No. 62 overview
The GASB has long moved to be the sole source of accounting guidance to those organizations that are required to follow its standards. Generally, if there was a private-company standard issued by the Financial Accounting Standards Board (FASB) such as Accounting for Asset Impairments (FAS 142) or Accounting for Derivative Instruments and Hedging Activities (FAS 133), there would eventually be a comparable statement issued by the GASB such as GASB 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, and GASB 53, Accounting and Financial Report for Derivative Instruments. This led to some inconsistencies in application between public and private (investor-owned) utilities.
With GASB 62, utilities that are required to follow GASB standards (called “public utilities" in this article) can choose to follow accounting and financial guidance issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements.
GASB states that the objective of GASB 62 is to incorporate into the GASB’s authoritative literature certain accounting and financial reporting guidance that is included in pronouncements issued on or before November 30, 1989, which do not conflict with or contradict GASB pronouncements. This includes guidance from:
- FASB Statements and Interpretations
- Accounting Principles Board Opinions
- Accounting Research Bulletins of the American Institute of Certified Public Accountants (AICPA) Committee on Accounting Procedure
A utility can elect to apply post-November 30, 1989 FASB as “other accounting literature" — which is the “lowest level" of generally accepted accounting principles (GAAP) that an organization may follow.
Even though we’re a “governmental utility" we still have our favorite FASBs!
Yes we do and we don’t want those taken away. Certain FASBs allow public utilities to better meet the measurements of their private sector business model and compare their operations to their private sector investor-owned peers. You may not want to lose that ability.
There are also some GASB-issued statements that public utilities are required to follow for which FAS had no comparable counterpart. For example, the accounting required for contributions in aid of construction under GASB 33, Accounting and Financial Reporting for Non-Exchange Transactions, does not match the intent or purpose of customer contributions in the utility industry. To meet industry accounting standards and follow transactional intent, public utilities use ASC 980, Regulated Accounting, in the FAS Accounting Standards Codification to make the accounting required by GASB conform to industry practices. (You may be familiar with ASC 980 under its previous name — FAS 71, Accounting for the Effects of Certain Types of Regulation.)
Baker Tilly has long recommended that public utilities use ASC 980/FAS 71 to record transactions in a way that meets their intended recovery through customer rates — and that is still our recommendation.
Has GASB 62 kept these favorites and how will this impact public utility accounting?
Public utilities’ favorite pre-1989 FASBs fall into these main areas:
- ASC 980/FAS 71 — Accounting for the Effects of Certain Types of Regulation
- ASC 835-20/FAS 34 and 62 — Interest Capitalization
Those two areas are addressed in GASB 62. In fact, Baker Tilly’s Energy and Utilities Group’s interpretation of GASB 62 shows that public utilities will find the transition to GASB 62 to be seamless, except for a change in note disclosure in the financial statements.
A summary of how these two areas are addressed in GASB 62 follows:
ASC 980/FAS 71 — Accounting for the Effects of Certain Types of Regulation
As mentioned earlier, ASC 980 is the accounting tool used by public utilities where strictly following GASB does not necessarily meet their business model and the intent of certain accounting transactions that will benefit future periods or be charged against future periods. This would also be in the manner in which public utilities recover their costs through rates charged to their ratepayers, make their operating benchmarks comparable to their investor-owned peer utilities, and also match their accounting to utility industry standards.
GASB 62 has codified ASC 980 in a form that will allow public utilities a seamless transition and no changes in their current application of regulatory accounting under ASC 980. GASB 62 discusses using these regulated accounting rules in paragraphs 476 — 500 of the standard.
Regulated accounting under GASB 62
GASB 62 uses the term “regulated operations," and discusses regulated accounting rules under paragraphs 476 — 500 of the standard.
Regulated accounting defined
The standard states that regulated accounting rules…may be applied to activities reported in business-type activities that have regulated operations that meet all of the following criteria:
- The regulated business-type activity’s rates for regulated services provided to its customers are established by or are subject to approval by an independent, third-party regulator or by its own governing board empowered by statute or contract to establish rates that bind customers.
- The regulated rates are designed to recover the specific regulated business-type activity’s costs of providing the regulated services.
- In view of the demand for the regulated services or products and the level of competition, direct and indirect, it is reasonable to assume that rates set at levels that will recover the regulated business-type activity’s costs can be charged to and collected from customers. This criterion requires consideration of anticipated changes in levels of demand or competition during the recovery period for any capitalized costs.
These are substantially the current rules followed under ASC 980.
Application of ASC 980 rules under GASB 62
GASB 62 goes on to discuss the impacts that regulators may impose on rates and the related accounting considerations that will be in play depending on those regulatory actions. Remember, for most public utilities the regulator is the city council or utility governing board.
The standard states that: “Rate actions of a regulator can provide a business-type activity with reasonable assurance of the existence of an asset." A regulated business-type activity should capitalize all or part of an incurred cost that otherwise would be charged to expense if both of the following criteria are met:
- It is probable that future revenue in an amount at least equal to the capitalized cost will result from inclusion of that cost in allowable costs for rate-making purposes.
- Based on available evidence, the future revenue will be provided to permit recovery of the previously incurred cost rather than to provide for expected levels of similar future costs. If the revenue will be provided through an automatic rate-adjustment clause, this criterion requires that the regulator’s intent clearly be to permit recovery of the previously incurred cost.
Finally, the standard provides for return of revenues to customers, stating that: “A regulator can require that a gain or other reduction of net allowable costs be given to customers over future periods. That would be accomplished, for rate-making purposes, by amortizing the gain or other reduction of net allowable costs over those future periods and reducing rates to reduce revenues in approximately the amount of the amortization. If a gain or other reduction of net allowable costs is to be amortized over future periods for rate-making purposes, the regulated business-type activity should not recognize that gain or other reduction of net allowable costs in the current period. Instead, it should be deferred for future reductions of charges to customers that are expected to result."
Impairment and discontinuation rules
The ASC 980 rules for impairment of regulatory assets and liabilities remain the same, i.e., if it is determined at a point in time that deferred costs or revenues will not be charged to or returned to customers, then the regulatory item is taken to the Statement of Revenues, Expenditures and Changes in Net Assets under normal GASB 42 impairment accounting.
Paragraphs 497 — 499 discuss the rules for discontinuation of the application of regulatory accounting, which are detailed and follow the current standards under ASC 980.
As with ASC 980, Baker Tilly recommends that utilities document their cost or revenues for deferral and seek governing board approval for such items either through a blanket resolution for routine items or more specific board action by passing resolutions for specific material items. Documentation should reflect the cost or revenues to be deferred, pertinent details of the transaction, and also the intended rate recovery or revenue return period. As with ASC 980, changes in any circumstances should be reflected in future accounting from the point of the change in circumstances.
ASC 835-20/FAS 34 and 62 — Interest capitalization
GASB 62 has fully incorporated the interest capitalization rules of ASC 835/FAS 34 (taxable bonds) and FAS 62 (tax exempt debt). Paragraphs 5 — 22 of GASB 62 discuss the specifics of interest capitalization.
Taxable bond issues
Paragraph12 states that: “The amount capitalized in an accounting period should be determined by applying an interest rate(s) (‘the capitalization rate’) to the average amount of accumulated outlays for the asset during the period. The capitalization rates used in an accounting period should be based on the rates applicable to borrowings outstanding during the period. If a government’s financing plans associate a specific new borrowing with a qualifying asset, the government may use the rate on that borrowing as the capitalization rate to be applied to that portion of the average accumulated outlays for the asset that does not exceed the amount of that borrowing."
In other words, the rules as used pre-GASB 62 should still be followed.
Tax exempt bond issues and interest capitalization
Paragraph 20 of GASB 62 incorporates the rules detailed in FASB 62 for capitalization of tax exempt bonds. The standard to follow is stated as: “The amount of interest cost capitalized on qualifying assets acquired with proceeds of tax-exempt borrowings that are externally restricted as specified …should be all interest cost of the borrowing less any interest earned on related interest-bearing investments acquired with proceeds of the related tax-exempt borrowings from the date of the borrowing until the assets are ready for their intended use."
Again, the rules for capitalization previously followed remain unchanged.
GASB 62 impact on the recording of asset retirement obligations or planned maintenance
Generally two other areas of non-GASB guidance are followed by public utilities — Asset Retirement Obligations and Planned Maintenance. If you have recorded Asset Retirement Obligations (AROs) under ASC 410, Asset Retirement and Environmental Obligations (formerly FAS 143), or record deferred maintenance or planned outages costs under FASB Staff Position, AUG AIR-1 — Accounting for Planned Major Maintenance Activities, you will find no change in your approach. GASB 62 does not impact this standard as these standards were issued after 1989. GASB 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, has designated FASB Statements to the level of “other accounting literature," which can be used in the absence of a GASB addressing the same situation. Since GASB does not address AROs and the ARO standard was put into effect in 2002, this standard can be applied without conflict with GASB. Likewise with the industry accounting used for planned major maintenance activities.
GASB 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, appears to have addressed any concerns public utilities may have about their use of FASB pronouncements, especially ASC 980 for Regulated Accounting. While there will be a note needed in your utility’s financial statements about implementing GASB 62, there should be no change in your financial statements if you’re currently using ASC 980.
As always, we seek your input into practical application of the new Statement. If you have comments or ideas, connect with us or post your comments to our Utility Accounting Issues Forum on LinkedIn.