How should contributed assets be reported by regulated utilities?

It is not uncommon for municipal or public utilities to have infrastructure that is financed by third parties, either through grants or through customer or developer contributions. At one time common practice was to record the assets only if they were financed by the utility, or to record the project net of the contribution. With the issuance of Governmental Accounting Standards Board (GASB) Statement No. 33 Accounting and Financial Reporting for Non-exchange Transactions this changed. That standard required the asset to be recognized and the contribution to be recorded and reported as revenue on the statement of revenues, expenses and changes in net assets. This posed an issue for utilities which followed regulatory accounting as outlined in Financial Accounting Standards Board (FASB) Statement No. 71 (also known as ASC980) and were not allowed to recover the cost of these contributed assets within through their approved rate structure or model. In these cases the assets were considered to be impaired under traditional FASB guidance. As such, these utilities would often recognize the contribution revenue and an offsetting impairment loss within the same period resulting in the net value of the asset being reported.

GASB Statement No. 62 Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements effectively incorporated the rules for regulated utilities into the GASB standards thus replacing FASB 71/ASC980 for municipal or public utilities. However, GASB had previously issued guidance to define asset impairments in Statement No. 42 Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries therefore the question remaining was how would a regulated enterprise account for assets that were contributed by a third party and thus would not be recovered under their regulated rate structure under GASB No. 62.

GASB No. 62 discusses asset impairments in paragraph 488 and clarifies that assets should first be evaluated for potential impairments under the guidance of GASB No. 42, and if impaired then an evaluation should be made as to the portion, if any, of the impaired cost that will still be allowed to be recovered. GASB has confirmed that governments should use an unexpected decline in service utility as discussed in Statement No. 42 as the definition of impairment, not the lack of cost recovery.

However, Statement No. 62 goes on in paragraph 492 to discuss instances where infrastructure costs will not be recovered through rates or will not be allowed to generate a rate of return. In these instances it is appropriate to decrease the value of the asset and recognize a loss for unrecoverable costs; however this should not be referred to as an impairment. Alternatively, some utilities have adopted a rate methodology where contributed assets are maintained on the books and depreciated and the contribution revenue is deferred under regulatory accounting to be amortized and applied in future periods to offset the depreciation on the contributed assets. This method would also be allowable, assuming it is consistent with the rate methodology and approved by the regulatory body.

Utility does not follow GASB 62 regulatory accounting
  • Recognize contributed revenue and contributed assets
Utility follows GASB 62 regulatory accounting - Option 1
  • Recognize contributed revenue and asset
  • Decrease asset value and recognize unrecoverable costs for amount of contribution that won't be recovered in rates
Utility follows GASB 62 regulatory accounting - Option 2
  • Recognize contributed revenue and asset
  • Report revenues to be applied in future periods (debit) and record a regulatory deferral which is amortized to match the depreciation on contributed assets

In determining if option 1 or 2 is appropriate management should review the rate recovery model approved by the regulatory body. It should be noted that these two methods would impact the value of the capital assets maintained on the books quite differently which may be significant if the utility pays a payment in lieu of taxes based on the investment in capital assets. Some utilities have opted not to follow regulatory accounting in the preparation of GAAP based financial statements even though they may have costs which are recovered through rates over a different time period than when they are recognized in the financial statements. This is often because the regulatory reporting required does not match the rate recovery methodology thus the implementation of regulatory accounting would result in differences between regulatory and GAAP reporting.

The incorporation of regulatory accounting from FASB No. 71/ASC 980 into GASB No. 62 does not change the generally accounting practices used for the recording or reporting of contributed assets however it does distinguish asset impairment losses from write-downs due to unrecoverable costs and thus those items should be distinguished in the financial statements as well.