Relook at SFAS 71John Lathrop, PartnerKPMG LLP.pptVIP

A re-look at SFAS 71 What does it require? How is it applied? Is it still relevant? SFAS 71 – Accounting for the Effects of Certain Types of Regulation An entity must follow the requirements of SFAS 71 if it has operations that meet all of the following criteria Rates charged to customers are established or approved by a regulator or governing board empowered by statute Rates are designed to recover specific costs of providing service Based on demand and competition, rates can be charged and collected SFAS 71 Theory A principal consideration of rate regulation is the cause and effect relationship of costs and revenue. Costs should be capitalized or a liability should be recorded if it is probable there will be a corresponding increase or decrease in future revenues. Regulatory Assets Regulators can provide reasonable assurance regarding the existence of an asset if Its probable future revenues permit recovery for rate making purposes The regulator intends to provide specific recovery of an incurred cost rather than provide for expected levels of similar future costs. Regulatory Assets—Examples Taxes recoverable through future rates Loss on reacquired debt Deferred employee benefit costs Deferred plant costs Storm damage costs Coal contract termination costs Environmental costs Regulatory Assets SEC has increasingly scrutinized basis for recording regulatory assets. SEC has unofficially suggested evidence supporting future recovery include: Rate order from regulator Previous rate order allowing recovery of similar costs Written documentation from regulator approving future recovery in rates Analysis of recoverability from internal or external counsel Other Regulatory Liabilities A regulator may impose a liability on an enterprise Ways in which regulatory liabilities can be imposed Refunds to customers Current rates intend to recover costs not yet incurred Gain on transaction may be deferred and amortized to reduce future rates Regulatory Liabilities—Examples Cost