Aiub Hasan

The practical expedient would apply to all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Taxes assessed on an entity’s total gross receipts or imposed during the inventory procurement process are excluded from the scope of this election. An entity not making this accounting policy election would apply the new revenue standard—as originally issued—in determining if those taxes should be included in the transaction price. Most of the large energy companies have indicated they will exclude sales-based taxes collected on behalf of third parties from the transaction price.

When we see legislative developments affecting the accounting profession, we speak up with a collective voice and advocate on your behalf. Our advocacy partners are state CPA societies and other professional organizations, as we inform and educate federal, state and local policymakers regarding key issues. Knowledge of power and utility entities revenue recognition task force accounting and objectives, particularly as applied to utility and commercial accounting procedures. Most of the utilities are the basic utilities without which the organization will not be able to continue its operations and thus plays an essential part in the working of the organization.

Contract Modifications: Blend and Extend Arrangements

As such, the seller would continue to recognize revenue at the premodification contract rate during the remainder of the original term and would record the difference between the new contract rate and original rate as a contract asset. The contract asset would unwind during the extension period as the recorded revenue would exceed the billed amounts. In 2018, the Accounting Standards Codification (ASC) Topic 606—Revenue from Contracts with Customers became effective for all public companies. This major overhaul of revenue recognition has affected almost every industry, and the power and utilities (P&U) industry is no exception.

• Many P&U companies enter into arrangements to provide a commodity to another entity in exchange for a similar commodity at a different location.
• P&U companies often enter into “blend and extend” arrangements, where the supplier and customer renegotiate an existing contract by adjusting the pricing and extending the life of the contract.
• Any reports requiring a signature, as well as any supplemental papers (i.e. computer printouts), should be mailed via regular post.
• A seller could conclude the price of the contract increases by an amount of consideration that reflects the entity’s standalone selling price for the additional deliveries.
• Utility companies often receive customer requests for infrastructure additions that cannot be serviced economically.

INSIGHT: How Revenue Has Changed for Public Energy Companies

The accounting for CIAC is subject to interpretation and will require management judgment, supporting documentation and disclosure if amounts are material. The power and utilities task force concluded CIAC can reasonably be viewed as a cost reimbursement from a customer that is not within ASC 606’s scope. The task force noted this analysis requires the exercise of judgment and that others may reach different conclusions based on the facts and circumstances of their arrangements. Contracts expected to result in physical delivery may be eligible for the normal purchases and normal sales (NPNS) scope exception in ASC 815.

It is likely that many other issues and questions will continue to arise within the P&U industry as entities apply the revenue recognition standard. This article serves as a base reference point for your research into some of the focal issues experienced by industry experts. Other industry-specific issues and discussions are available on the RevenueHub site for all major industries as identified by the AICPA. Instead, customers requesting uneconomic services must make an upfront payment equaling the amount by which the project’s costs exceed the utility’s investment and allowed return.

Step 3: Determine the Transaction Price

It’s based on some strict guidelines laid down by the Federal Energy Regulatory Commission, that itemize a complete chart of accounts and really detailed instructions for which transactions go into each of these accounts. By the company, and the same remains as the liability until the company makes the payment of the same to the respective service provider. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

Typically, investors buy utilities as long-term holdings for their dividend income and stability. The adoption of this ASU will be complex and likely will require significant hours to correctly implement. The effect on each energy company will vary depending on existing revenue streams and estimation methodologies. Even if the amount or timing of revenue recognition does not change, presentation and disclosure will.

Where are utilities balance sheet?

To prevent discriminatory practices or predatory pricing behavior, tariffs can only be changed by an “independent, third-party regulator” or via legislative action. The amount of interest expense that can be capitalized is not based on GAAP rules, though. Conversely, it’s non-operating expenses are not recovered through the rates it charges to customers.

Non-operating expenses usually relate to investment losses, or losses on the sale of property. With the new revenue recognition standard’s effective date approaching, KPMG reports on the most significant industry issues. § The entity would measure its progress toward satisfaction of the performance obligation using the same measure of progress for each distinct good or service in the series. Guidance in ASC 980, Regulated Operations, was amended to specifically exclude alternate revenue programs (ARPs) from ASC 606 because such programs represent contracts between the utility and its regulators, not customers. Take-or-pay arrangements between P&U suppliers and customers ensure that the customer will either “take” product from the supplier or “pay” a penalty.

All entities also must disclose the methods, inputs and assumptions made in assessing whether an estimate of variable consideration is constrained. If an entity elects either of these practical expedients, it must disclose what exemptions it is applying, the nature of the performance obligations, remaining duration, and a description of the excluded variable consideration. An entity shall explain whether any consideration is not included in the transaction price and, therefore, not included in the information disclosed, e.g., an estimate of the transaction price would not include any estimated amounts of constrained variable consideration. Step 3 of the standard as originally issued required amounts collected on behalf of third parties to be excluded from the transaction price. Entities would have had to evaluate all taxes to determine if the tax is levied on the entity or the customer—this analysis would include sales, use, excise and value-added taxes.

Some utilities have recognized ARP revenue in prior periods (when earned) but included customer charges relating to the ARP revenue in subsequent periods. Based on its interpretation of ASC 980 and ASC 606, FinREC has presented two acceptable methods by which utilities can properly present the subsequent billing of ARP charges on the income statement. Based on what I’ve just said, the key issue in this industry is exactly which account is used to record a transaction.

I’ll just touch on a few of these accounts, so you can get a feel for the level of detail. There’s a set of expense accounts for steam power generation, another set of accounts for nuclear power generation, and even more accounts for hydraulic power generation. All entities are required to disclose judgments and changes in judgments that significantly affect the amount and timing of revenue from customer contracts. This includes the timing of satisfaction of performance obligations and the transaction price and amounts allocated to performance obligations. If the remaining goods or services are not distinct, the modification is accounted for as if it were part of the existing contract, forming part of a single, partially satisfied performance obligation at the date of the modification. The modification’s effect on the transaction price and on progress toward satisfaction of the performance obligation is recognized as an adjustment to revenue on a cumulative catch-up basis.

• With the new revenue recognition standard’s effective date approaching, KPMG reports on the most significant industry issues.
• Utilities exclude the billings related to previously-recognized ARP revenue when recognizing revenue from customer charges.
• Entities often seek RECs to comply with government regulations or promote environmental causes.
• The first step in accounting for electricity and capacity arrangements is to consider both the existence of (a) embedded derivatives per ASC 815 – Derivatives and Hedging or (b) contract terms that qualify as leases under ASC 840 – Leases.
• The complex arrangements between P&U companies, governments, and customers pose some of the most difficult issues.

The property operator may be reimbursed by the other working interest owners for overhead costs incurred. Because these payments represent the shared risks and rewards for their joint, undivided ownership interest in the property, these arrangements do not represent a vendor-customer relationship and the other working interest owners do not meet the definition of a customer. The oil and gas task force concluded these reimbursements generally are not considered revenue from contracts with customers subject to ASC 606. However, entities that serve as contract operators and are paid to operate properties in which they do not have a working interest would be subject to ASC 606 and should record the reimbursement as revenue in the income statement. In other cases, operators may provide services for other joint operating interest holders and for other third parties in the same field. If these services are outputs of the entities’ ordinary activities, they should be evaluated to determine if there are performance obligations for such services that are part of a contract with a customer subject to ASC 606.

The ASU will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. Utility companies often receive customer requests for infrastructure additions that cannot be serviced economically. For example, the cost of connecting electrical lines and water pipes to a remote cabin may exceed the expected future cash flows stemming from that connection. Utilities cannot recover the projected costs by raising utility prices (either on the individual or the collective level) due to strict regulations about customer pricing. Utilities exclude the billings related to previously-recognized ARP revenue when recognizing revenue from customer charges. On the income statement, ARP revenue includes all of the excess revenue generated by satisfying the regulator-specified conditions for the ARP.

RECs can be used independently of the electricity to satisfy regulatory requirements and have stand-alone value in the secondary market. Utilities record the entire price charged to the customer as revenue when the utility service is performed, including billings related to previously-recognized ARP revenue. To avoid counting the ARP-related revenue twice, utilities must also recognize an “equal and offsetting” reversal to the ARP revenue account by the amount of ARP revenue included in the price of the utility service.

This treatment assumes that the P&U company’s promise to provide capacity is a stand-ready obligation that the customer will receive evenly throughout the contract period. Each contract should still be reviewed individually since these conclusions do not represent the proper treatment for all situations. The objective of the disclosure requirements is to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Companies that have early-adopted the standard have found this area to be more challenging than initially anticipated, even with significant relief for nonpublic entities. In most cases, additional data will need to be collected and additional monitoring and record keeping will be required. Energy companies should ensure they have systems, internal controls, and procedures in place to accumulate the information required to satisfy these new presentation and disclosure requirements.