In Reply Refer To:
OED-DRAP
Docket No. AI02-1-000
February 20, 2002
TO ALL JURISDICTIONAL PUBLIC UTILITIES, LICENSEES, NATURAL GAS COMPANIES, AND OIL PIPELINE COMPANIES SUBJECT: ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 143, Accounting for Asset Retirement Obligations. 1 Jurisdictional entities must begin implementing the statement on January 1, 2003, for general purpose financial statements that are provided to shareholders and the Securities and Exchange Commission. The statement also encourages early adoption. MAY A JURISDICTIONAL ENTITY EARLY ADOPT THE PROVISIONS OF FAS 143 FOR ACCOUNTING AND REPORTING TO THE FERC?No. The Commission's existing Uniform Systems of Accounts2 for jurisdictional entities do not specifically address the accounting and reporting matters contained in this pronouncement. Many of the issues related to the early adoption of this pronouncement could result in inconsistent accounting treatment among companies and may have unintended effects on cost-of-service and formula rates. Consequently, public utilities and licensees, natural gas companies, and oil pipelines should not early adopt FAS 143 for financial accounting and reporting to the Commission pending Commission action on this matter. BACKGROUND OF SFAS 143
Essentially under the requirements of FAS 143, an entity must estimate and record the present value of future legal obligations related to the final removal of its plants and facilities. Entities will be required to record the asset retirement obligation as a liability with a corresponding increase to the capitalized cost of the related plant or facility. The capitalized cost of the asset retirement obligation will subsequently be depreciated over the life of the asset. Additionally, the asset retirement liability will be increased over time to account for the time value of money through charges to operating expense until the liability is ultimately extinguished when the actual removal work is performed. Finally, the statement requires that the cumulative-effect related to the adoption of the pronouncement be flowed through the income statement.
IMPACT ON JURISDICTIONAL ENTITIES
The adoption of this statement would generally result in jurisdictional entities immediately increasing plant costs and subsequently increasing depreciation expense by the amount of the recorded asset retirement obligation. Operating expenses would also increase as the jurisdictional entity increased the carrying amount of its asset retirement liability over the remaining useful life of the related property. Finally, amounts recorded in accumulated depreciation for negative salvage that did not rise to the level of a legal liability as defined by FAS 143 would be flowed through the income statement at the date of adoption.
The Commission's existing Uniform Systems of Accounts3 for jurisdictional entities do not specifically address the accounting and reporting matters contained in this pronouncement related to the appropriateness of including amounts in the plant accounts related to legal obligations for future removal of facilities. Additionally, many utilities currently provide for the costs related to the retirement of certain long-lived assets in their financial statements and recover those amounts in rates charged to their customers. Some of those costs may not rise to the level of an asset retirement obligation under the requirements of FAS 143. Consequently, due to the many implementation issues surrounding the adoption of FAS 143, the potential for inconsistent accounting and reporting related to the recognition of the asset retirement obligation, and the potential unintended impacts on cost-of-service and formula rates, it is inappropriate for public utilities, licensees, natural gas companies, and oil pipelines to early adopt FAS 143 for financial accounting and reporting to the Commission.
The Commission delegated authority to the Chief Accountant under 18 C.F.R. 375.303 to issue interpretations of the Uniform Systems of Accounts for public utilities, licensees, natural gas companies, and oil pipeline companies. The guidance provided herein constitutes final agency action pursuant to this authority. Within 30 days of the date of this letter, interested parties may file a request for rehearing by the Commission under 18 C.F.R. 385.713.
John M. Delaware
Deputy Executive Director
and Chief Accountant
- 1FAS 143 accounting pronouncement may be obtained from FASB at http://accounting.rutgers.edu/raw/fasb/.
- 2See 18 C.F.R. Part 101 Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act (2001); 18 C.F.R. Part 201 Uniform System of Accounts Prescribed for Natural Gas Companies Subject to the Provisions of the Natural Gas Act (2001); and 18 C.F.R. Part 352 Uniform System of Accounts Prescribed for Oil Pipeline Companies Subject to the Provisions of the Interstate Commerce Act (2001).
- 3See 18 C.F.R. Part 101 Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act (2001); 18 C.F.R. Part 201 Uniform System of Accounts Prescribed for Natural Gas Companies Subject to the Provisions of the Natural Gas Act (2001); and 18 C.F.R. Part 352 Uniform System of Accounts Prescribed for Oil Pipeline Companies Subject to the Provisions of the Interstate Commerce Act (2001).