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FASB Pension ASU Implementation Considerations

Tuesday May 23rd, 2017

Confidential & Proprietary – Copyright © 2017 PowerPlan, Inc.

Agenda

2Confidential & Proprietary – Copyright © 2017 PowerPlan, Inc.

Randall Hartman, EEI• Background ASU 715• Industry Specific Concerns• Open Topics

Jim Dahlby, PowerPlan• Allocations, Billings & AFUDC• Cost of Removal & ARO• Closing to Plant & Assets

Joel Sechler, RCC• Depreciation• Retirement• Tax

Safe Harbor


Industry Groups and Accounting Firms still working through many of these topics

Some points of discussion are likely to change as these topics are further refined

Individual facts and circumstances need to be considered for each organization, regulatory and materiality are of particular importance.

ASC 715Compensation – Retirement Benefits

Background• Focus: transparency of benefit cost presentation• Income statement classification priority: decision-usefulness to

investors– Service cost – All other components of net benefit cost

• GAAP PP&E capitalization limited to service cost• No exceptions for regulated entities

– Affirmed ability to apply ASC 980-Regulated Operations• Effective for 2018 calendar year


Specific Concerns – Regulated Entities• Regulator continues capitalization of all benefit cost components during

construction– ASC 715 requirements for GAAP reporting

• Service cost capitalized = PP&E• Non-service cost capitalized = regulatory asset

– Identification/computation– Amortization period, method, income statement line– Derecognition for early retirements

• Capitalization of AFUDC on capitalized non-service cost– Recognition– Balance sheet classification


Other Issues• Industry task force on possible methodology for estimation of

regulatory asset• Service cost exceeds net benefit cost

– Regulatory liability?– Net amount capitalized?

• State regulator aligns with GAAP – FERC reporting and rate considerations

Allocations, Billings & AFUDC

Allocations & Overheads


Need Traceability of where non-service pension costs are allocated on balance sheet• Labor Loading to CWIP, Stores Clearing, Inventory, Fuel, etc. • What is impact of multi-step allocations? Does Stores Clearing need to be broken into Non-

Service Pension and All Other, etc.? Materiality?

Result: • Add new cost elements, expenditure types, etc. in Chart of Accounts• Update Allocation and Overheads to separate out Non-Service Pension Cost

– Options for Contra Reclass after or separating pools to keep separate• Reclass to Regulatory Asset/Liability based on specific situations

Billings


Joint Owner, Reimbursables, CIAC, Storm Crews

Billings normally driven based on contractual agreements

Open Questions: What impact does billings have on non-service pension being charged to CWIP or billed to a 3rd party.

Result: • When company will retain a portion of an asset in PP&E, depending on materiality the billing

process may need to bill amounts from CWIP and Reg Asset balances, since the CWIP will be split.

• Items collected for billing pass through, there is no impact to income statement, therefore no changes required.

• Review agreements to determine if there is a specific reference to GAAP accounting

AFUDC


Accounting Firms in agreement that AFUDC Base can be construction costs as determined by AFUDC rules• This doesn’t have to equal GAAP CWIP basis• All AFUDC stays in CWIP(107)

Result: Compute AFUDC as is today, based on total CWIP including any non-service

pension costs Keep CWIP as-is for FERC, AFUDC and Operational/Budgeting Exclude reclass of non-service pension amounts to Regulatory Asset/Liability

from AFUDC base


Polling Question:

How many people have an internal working group established already?

11

Cost of Removal & ARO

Cost of Removal


Monthly Accrual of Cost of Removal in Depreciation is reclassed from Accumulated Reserve (108) for FERC reporting to a Regulatory Liability under GAAP

Cost of Removal expenditures under GAAP are viewed as a spending of a regulatory liability

Result: No change required for Cost of Removal related to Non-Service Pension Costs

Asset Retirement Obligations


Estimation and Liability

ARO Liability must be based on estimated expenditures at “market” rates for external parties

Internal labor and pension costs should have no bearing on how the ARO liability is formed

Result: No changes to ARO estimation or liability

Asset Retirement Obligations


Settlement

Scenario 1: Accretion and ARC Depreciation are deferred to a Regulatory Asset• Expenditures for Settlement are accounted for based on regulatory treatment (e.g. COR)• ARO liability and ARO Reg Asset reduced as liability is reduced (either through a new layer

or adjustments)• Result: Follow approach for COR

Scenario 2: No Regulatory Asset for ARO Liability• Expenditures for Settlement are accounted for reduction in ARO Liability• Result:

– Based on materiality – don’t add non-service pension to labor used in settlement. Net result is same income statement but shift between pension and gain/loss for ARO

Closing to Plant & Assets

Closing to Plant and Assets Options


Option #1 – Set of Books in CWIP, Asset and Depreciation Modules

Option #2 – Maintain 1 to 1 Regulatory Assets/Liabilities for Each Asset

Option #3 – Create summarized (e.g. functional class) Regulatory Assets/Liabilities

Option #4 – Manually in GL

Options Considerations Reference Guide

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Weighing the Options


Decision FactorOption #1

(Separate Set of Books)

Option #2 (1-to-1 – Separate Asset)

Option #3 (Summarized Reg

Asset)

Provides fully detailed asset reporting from a FERC / Regulatory perspective Yes Yes Yes

Allows for GAAP net book value reporting at an asset level (for sale, investor reporting/reconciling, etc.) Yes Yes No

Accounting for asset transfers on the underlying asset automatically accounted for in the reg asset Yes No No

Asset retirements to the underlying asset automatically trigger proportional retirement to the reg asset Yes Yes No

Impact on number of sets of books in PowerPlanAdditional 1-2 per existing

SoBNone None

Requires the creation of new basis buckets in PowerPlan Yes Yes Yes

Requires the creation of new depreciation groups / methods in PowerPlan No Yes Yes

Weighing the Options


Decision Factor

Option #1 (Separate Set of

Books )

Option #2 (1-to-1 –Separate Asset)

Option #3 (Summarized Reg Asset)

Impact on number of asset records in the CPR None Double (or more)

Increase based on level of summarization

Allows for the reg asset to depreciate at the same rate as the “native” asset Yes Yes No

Increase in complexity of Depreciation Control Tree None Low to High High

Impact to journal entry configuration (or reporting, if in lieu of automated journal entries) High Low Low

Automated integration of book and tax depreciation No Yes Yes

New, on-going manual processes required None None Several1

1 Composite Rate Calculations, Asset retirements, transfers, and sales

Option #4 Considerations


Materiality?

Manually keep all FERC to GAAP differences in GL

Monthly Entries:• CWIP & Allocations• Joint Owner, CIAC, Billings, etc.• Closing to Plant• Depreciation• Retirements (optional)

Sustainable process for Year 2, Year 10, etc.

Tax Adjustments – discussed later

Contact:Jim Dahlby

[email protected]

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mailto:[email protected]

Proprietary and Confidential 23

Depreciation Considerations


differently now


Depreciation Implementation Considerations

• Goal: Track the Recovery of the Pension Regulatory Asset/Liability over life of the underlying Fixed Assets.

• Reversal of the Timing Difference• Ensure the economic realities are appropriately reflected

• Potential Tracking Methods• Fixed Asset Sub Ledger• General Ledger with Spreadsheet Support

Presenter

Presentation Notes


Single Composite Depreciation Group

Multiple Groups by Functional Class

Multi Sets of Books

Depreciation Implementation Considerations


Single Group Approach

• One Pension Group would be created by legal entity to adjust SEC Accumulated Reserve

• Amortized Over the Composite Life of All Assets

• Pro: Simplistic Approach and Minimal Impact to Accounting Operations

• Con: Least accurate and may not be reflective of underlying asset depreciation

Presenter

Presentation Notes


Functionalized Groups Approach

• A Group created for each FERC Functional Class• Amortized over Functional Class Composite Life

• Pro: More accurate than contra group with medium impact to Accounting Operations

• Con: Still may not be reflective of underlying asset depreciation

Presenter

Presentation Notes


Multi Set of Book Approach

• Multiple sets of books are tracked for all depreciation groups

• Same rates FERC depreciation rates

• Pro: Most Accurate recovery of timing difference. Reserve is identifiable for Retirements.

• Con: Can be burdensome to maintain and need to modify integrations with General Ledger

Presenter

Presentation Notes


Other Depreciation Considerations

• How Often should the composite rates be updated?• Quarterly• Annually

• Will Internal labor Cost of Removal have a timing difference?

• Can I support that in my Reserve / Regulatory Asset?

• What level of detail does the Tax Department need to support ADIT’s?

Presenter

Presentation Notes


Fixed Asset Retirement Considerations


Asset Retirement Accounting Impacts

• Goal: Track Asset Retirement Impacts on the Recovery of the Regulatory Asset / Liability

• How will Retirements be applied to assets with a timing difference?

• Multi Set of Books• Contra Assets Retirement• By Vintage by Depreciation Group

• Impacts Depreciable Base

Presenter

Presentation Notes


Retirements Multi Sets of Books

• Basis Differences are automatically retired when the underlying Assets are retired.

• Gross Depreciable Base reduction that corresponds to FERC Books.

• Pro: Depreciation reversal calculation is most accurate.• Con: May require integration changes with the General

Ledger. More Complex Change Management.

Presenter

Presentation Notes


Contra Asset – Related Retirement

• Contra Assets, equal to the pension differential are created at unitization in relation to underlying assets

• Pro: Multiple Set of Books are not required and improved integration with Tax.

• Con: Increased volume of Assets and Depreciation Groups to Track. Potential Integration changes with the general ledger would be required.

Presenter

Presentation Notes


By Vintage by Contra Depreciation Group

• Actual Retirements are rationed by the applicable non-service cost impact on a particular vintage and applied to Contra Group manually.

• Pro: Minimal (If Any Integration Changes)• Con: Less Accurate and may lead to divergent depreciation

calculations over time.

Presenter

Presentation Notes


Tax Accounting Considerations


GAAP vs FERC Timing Differences

GAAP CWIP FERC CWIPGAAP Net Plant FERC Net Plant

Since the difference in book expense is only temporary, a FAS 71 Regulatory Asset/Liability will likely be set up to track the difference

The timing difference will originate as internal labor is capitalized and will reverse as the underlying assets are depreciated and retired

Presenter

Presentation Notes


Why is this important for Tax?For a rate-regulated utility, the most important job of the tax function is to support accurate rate recovery, and to account for tax positions that are consistent with the economic realities of rate filings.

Multiple Book Basis to Tax Basis Reconciliations– GAAP is the starting point for IRS calculations– FERC (or PSC) is the starting point for above-the-line tax expense

Separate GAAP-vs-Tax and FERC-vs-Tax Timing Differences– Different ADIT balances– Different deferred tax expense amounts


Polling Question

How Many Utilities Have not engaged their Tax Department determining the best solution for the company?


Conclusion


Materiality / Solution Complexity

Functionalized Differential Groups Multi Set of Books

Single Composite Differential Group Contra Assets

Approach

Solution Complexity

Materiality


Contact Information

Joel SechlerE-mail – [email protected] - 610-554-5567

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