83 FERC 62,240
FEDERAL ENERGY REGULATORY COMMISSION
WASHINGTON, D.C. 20426
In Reply Refer To:
OCA\DGOO
Docket No. AI98-2-000
6-15-98
TO ALL JURISDICTIONAL LICENSEES, PUBLIC UTILITIES
AND NATURAL GAS COMPANIES
SUBJECT: GUIDANCE ON ACCOUNTING FOR DEFERRED INCOME TAXES ON
INTERCOMPANY PROPERTY TRANSFERS
Introduction
In a recent order, the Commission set forth the proper
accounting for deferred income taxes related to intercompany
transfers of property. (1) This accounting differs in certain
respects from that previously required by the Commission for
these types of transactions. The change involves how sellers are
to recognize deferred income taxes on deferred intercompany tax
gains and losses and how buyers are to recognize deferred income
taxes on the change in the tax basis of the transferred property.
In brief, the change in policy allows companies to record
the deferred income tax consequences of intercompany transfers of
property in deferred income tax accounts rather than in
miscellaneous deferred debit/credit accounts or intercompany
receivables/payables.
The following guidance is being provided to all
jurisdictional licensees, public utilities and natural gas
companies to assist them in complying with the Commission's
accounting requirements for the tax consequences of intercompany
property transfers.
For Further Information Contact
John M. Okrak (Technical Information)
Office of the Chief Accountant
888 First St. NE.
Rm. 71-17
Washington, DC 20426
(202) 219-2587
1. Seller's Accounting for Intercompany Property Transfer
Question: How should the seller of property in an intercompany
transfer account for the income tax consequences
attributable to such transfer?
Response: The intercompany transfer of property is a taxable
event that (1) results in either a deferred tax gain or
loss for the seller and (2) establishes a new tax basis
for the property transferred to the buyer. If the
property transfer results in a deferred tax gain for
income tax purposes, the seller is required to
recognize a deferred tax liability for the tax gain in
Account 283, Accumulated Deferred Income Taxes - Other.
Alternatively, if the property transfer results in a
deferred tax loss for income tax purposes, the seller
is required to recognize a deferred tax asset for the
tax loss in Account 190, Accumulated Deferred Income
Taxes. The seller is also required to flowback (i.e.,
reverse) the deferred income taxes related to the
property transferred.
2. Buyer's Accounting for Intercompany Property Transfer
Question: How should the buyer of property in an intercompany
transfer account for the income tax consequences
attributable to such transfer?
Response: Under Section 168(I)(7) of the Internal Revenue Code,
the affiliated buyer, in a deferred tax gain situation,
assumes the tax basis of the transferor and recognizes
a new tax asset for the excess of the transfer price
over the transferor's tax basis. In a deferred tax
loss situation, the affiliate buyer assumes the tax
basis of the transferor to the extent it does not
exceed the sales price of the property transferred.
Therefore, in a tax loss situation there is no new tax
asset to be recognized.
In accounting for the property transfer, the buyer is
required to record deferred taxes in the same amount as
recorded on the seller's books for the transferred
property. The buyer is to record these deferred taxes
in the same deferred tax account as that used by the
seller. Any step-up in the tax basis of the property
is a separate temporary difference and the related
deferred tax asset should be recorded in Account 190.
Any reduction in the tax basis of the property
resulting from the transfer is to be recognized by
reducing the amount of deferred income taxes that were
recorded on the seller's books for the property.
3. Effective Date of Change
Question: What is the effective date of this change in accounting
for intercompany property transfers?
Response: The change in accounting is to be applied to all
intercompany property transfers occurring after
March 31, 1998, but the Commission would have no
objections if it were applied to previous transactions.
4. Cost-of-Service Tariffs/Formula Rate
Question: An entity has a cost-of-service tariff/formula rate
under which monthly billings are based on recorded
amounts under the FERC's Uniform System of Accounts.
Under the tariff/formula rate, only the amounts
recorded in certain specified accounts affect the
monthly billings, such as those included in the
entity's deferred income tax accounts. May an entity
adjust its monthly billings to give proper effect to
the revised accounting for intercompany property
transfers if implementing the change in accounting for
FERC accounting and reporting affects changes in the
billings under its cost-of-service tariff/formula rate?
Response: Adoption of this change in accounting for intercompany
property transfers for FERC accounting and reporting
purposes should not affect the measurement of cost
included in an entity's billing determinations without
prior regulatory approval. If an entity's billing
determinations would be affected by adoption of this
change, because of the provisions of its tariffs, the entity shall make a filing with the proper rate
regulatory authorities before implementing the change
for billing purposes.
The Commission delegated authority to the Chief Accountant
under 18 C.F.R. 375.303 to issue interpretations of the Uniform
System of Accounts for licensees, public utilities and natural
gas companies and sign correspondence on behalf of the Commission
relating to Annual Report Form Nos. 1, 1-F, 2 and 2-A. 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.
Debbie L. Clark
Chief Accountant
1. See NorAm Gas Transmission Company, 82 FERC 61,330 (1998).
Intercompany means any transaction between members of the
same affiliated group which file a consolidated income tax
return.