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Accounting for Asset Retirement Obligations
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 Accounts [2] 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 Accounts [3] 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
[1]
FAS 143 accounting pronouncement may be obtained from FASB
at http://accounting.rutgers.edu/raw/fasb/.
[2] See 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).
[3]See 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).
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