In Reply Refer To:
OED-DRAP
Docket No. AI01-1-000
August 10, 2001
TO ALL JURISDICTIONAL PUBLIC UTILITIES, LICENSEES,
NATURAL GAS COMPANIES, AND OIL PIPELINE COMPANIES
SUBJECT: ACCOUNTING AND REPORTING FOR CERTAIN
TYPES OF FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
INTRODUCTION
The Financial Accounting Standards Board has issued
three pronouncements affecting the manner in which certain types
of financial instruments and hedging activities are measured and
reported in the financial statements. The pronouncements are:
. SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, effective for fiscal years
beginning after December 15, 1993.
. SFAS No. 130, Reporting Comprehensive Income,
effective for fiscal years beginning after December 15, 1997.
. SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS
No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, effective January 1, 2001,
for calendar year companies.
These pronouncements changed the accounting and
reporting for certain financial instruments and hedging activities,
and established new standards for displaying comprehensive income
and its components in a full set of general purpose financial
statements.
The Commission's existing Uniform Systems of Accounts1
for jurisdictional entities do not specifically address the accounting
and reporting matters contained in these pronouncements. The following
guidance is being provided to all jurisdictional entities concerning
the accounting and reporting of certain financial instruments
and hedging transactions in the Annual Report Form Nos. 1, 1-F,
2, 2A and 6 for the year ending December 31, 2001.
1 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); 19
C.F.R Part 201 Uniform System of Accounts Prescribed for Natural
Gas Companies Subject to the Provisions of the Natural Gas Act
(2000); and 18 C.F.R. Part 352 Uniform System of Accounts Prescribed
for the Oil Pipeline Companies Subject to the Provisions of the
Interstate Comerce Act (2000).
1. ACCOUNTING FOR OTHER COMPREHENSIVE INCOME
Background: SFAS No. 115 and SFAS No. 130
require entities to account for certain items as Other Comprehensive
Income and report those amounts in a new equity section of the
balance sheet.
Question: What equity account should an entity
use to record Other Comprehensive Income for reporting to the
Commission?
Response: The existing Uniform Systems of
Accounts for jurisdictional entities do not specifically contain
an account for recording Other Comprehensive Income. Jurisdictional
utilities, licensees and gas pipeline companies will reflect Other
Comprehensive Income in a separate subaccount of Account 211,
Miscellaneous Paid-In Capital. Oil pipeline companies will reflect
the amount in a separate subaccount of Account 73, Additional
Paid-In Capital.
2. ACCOUNTING FOR RECLASSIFICATION ADJUSTMENTS
Background: Under SFAS No. 130 an entity
must record "reclassification adjustments" to remove
amounts previously recorded in accumulated Other Comprehensive
Income when the related transactions or events are ultimately
recognized in earnings in subsequent periods.
Question: What account should jurisdictional
entities use to record reclassification adjustments for reporting
to the Commission?
Response: The Uniform Systems of Accounts
do not provide for a reclassification adjustment account for amounts
that must be reclassified from accumulated Other Comprehensive
Income into earnings in subsequent periods. Therefore, jurisdictional
entities will use a separate subaccount of Miscellaneous Paid
in Capital to serve as their reclassification adjustment account
to record amounts in earnings when the transactions or events
that gave rise to the recognition of Other Comprehensive Income
are ultimately included in earnings.
3. DISPLAYING THE COMPONENTS OF COMPREHENSIVE
INCOME IN THE FERC ANNUAL REPORTS
Background: SFAS No. 130 does not prescribe
a specific format for reporting comprehensive income but requires
that an entity display net income as a component of comprehensive
income in its financial statements. It permits a choice of displaying
comprehensive income and its components in (a) one or two statements
of financial performance, or (b) a statement of changes in equity.
Question: How should entities report to the
Commission the items classified as Other Comprehensive Income
in the schedules contained in the FERC Annual Report Form Nos.
1, 1-F, 2, 2A and 6?
Response: The existing schedules (e.g. Statement
of Income or Comparative Balance Sheet) do not include a format
or separate section for reporting Other Comprehensive Income.
To promote consistency in reporting, entities shall report Other
Comprehensive Income in the Notes to Financial Statements2schedule
contained in the FERC annual report forms, using formats similar
to the examples shown in the attached enclosure.
4. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
Background: SFAS No. 133 requires an entity
to recognize certain derivative instruments as either assets or
liabilities in the Statement of Financial Position and measure
those instruments at fair value.
Question: What accounts should be used to
record changes in the fair value of derivative instruments that
are not designated as hedges?
Response: Public utilities, licensees, and
natural gas companies will record the change in the fair value
of derivative instruments that are not designated as hedges in
Account 124, Other Investments, and reflect any gains or
losses in Account 421, Miscellaneous Nonoperating Income, or Account
426.5, Other Deductions, respectively. Oil pipeline companies
will record the change in fair value of derivative instruments
not designated as hedges in Account 21, Other Investments, and
reflect any gains or losses in Account 660, Miscellaneous Income
Charges.
5. ACCOUNTING FOR FAIR VALUE HEDGES
Background: If certain criteria are met under
SFAS No. 133, a derivative instrument may be designated as a fair
value hedge. Under the special accounting for fair value hedges,
any change in the fair value of a recognized asset, liability,
or a firm commitment is recognized in earnings in the period of
change together with the offsetting gain or loss on the hedged
item attributable to the risk being hedged. The effect of this
accounting is to record in earnings the extent to which the hedge
is ineffective in achieving offsetting changes in fair value of
the derivative instrument as compared to changes in the fair value
of the item being hedged.
Question: How should a jurisdictional entity
account for the changes in fair value of the item being hedged
and the changes in fair value of the derivative instrument? Additionally,
what income statement account should be used to record the ineffectiveness
of the hedged transaction?
Response: Jurisdictional licensees, utilities
and natural gas companies will record changes in the fair value
of the carrying amount of the hedged item in a separate subaccount
of the account that carries the item. Changes in the fair value
of the derivative instrument will be recorded in Account 186,
Miscellaneous Deferred Debits, or Account 253, Other Deferred
Credits, as appropriate. The ineffective portion of the hedge
transaction will be reflected in the same income or expense account
that would have been used if the hedged item had been disposed
of or settled. For example, the ineffective portion of a fair
value hedge related to long term debt would be reflected in Account
427, Interest on Long-Term Debt.
Oil pipeline companies will record changes in the
fair value of the carrying amount of the hedged item in a separate
subaccount of the account that carries the item and record changes
in the fair value of the derivative instrument in a deferred charge
account. Similarly, the ineffective portion of the hedge transaction
should be reflected in the same income or expense account that
would have been used if the hedged item had been disposed of or
settled.
Finally, jurisdictional entities will disclose in
the Annual Report Form Nos. 1, 1-F, 2, 2A, and 6 filed with the
Commission the impact the fair value hedge had on the carrying
amount of the respective asset, liability, or firm commitment
being hedged.
6. ACCOUNTING AND REPORTING OF CASH FLOW
HEDGES
Background: If certain criteria are met under
SFAS No. 133, a derivative instrument may be designated as a cash
flow hedge. Under the special accounting for cash flow hedges
the effective portion of the derivative's gain or loss is initially
reported as a component of Other Comprehensive Income and the
ineffective portion is reported in earnings.
Question: How should a jurisdictional entity
account for the changes in fair value of a derivative instrument
designated as a cash flow hedge?
Response: Jurisdictional licensees, utilities
and natural gas companies will record changes in the fair value
of the derivative instrument in Account 186, Miscellaneous Deferred
Debits, or Account 253, Other Deferred Credits, as appropriate.
The effective portion of the cash flow hedge should be recorded
in a subaccount of Account 211, Miscellaneous Paid-In Capital.
The ineffective portion of the hedge transaction will be reflected
in the same income or expense account that would have been used
if the hedged item had been disposed of or settled. For example,
the ineffective portion of a cash flow hedge used to protect against
the risk of increases in variable interest expense on long term
debt would be reflected in Account 427, Interest on Long-Term
Debt.
Oil pipeline companies will record changes in the
fair value of the cash flow hedge in Account 44, Other Deferred
Charges, or Account 63, Other Noncurrent Liabilities, as appropriate
and record the effective portion of the cash flow hedge in a separate
subaccount of Account 73, Additional Paid-In Capital. The ineffective
portion of the cash flow hedge will be reported in earnings in
Account 660, Miscellaneous Income Charges.
7. ACCOUNTING FOR REGULATORY ASSETS AND LIABILITIES
Question: How should an entity, under a cost
of service rate regulation, account for changes in the fair value
of derivative instruments and unrealized holding gains and losses
on certain marketable securities?
Response: If it is probable that a rate setting
body will include these amounts in the development of future cost
based rates, then the entity must record these amounts as a regulatory
asset in Account 182.3, Other Regulatory Assets, or Account 254,
Other Regulatory Liabilities, as appropriate.
8. COST-OF-SERVICE TARIFFS/FORMULA RATE
Background: An entity has a cost-of-service
tariff and/or a formula rate under which amounts billed each month
will change based on amounts recorded in FERC's Uniform System
of Accounts. Under the tariff/formula rate, only amounts recorded
in certain specified accounts affect the monthly billings.
Question: May a jurisdictional entity include
in its monthly billings: (1) amounts recorded in a separate subaccount
of Paid in Capital related to items of accumulated Other Comprehensive
Income, or (2) adjustments to asset or liability amounts resulting
from fair value hedge accounting?
Response: Adoption of the accounting guidance
contained in this letter is for FERC accounting and reporting
purposes, and may not affect the measurement or periods in which
amounts are included in a jurisdictional entities billing determinations
without prior regulatory approval. If an entity's billing determinations
would be affected by the adoption of the guidance contained in
this letter, the entity shall make a filing with the proper rate
regulatory authorities before implementing the accounting change
for billing purposes.
9. ACCOUNTING AND REPORTING OF EMISSION ALLOWANCES
Background: The Uniform System of Accounts
for jurisdictional electric utilities and licensees provides specific
accounting guidance for exchange traded emission allowance futures
contracts.
Question: Does this guidance letter change
any of the existing accounting and reporting requirements for
emission allowances?
Response: No. Jurisdictional public utilities
and licensees will continue to follow the accounting and reporting
instructions provided for in General Instruction No. 21 of 18 C.F.R.
Part 101 for the costs and benefits associated with emission allowance
transactions.
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
Enclosure
Enclosure
Sample formats that may be used to display comprehensive
income in the Notes to Financial Statements schedule of the FERC
Annual Reports for jurisdictional public utilities, licensees,
natural gas and oil pipeline companies.
|
STATEMENT OF COMPREHENSIVE INCOME |
YEAR ENDED
12/31/0X |
1 |
Net Income as Reported in FERC Form 1, 1-F,
2, 2A, or 6 |
$500,000 |
2 |
Other Comprehensive Income, Net of Tax: |
|
3 |
Foreign currency translation adjustments |
$ 2,000 |
4 |
Unrealized gains and (losses) arising during
period |
10,000 |
5 |
Less Reclassification Adjustment for gain
included in income |
(1,000) |
6 |
Minimum pension liability adjustment |
$ 0 |
7 |
Total Other Comprehensive Income |
$ 11,000 |
8 |
Comprehensive Income |
$ 511,000 |
Sample format of displaying other comprehensive
income and its components in a statement of changes in equity
in the Notes to the Financial Statements schedule of the FERC
Annual Reports for jurisdictional public utilities, licensees,
natural gas and oil pipeline companies.
|
STATEMENT OF CHANGES IN EQUITY |
ACCUMULATED BALANCE
AT 12/31/0X |
COMPREHENSIVE INCOME
AMOUNT FOR THE YEAR ENDED
12/31/0X
|
1 |
Retained Earnings Balance at 1/01/0X |
$1,000,000 |
|
2 |
Net Income as Reported in the FERC Form
No. 1, 1-F, 2, 2A, or 6 |
$500,000 |
$500,000 |
3 |
Dividends Declared on Common Stock |
$ (30,000) |
|
4 |
Retained Earnings Balance at 12/31/0X |
$ 1,470,000 |
|
5 |
Accumulated Other Comprehensive Income (Subaccount of Additional
Paid in Capital ) |
|
|
6 |
Balance at 1/01/0X |
$25,000 |
|
7 |
Foreign Currency Translation Adjustments |
|
$2,000 |
8 |
Unrealized Gains (Losses) on Securities
During Year |
|
$10,000 |
9 |
Reclassification Adjustment |
|
$(1,000) |
10 |
Minimum Pension Liability Adjustment |
|
$ 0 |
11 |
Other Comprehensive Income |
$11,000 |
$11,000 |
12 |
Comprehensive Income |
|
$511,000 |
13 |
Accumulated Other Comprehensive Income Balance at 12/31/
0X |
$36,000 |
|
14 |
Paid In Capital Balance at 1/01/0X |
$40,000 |
|
15 |
Changes During Year |
$0 |
|
16 |
Paid In Capital Balance at 12/31/0X (Net
of amounts shown on Line 13) |
$40,000 |
|
17 |
Common Stock Balance at 1/01/0X |
$100,000 |
|
18 |
Common Stock Issued |
$0 |
|
19 |
Common Stock Balance at 12/31/0X |
$100,000 |
|
20 |
Total Stockholders Equity |
$1,646,000 |
|