In March of this year the Government Accounting Standards Board (GASB) issued Statement No. 65 Items Previously Reported as Assets and Liabilities. This standard was intended to compliment Statement No. 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. Statement No. 63 applied the definitions from GASB Concepts Statement No. 4 and created a financial reporting model where:
|+||Deferred outflows of resources|
|-||Deferred inflows of resources|
With GASB No. 65 the board began to identify items that were previously reported as assets and liabilities that should be classified as deferred outflows or deferred inflows going forward. GASB No. 65 is effective for periods beginning after December 15, 2012 however early application is encouraged.
This standard identified two items which are common to public utilities which will be reclassified under the new reporting format.
Losses on refunding debt –When a utility refunded existing debt the difference between the reacquisition price and the carrying amount of the refunded debt results in a loss on refunding. The board debated the essence of this transaction and determined that the loss does not represent an asset as there is no resource the entity can use in the future. In addition, the loss is does not represent a liability as there is no future obligation of resources. Because this loss is the result of a use of resources in the current period which benefits future periods through adjustments to interest rates or prepayment terms the loss should be classified as a deferred outflow of resources, rather than as a contra-liability as it has been shown. This line item is still amortized as a component of interest expense over the shorter of the life of the old or new debt.
Regulatory credits – GASB No. 62 incorporated regulatory accounting (ASC 980/FASB 71) into the governmental standards. GASB No. 65 re-evaluates the types of balances created under regulatory accounting and discusses the following categories:
- Regulatory credits which result in a refund being provided to utility customers over a future period should be shown as a liability of the utility.
- Regulatory credits which provide recovery in the current period for costs to be incurred in a future period should be reported as deferred inflows of resources.
- Similarly, gains or other revenues received in the current period to be applied as a reduction in recoverable costs in a future period should be shown as deferred inflows of resources.
There is no discussion of regulatory debits in this statement which implies that these would represent resources the utility controls and thus they should be classified as assets.
Debt issuance costs
GASB No. 65 also discusses the treatment of debt issuance costs. The board evaluated these costs and concluded that with the exception of prepaid insurance the costs relate to services provided in the current period and thus they should be expensed in the current period. This is a significant change from current practice which is to record these as assets and amortize them over the life of the related debt issue.
As previously noted GASB No. 62 outlines the concept of regulatory accounting for entities or operations that are rate regulated. This accounting allows a utility to alter the accounting for certain transactions to match the regulated rate recover of the costs if two key criteria are met (a) future recovery is probable and (b) it is clear that future recovery is based on prior costs and not similar future costs. The question then is "Are the debt issuance costs recovered through rates?"
If rates are designed on the cash basis and amount borrowed for debt issuance costs is included in the revenue requirement on a systematic basis over the life of the debt similar to interest expense then the answer is yes. If the utility designs rates on the utility basis and the return on rate-base is designed to recover the cost of financing including debt service and borrowed issuance costs then the answer is also yes. If, however, the utility has specifically excluded the recovery of debt issuance costs from its revenue requirement then the answer is no.
|Revenue Requirement Method||Debt Issuance Costs Rate Treatment||Debt Issuance Costs Accounting Treatment|
|Cash basis||Included in revenue requirement for recovery||Regulatory asset - amortized to match rate recovery|
|Cash basis||No recovery provided||Expense in period incurred|
|Utility basis||Included in revenue requirement for recovery||Regulatory asset – amortized to match rate recovery|
|Utility basis||No recovery provided||Expense in period incurred|
If the utility’s rate methodology provides recovery for debt issuance costs the utility can choose to follow GASB No. 62 and record the costs as a regulatory asset and amortize them over the life of the related debt – assuming that is the recovery period. As with any application of regulatory accounting this should be approved by the governing body along with the recovery period and if material the policy should be disclosed in the notes to the financial statements.
If, however, the utility’s revenue requirement does not provide for recovery of the debt issuance costs future costs should be reported as a non-operating expense in the year incurred. In addition, the financial statements should be restated to eliminate the deferral of any prior issuance costs from the statement of net assets and recognize them as an expense either in the year incurred if that year is presented or as an adjustment to the net position for the first year presented. If a restatement is required the details of this should be disclosed in the footnotes.
Use of term "deferred"
The final change made by GASB No. 65 is the restriction of the use of the term "deferred" only to those items designated as deferred outflows or deferred inflows of resources by the standards. As such, other items may need to be re-titled on the financial statements, for example deferred debits or credits may become regulatory assets or liabilities and deferred revenues will need to be unearned revenues.
GASB No. 65 is effective for periods beginning after December 15, 2012 however early application is encouraged. At this time management should be evaluating what changes will be required and if any early action is needed to ensure that regulatory accounting can be followed where desired. Please contact Jodi Dobson at firstname.lastname@example.org or Russ Hissom at email@example.com with further questions.
As always, we seek your input into practical application of the new Statement. If you have comments or ideas, connect with us or post your comments to our Utility Accounting Issues Forum on LinkedIn.