Today, you’ll find our 431,000+ members in 130 countries and territories, representing many areas of practice, including business and industry, public practice, government, education and consulting. The AICPA Power and Utility Entities Revenue Recognition Task Force identified and developed these accounting implementation issues, and the AICPA Revenue Recognition Working Group and AICPA Financial Reporting Executive Committee (FinREC) approved them. Renewable energy certificates (RECs) are tradable certificates that signify the production and delivery of one megawatt hour (MWh) of electricity via a renewable energy source. Entities often seek RECs to comply with government regulations or promote environmental causes.

Transaction Price Allocated to the Remaining Performance Obligations

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Properly identifying the performance obligations will be time-consuming but critical because these determinations drive the pattern of revenue recognition and financial statement disclosures. A performance obligation is a promise to transfer goods or services to a customer that can be explicitly identified in a contract or implied by power and utility entities revenue recognition task force customary business practices, published policies, or specific statements. When identifying the performance obligations in a bundled contract, FinREC believes that the electricity and capacity services are generally “distinct” and should be accounted for as separate performance obligations.

Step-price Contract with a Significant Financing Element

• Utilities need to buy a lot of assets, and they get the funding for it from bond issuances.
• Whatever measurement method the P&U entity selects, this method should be applied consistently for the specific performance obligation and similar performance obligations in other contracts.
• To prevent discriminatory practices or predatory pricing behavior, tariffs can only be changed by an “independent, third-party regulator” or via legislative action.
• The ASU will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S.

In step-price contracts, changes to the price over the course of the contract term can result partially or completely from a significant financing element. Instead of charging customers the value of the delivered good at each phase of the contract, P&U companies may set pricing terms that accommodate the customer’s ability to pay. For example, a significant financing element may be present in a step-price arrangement where the rates increase over time, even though market prices (based on the forward curve) are expected to decrease.

Series of Distinct Goods or Services

These customer payments to cover the uneconomic portion of an infrastructure investment are called contributions in aid of construction (CIAC). The CIAC amount is determined using a methodology established by the local regulator and the amount is not subject to negotiation by the customer nor the utility. The utility cannot raise or lower the CIAC amount and does not earn any margin on the prescribed payment. The utility maintains control of the infrastructure along with responsibility for its maintenance and operation. Under ASC 606, companies may be able to recognize the future payment penalties as breakage revenue prior to the expiration of the customer’s exercisable rights if they can reliably estimate the amount of future payment penalties. However, companies may not be able to predict customer behavior sufficiently enough to utilize this accounting treatment.

Arrangements that include volume variability, such as take-or-pay arrangements, should be evaluated to determine if the optional purchase creates a material right. Options for customers to purchase additional goods or services would not be considered performance obligations. Therefore, the resulting consideration would not be included in the transaction price unless the options give rise to a material right, such as, additional quantities at prices that are significantly in-the-money at contract inception. If the optional purchases do not give rise to a material right, an entity would only account for the optional purchases when exercised. § The extension period is a separate contract, and the modification results in the addition of distinct goods or services because the additional deliveries are discrete and separate from the deliveries under the original contract. A seller could conclude the price of the contract increases by an amount of consideration that reflects the entity’s standalone selling price for the additional deliveries.

Customers use these variable-quantity contracts to source supply to meet their expected need. The pricing for such contracts generally is known at the time the contract is executed and reflects the standalone selling price. Per ASC 606, P&U companies must first determine whether the modification should be treated as a new contract. If additional goods or services are added to the contract and the price of these goods or services reflects their SSPs, the arrangement should be considered a separate contract. For legal purposes, the arrangement would be a single contract, but for accounting purposes, the existing contract and the recent modification are treated as two separate contracts. In the P&U industry, several scenarios necessitate the inclusion of variable consideration.

The classic example of this in the utility industry is a nuclear power plant, where the retirement cost is incredibly high. The accounting for AROs is complicated, because the liability has to be constantly revisited over time, to see if the liability amount has changed. As you might expect, when the accounting system has to track the cost of each retirement unit, as well as its description, location, and so on, the system is going to be pretty massive. Any income streams outside ASC 606’s scope must be separately identified on the income statement, including—but not limited to—collaborative arrangements, certain commodity exchange transactions, derivatives, leases, and alternative revenue programs.

Determining Standalone Selling Prices for Storable Commodities

There is no presumption that a B&E contract modification contain an inherent financing element—the mere act of blending the rate in connection with a contract extension does not create a financing, that would require separate accounting. For the undelivered goods in a take-or-pay arrangement, oil and gas companies only may recognize revenue when the likelihood of reversal is remote. § Each distinct good or service in the series represents a performance obligation that will be satisfied over time.

P&U companies may initially enter into agreements with customers to provide goods or services over a specified period only to later terminate some of the contractual obligations in exchange for a monetary settlement payment from the customer. Customers may request a partial termination of a contract due to changes in market prices or changes in their electricity needs. These contract modifications can represent “vertical” terminations (orders for some periods are cancelled completely), “horizontal” terminations (the quantity ordered changes across all delivery periods), or a combination of the two. In many step-price arrangements, the change in pricing is correlated to the slope of the forward curve5 applicable to the delivery period.

Previous revenue guidance did not include an accounting framework for contract modifications, except for construction and production-type contracts. A contract modification would be recognized as a separate contract only if distinct goods or services are added for additional consideration that reflects their standalone selling prices. The TRG concluded an entity should consider all relevant facts and circumstances in assessing the pattern of revenue recognition. The performance obligation for the sale of oil and gas production not simultaneously received and consumed,— like crude oil)— generally is satisfied at a point in time (transfer of the goods to the customer). The performance obligation for the sale of oil and gas production simultaneously received and consumed—natural gas sold to and immediately consumed by a third-party power plant operator—would meet the criteria for over time recognition. The new contract would be accounted for as a single performance obligation satisfied over time (a series of distinct goods or services), and revenue would be recognized at the contract rate.

Generally, the pricing at each period is calculated using a formula established by regulators. Similar types of P&U contracts often state different prices based on the time of day (peak or non-peak hours) or season of delivery. In the P&U industry, producers and buyers often enter into long-term sales contracts over a year in duration.

• This treatment assumes that the P&U company’s promise to provide capacity is a stand-ready obligation that the customer will receive evenly throughout the contract period.
• Assessment would have been on a tax-by-tax and jurisdiction-by-jurisdiction basis, a costly and operationally challenging process.
• In-depth analysis, examples and insights to give you an advantage in understanding the requirements and implications of financial reporting issues.
• This provision prevents an entity from having to allocate the transaction price on a relative standalone selling price basis to each increment of a distinct service in repetitive service contracts.
• Non-operating expenses usually relate to investment losses, or losses on the sale of property.

The complex arrangements between P&U companies, governments, and customers pose some of the most difficult issues. Due to bundled sales contracts, contract modifications and different pricing terms, application of the five-step revenue-recognition model can be complicated. The new revenue standard applies to all contracts with customers, except for those within the scope of other standards. If the other accounting guidance specifies how to separate and/or initially measure one or more parts of a contract, an entity first should apply those requirements before applying Accounting Standards Codification (ASC) 606. The scope determination not only ensures the correct accounting guidance is applied, but also determines income statement presentation—any income streams not in ASC 606’s scope must be broken out separately in the financial statements.

And then we have nuclear fuel expense, operation supervision, maintenance of structures, meter reading expenses, regulatory commission expenses, and – my favorite – customer service expenses. They also have power transmission expenses, such as overhead line expenses, underground line expenses, and load dispatching. An unusual aspect of this account structure is that it’s based on the activity-based costing system, where costs are linked to specific activities. By using this approach, you can determine the entire cost to conduct an activity, such as electricity generation or meter reading. For example, the cost of the miles that a truck is driven is then charged to a construction project to build a power transmission line.

If these sections of accounting guidance apply, the contract may not fall within the scope of ASC 606. Otherwise, the next step for revenue recognition is to identify the contract’s performance obligations. All entities must disclose how performance obligations are satisfied—at a point in time or over time, significant payment terms, if the consideration is variable and if the estimate of variable consideration is constrained. All entities must describe the nature of goods or services provided, highlighting if an entity is acting as an agent. Contributions in aid of construction (CIAC) represents money or other property contributed to a regulated utility to ensure the appropriate parties are paying for utility infrastructure costs and the service price is economical and fair for all customers.

Speeches by SEC officials emphasize the need for specific company judgments and not boilerplate language. Companies should consider the totality of information disseminated to avoid inconsistency in messaging between financial statement notes and other investor or marketing communications. When the entity is providing financing, interest income would be recognized as the discount on the receivable unwinds over the payment period. However, when the entity receives an upfront fee, the entity is deemed to be receiving financing from the customer and interest expense is recognized, with a corresponding increase to revenue recognized. The new revenue model requires variable consideration be included in the transaction price if it is probable that subsequent changes in the estimate would not result in a significant reversal of revenue.