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Accounting for OPEB costs and regulatory assets.

Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report, identifies Financial Accounting Standards Board emerging issues task force (EITF) consensuses as sources of established generally accepted accounting principles.

This month's column lists 1992 and 1993 EITF consensuses adopted from January 21 through May 20, 1993 (see the sidebar on page 95). In addition, three consensuses on FASB Statement no. 106, Employers' Accounting for Post-retirement Benefits Other Than Pensions (OPEB), are summarized: plan assets under FASB Statement no. 106, accounting for OPEB costs by rate-regulated enterprises and accounting for regulatory assets. The summaries are presented below in the order of importance from broad to narrow applicability.

EITF Abstracts, copyrighted by the FASB, is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700.

ISSUE NO. 93-3

Issue no. 93-3, Plan Assets Under FASB Statement No. 106, discusses whether a trust established to pay post-retirement benefits must be determined to be "bankruptcyproof' (that is, the trust assets are insulated from the claims of general creditors in bankruptcy) for the trust assets to qualify as plan assets under Statement no. 106. The protection afforded these plans in bankruptcy proceedings is unclear in many cases and often not easily determinable.

The EITF reached a consensus that it is not necessary to determine a trust is bankruptcy-proof for the assets of the trust to quaIify as plan assets under Statement no. 106. However, the EITF also reached a consensus that assets held in a trust that explicitly provides for such assets to be available to the employer's general creditors if the employer enters bankruptcy do not qualify as plan assets under Statement no. 106.

Once the trust assets qualify as plan assets under Statement no. 106 and this consensus, they may be offset against the accumulated post-retirement benefit obligation in determining the obligation or asset recognized in the employer's balance sheet. The return on the plan assets also may offset post-retirement benefit cost in the statement of income.

ISSUE NO. 92-12

Issue no. 92-12, Accounting for OPEB Costs by Rate-Regulated Enterprises, is a specialized industry issue. Statement no. 106 permits companies to adopt the standard by recognizing the transition obligation (related to prior service cost) either immediately on adoption or by amortizing the obligation over the employees' average remaining service period or 20 years, whichever is longer.

When rate-regulated enterprises adopt Statement no. 106, OPEB costs may increase significantly. Traditionally, regulators allowed costs to be included in rates on a pay-as-you-go basis. The regulators will need some time to decide how these OPEB costs are to be included in rates. Until the regulatory proceedings are concluded, rate-regulated enterprises must decide whether a regulatory asset can be recognized for the difference between OPEB costs under Statement no. 106 and OPEB costs included in rates.

FASB Statement no. 71, Accounting for the Effects of Certain Types of Regulation, says costs incurred should be deferred and recognized as a regulatory asset ff it is probable the costs will be recoverable through future revenues resuiting from the rate-making process. The issue is what additional criteria or evidence, if any, is needed for a rate-regulated enterprise to satisfy the Statement no. 71 requirements for recognizing a regulatory asset for Statement no. 106 costs for which rate recovery has been deferred.

The EITF reached several consensuses on this issue, all of which apply only to differences arising from the application of Statement no. 106 by rate-regulated enterprises that meet the criteria for applying Statement no. 71.

Continuing OPEB plans. The consensuses reached on continuing OPEB plans apply to either of Statement no. 106's transition options (immediate versus deferred recognition of the transition obligation). The EITF reached a consensus that a regulatory asset related to Statement no. 106 costs should not be recognized if the regulator continues to include OPEB costs in rates on a pay-as-you-go basis. The task force also reached a consensus that a rate-regulated enterprise should recognize a regulatory asset for the difference between Statement no. 106 costs and OPEB costs included in the enterprise's rates if the enterprise

* Determines it is probable future revenue in an amount at least equal to the deferred cost (regulatory asset) will be recovered through rates.

* Meets four criteria that depend on the future intent of the regulator and the timing of cost deferral and recovery in rates. (See EITF Abstracts for details.)

Transition guidance for continuing plans. Issue no. 92-12 also provides transition guidance that applies when rate-regulated entities adopt Statement no. 106 before the regulators can issue a rate order, policy statement or generic order that complies with the stated criteria in the abstract. In these circumstances, a regulatory asset can be established only if

* The regulated enterprise has filed a rate application to have Statement no. 106 costs included in rates in accordance with these consensuses or intends to do so as soon as practicable.

* It is probable the regulator will change the amount of OPEB costs included in future rates in a manner that meets the four required criteria referred to above.

Discontinued plans. For purposes of this consensus, a discontinued plan is defined as one whose participants do not earn additional benefits for future service (that is, one that has no current service costs). The EITF reached a consensus that an OPEB regulatory asset can be recorded if it is probable future revenue in an amount at least equal to any deferred Statement no. 106 costs will be recovered in rates within approximately 20 years following the adoption of Statement no. 106. Rate recovery during that period may continue on a pay-as-you-go basis.

ISSUE NO. 93-4

Issue no. 93-4, Accounting for Regulatory Assets, arose from Issue no. 92-12 but subsequently assumed a broader scope. The issue is whether a rate-regulated enterprise that initially fails to meet the regulatory asset recognition criteria described in Issue no. 92-12, but meets those requirements in a subsequent period, can recognize a regulatory asset relating to OPEB costs in the period in which those criteria are met. The EITF reached a consensus that a regulatory asset for OPEB costs should be recognized in the period in which the applicable criteria are met. This consensus also applies to all regulatory assets recognized pursuant to the criteria in Statement no. 71.

The EITF also reached a consensus that the carrying amount of an existing regulatory asset recognized pursuant to the criteria in Statement no. 71 should be reduced to the extent the asset has been impaired. Impairment of a regulatory asset should be judged in the same manner as assets of enterprises in general.


* EITF Issue no. 93-3 Accounting problem: If a trust is established to pay post-retirement benefits, must the trust assets be bankruptcy-proof to qualify as plan assets under FASB Statement no. 106? Consensus: No, unless there is explicit evidence the trust assets are available to the employer's general creditors.

* EITFlssue no. 92-12 Accounting problem: May a rate-regulated enterprise record a regulatory asset for unrecovered Statement no. 106 costs? Consensus: Yes, if certain criteria are met.

* EITF Issue no. 93-4 Accounting problem: (1) If a rate-regulated enterprise initially fails to meet the regulatory asset recognition criteria in Statement no. 71 but meets the requirements in a subsequent period, can the regulatory asset be recognized in the period the criteria are met? (2) Should impairments of established regulatory assets be recognized in the financial statement? Consensus: (1) Yes (2) Yes.
Issue no. Title
92-12 Accounting for OPEB Costs by Rate Reg-
 ulated Enterprises
93-1 Accounting for Individual Credit Card Ac-
93-3 Plan Assets Under FASB Statement No.
93-4 Accounting for Regulatory Assets
93-5 Accounting for Environmental Liabilities
93-7 Uncertainties Related to Income Taxes
 in a Purchase Business Combination
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Title Annotation:postretirement benefits other than pensions
Author:Volkert, Linda A.
Publication:Journal of Accountancy
Date:Jul 1, 1993
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