How Do You Account for Ciac Contributions in Aid of Construction

CIAC accounting?

CIAC accounting is accounting for amounts paid by developers, customers, and governments for reimbursement of electric assets that a utility or co-op is constructing to serve them.

CIAC, or did you say Kayak? We'll stick with CIAC/Kayak, so that we don't get tired of saying or typing Contributions in Aid of Construction.

What is CIAC?

It might sound complicated, but in plain language, a customer signs up for electric service in an area where there is no utility or co-op infrastructure. In order to receive service, the customer pays the utility or co-op to build the infrastructure. The payment is called a Contribution in Aid of Construction, or CIAC. The FERC Chart of Accounts and accounting standards shows the proper accounting for CIAC, but there are two methods that are used.

The first method is for electric cooperatives and those utilities — mainly private sector utilities — that follow the Financial Accounting Standards Board (FASB) standards.

The second method is for those governmental utilities (municipals, joint action agencies) that follow the standards of the Governmental Accounting Standards Board (GASB). As a bonus, we'll throw in a third method, but more on that later.

Case study for all methods

Here are the particulars from a case study that we'll use for our inputs on all of the methods.

Situation

Utilities and co-ops in growing communities often find themselves the receiver of utility plant in service installed by developers. As subdivisions are installed for future homes, the infrastructure is put in place for electric service to the development's properties, including electric overhead and underground facilities and services, as well as water and wastewater mains and services, and street infrastructure, like streets, curbs and gutters.

The developer pays for the improvements, but does not want ownership of them and thus "contributes" these to the co-op or utility. When the developer "contributes" these assets, the utility then maintains the assets and eventually must replace them at the end of their useful life. These are called Contributions in Aid of Construction.

In Our Town, a developer paid the electric utility $6 million to build electric facilities in a new residential subdivision. The accounting using each method would be as follows:

Method 1 — Private Sector Utilities and All Electric Cooperatives (FASB and FERC)

Method 1 is straightforward. The developer's check or wire for $6 million is credited directly to the project's cost. The entry:

It seems redundant to make this entry, but in reality the work order that tracks the amount of cost the co-op/utility incurred to do the work to put the assets in service would have a running total of the project's cost. The developer's check offsets those project costs and the net cost is zero.

From an accounting and practical viewpoint, this makes perfect sense. The utility or co-op didn't pay for the assets, so the assets should not be recorded with a value on the books of the entities. There is a twist though — these "zero value" assets are owned by the utility or co-op, must be maintained, and eventually replaced. So the assets should appear on the GIS maps for the utility or co-op.

Method 2 — Municipal Utilities and Joint Action Electric Agencies (GASB)

Method 2 is not straightforward. We begin with some background on why the GASB approach is more complicated.

Governmental Accounting Standards Board Statement No. 33

GASB Statement No. 33 — Accounting and Financial Reporting for Non-exchange Transactions — requires that a utility recognize the CIAC assets as a revenue in the year the assets are installed, based on their installed cost. So, in the case of the GASB utility, the assets have a cost that equals the installed assets cost — $6 million (vs. the "zero asset cost" using FASB).

The GASB utility must also recognize depreciation expense on these assets for which they did not pay to install. Recognizing the revenues following GASB 33 creates inequities in rate recovery between GASB and FASB utilities.

Revenue recognition using GASB

GASB principles use an "economic resources measurement focus" and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded when the liability is incurred or economic asset used. Revenues, expenses, gains, losses, assets and liabilities resulting from exchange and exchange-like transactions are recognized when the exchange takes place.

In plain language, under GASB standards the full transaction is recognized when it is earned. In this case, the CIAC assets were "earned" all in the year the assets were contributed by the developer — even though the assets have a life of greater than one year (more like 25–35 years).

The entry that is made for the developer CIAC is:

If your utility does not have a lot of CIAC activity we recommend you stop with this entry. If there is a "material" amount of activity, you'll like Method 3.

The problem with Method 2

The next step in the chain of events using Method 2 is for the utility to depreciate the CIAC assets. If we assume that the CIAC assets have a useful life of 30 years, then $200,000 of depreciation will be recognized annually and eventually the assets will need to be replaced. So, we are left with recognizing expense for assets we got for nothing and recording retirement entries for assets that technically have zero value.

Method 3 addresses this issue.

Method 3 — Use GASB 62 to offset the GASB 33 non-exchange effect

Governmental Accounting Standards Board Statement No. 62 — Regulated Operations — is used to match revenues and expenses to when they are included in electric rates and paid by customers. This is "the intent standard" — the recording of the transaction should match the intent of the transaction.

The intent of the transaction is that there should not be depreciation expense charged to ratepayers for CIAC assets that the utility received at zero cost. The rate impact using this regulatory accounting treatment is zero.

To reflect that intent, the CIAC piece of the transaction should be amortized over the life of the related assets by offsetting CIAC revenues against the depreciation expense recognized on the contributed assets. In our example, the assets have a life of 30 years ($6,000,000 / 30 years = $200,000).

First, the following entry is made when the $6 million check is received:

This treatment results in a net income statement impact of zero, which is the same final result as for a utility that follows FASB. The approach is more convoluted, but yields the answer you would like to match rates to revenue recognition.

Which method can help your organization?

For electric co-ops and FASB-following utilities, Method 1 is always the approach to follow. For municipal utilities, if there is not a lot of CIAC activity in your service territory, sticking with the straightforward approach of Method 2 is appropriate. If there is a lot of CIAC activity, we think you do your financials and ratepayers a disservice if you don't follow Method 3, which will offset the depreciation expense of CIAC assets and reduce depreciation expense in customer rates.