Impairment Accounting Using Asc 360 and Gasb 42

Impaired Power Plants are Part of the Electric Business

ASC 360 – Property, Plant, and Equipment for impaired assets has become a steady part of our utility accounting world. Over the years the electric utility business was known as a stable and slow moving industry. But in recent years, the electric utility power supply model is rapidly changing, as technological and political forces change the framework under which the industry provides power and services to customers.

These changes require electric utilities to take a close look at asset utilization and the long-term viability of current power supply assets. As options are evaluated, a utility may realize that it is time to implement new power supply resources, more renewables or move to a new type of fuel. The technical accounting term for this change or falling out of favor is called an asset impairment.

The Factors That Drive Impairment

Private sector utilities and electric cooperatives operating under the accounting rules in ASC 360 - Property, Plant and Equipment. The standard states that an impairment exists if the carrying value of an asset or asset group exceeds its current fair value. The testing for impairment should be done when it is determined that events or changes in circumstances show that an asset's carrying value may not be recoverable in customer rates.

Some common events include:

• Significant decrease in the market price of a long-lived asset or asset group
• A significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition
• Significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset
• An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset
• A current-period operating or cash flow loss combined with a history of losses or forecast demonstrating continuing losses
• A greater than 50% expectation that a long-lived asset will be sold or disposed of significantly before the end of its previously estimated useful life

Calculating and Recording an Asset Impairment

In the most direct approach, the difference between an asset or asset groups' fair value and carrying value (book value) is the impairment. An impairment should be recognized as a loss in the period of determination of the impairment, impacting net income. Under ASC 360 – Property, Plant, and Equipment, once an impairment has been recognized, it cannot be reversed.

Creating a Regulatory Asset to Recover Impaired Asset Costs in Customer Rates

An impairment should be recognized as a loss in the period of determination of the impairment, impacting net income. This, in turn, raises the question of whether the amount calculated as an impairment will be recovered in utility customer rates. Rate recovery may be important as often the impaired asset has been financed with debt, and a portion of that debt may still be owed to bondholders.

Regulatory accounting under ASC 980 can be used to recover these impaired costs from customers, on approval of the regulator (state or federal regulatory entity, Co-op Board, or other body that has the authority to approve customer rates).

Under ASC 980-360-35-3, an evaluation should be made of the potential of future cash flow recovery in customer rates of the calculated impairment. The ASC standard states that the present value of future revenues to be provided in customer rates should be recorded as a regulatory asset and amortized over the period the same amounts are recovered in customer rates.

Rate Impact of Impairment Losses

Generally, as impairment losses are related to capital assets, the impairment amount should be reflected in increased customer fixed charges (demand and customer charge). We have observed some utilities include a separate impairment fixed surcharge in customer rates. We have also seen an approach to include the fixed impairment charge directly in the utility revenue requirement and in the customer fixed charge, but not separately identified on the customer's bill.

Review the Fixed Asset Portfolio Now for Potential Impairments

We recommend that you dig into the specifics of ASC 360 for some of the nuances involved with calculating asset impairment. While you may not like the impairment evaluation answer, the time to review the asset portfolio for potential impairments should happen sooner rather than later. Evaluating sooner will allow the potential regulatory process to play out to recover some or all of the impaired asset costs in customer rates.