The power and utilities sector has asked the FASB to address a narrow reporting issue involving the costs around the construction of items like wind turbines or the installation of gas pipelines on land leased from others.
An accounting anomaly arises under ASC Topic 842, Leases, in relation to land or building lease costs incurred during the construction period of a fixed asset affixed to the land, according to a letter from Edison Electric Institute (EEI) and American Gas Association—organizations that represent electricity and natural gas distribution companies in the US.
At the crux of the matter: today’s rules don’t consistently enable firms to properly reflect the underlying economics of such transactions, EEI’s Senior Director of Accounting Randall Hartman said on November 17, 2023.
The groups asked the FASB to align the accounting for all land rental costs incurred during construction of wind turbines and other assets so that they can be capitalized as part of the construction costs—stressing that this is an emerging issue in the sector.
“So, you’ve got economically identical transactions, such as building a power plant to provide electricity from renewable resources, but in some cases the cost of the plant might include land use costs during construction, in other cases it might not,” Hartman explained. “In our view, this is a potential inconsistency that didn’t make sense from an economic perspective,” he said. “The result of that would be that similar facilities that would have the same economics might have ultimately different cost profiles and the operators might have different financial results even though the overall economics are the same.”
The effects of the rules are similar for transactions in the natural gas sector, according to the letter. If a gas company, for example, is installing a gas pipeline in a leased arrangement it would not be able to capitalize the cost of that leased land as part of the cost of the gas pipeline. But if the company is installing it under an easement, which is not considered a lease because there continues to be joint use, then the company could capitalize the cost.
EEO and AGA suggest two potential solutions for the FASB to consider to fix the issue:
- Amend ASC 842 to delete the language in ASC 842-10-55-21 prohibiting land and building lease costs from being capitalized to property, plant and equipment when constructed for an entity’s own use; or
- Clarify the scoping criteria of ASC 970-10-15 Scope and Scope Exceptions.
EEI is the association that represents all US investor-owned electric companies. EEI also has more than 70 international electric companies, with operations in more than 90 countries, as international members, and hundreds of industry suppliers and related organizations as associate members. AGA represents 202 local energy companies that deliver clean natural gas throughout the US. Today, natural gas meets almost one-fourth of the nation’s energy needs.
Both EEI and AGA are regulated industries that provide a central service to customers in the power and utilities market. The sectors interact because the electric industry uses natural gas to reduce carbon.
For in-depth analysis of the FASB’s standard for lease accounting, please see Catalyst: US GAAP — Leases, also on Checkpoint.
This article originally appeared in the November 20, 2023, edition of Accounting & Compliance Alert, available on Checkpoint.
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