Rural Utilities Service Ken Ackerman Assistant Administrator Program Accounting and Regulatory Analysis NRECA 2003 Tax, Accounting and Finance Conference Chicago, Illinois July 29, 2003
TOPICS • Funding Levels • Accounting Issues • Other Issues and Programs • Audit Issues
Electric Program Presidents Committee NRECA FY 2004 FY 2004 FY 2004 Hardship $ 240 M $ 240 M $ 240 M Municipal Rate $ 100 M $ 1,000 M $ 1,000 M Guaranteed - FFB $ 1,500 M $ 2,000 M $ 1,900 M Guaranteed - CFC/CoBank $ 100 M $ 100 M $ 100 M Treasury Rate $ 700 M $ 750 M $ 760 M Totals $ 2,640 M $ 4,090 M $ 4,000 M
Asset Retirement Obligations • Statement of Financial Accounting Standard No. 143, Accounting for Asset Retirement Obligations • Issued in June 2001 • Effective for fiscal years beginning after June 15, 2002
Asset Retirement Obligations • FERC final rule issued April 9, 2003 • Order No. 631 • Effective for fiscal years beginning on or after January 1, 2003 • Creates new accounts and revises existing definitions, descriptions and instructions
Asset Retirement Obligations • New Accounts • 230, Asset retirement obligations • New plant account in each functional category • 403.1 Depreciation expense for asset retirement obligations • 411.10 Accretion expense
Asset Retirement Obligations • Adoption is retroactive and shall be recognized as a cumulative effect of a change in accounting principle • At adoption, the liability and related asset will be recognized as if FAS No. 143 had been in effect for all periods.
Asset Retirement Obligations • RUS issued a letter June 25, 2003, providing guidance for adopting FERC Order No. 631 • RUS will create Account 403.8 for depreciation expense associated with asset retirement obligations • RUS will not require separate subsidiary records for the cost of removal included in depreciation rates on assets not covered by FAS No. 143
Guarantees • FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others • Issued November 2002 • Effective for guarantees issued or modified after December 31, 2002
Guarantees • Guarantor must disclose: • Nature of guarantee • Maximum potential future payments • Carrying amount of liability, if any • Nature of recourse provisions
Guarantees • Does not apply to guarantees issued between either parents and their subsidiaries or corporations under common control. • Does not encompass indemnifications or guarantees of an entity’s own future performance
Variable Interest Entities • FASB Interpretation No. 46, Consolidation of Variable Interest Entities (VIE) • Effective for VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date • May be applied prospectively with a cumulative-effect adjustment as of the date it is first applied or by restating previously issued statements for one or more years
Variable Interest Entities • Subject to the provisions of this interpretation if: • Equity investment at risk is not greater than the expected losses of the entity, or • Holders of the equity investment at risk, as a group, lack the ability to exercise a controlling financial interest.
Variable Interest Entities • Controlling financial interest means: • Direct or indirect ability to make decisions about the entities activities through voting rights or similar rights; • Obligation to absorb expected losses if they occur; or • The right to receive the expected residual returns of the entity
Variable Interest Entities Primary Beneficiary An entity must consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both.
Statement of Financial Accounting Standard No. 150 • FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity • Issued in May 2003 • Effective for financial instruments entered into or modified after May 31, 2003
SFAS No. 150 • May affect patronage capital allocated • Applicable to financial instruments which are mandatorily redeemable at a specified or determinable date or upon an event certain to occur • By-laws which call for mandatory retirement of patronage capital allocated to an estate
AcSEC ED on Plant, Property and Equipment (Revised) • SOP keeps 4-Stage framework • Preliminary • Preacquisition • Construction/Acquisition • In-service
AcSEC ED on Plant, Property and Equipment (Revised) • RUS concerned with Stage 1 Preliminary • Calls for expensing costs • Long Range Plans etc. • Normally deferred and capitalized • Would be expensed • RUS expenses when determination made not to construct
AcSEC ED on Plant, Property and Equipment (Revised) • RUS agrees with Stages 2, 3, 4 • Requirements similar to USOA in each • Capitalize identifiable costs on construction • Expense items which are not components
AcSEC ED on Plant, Property and Equipment (Revised) G&A Expenses • Allows capitalization of identifiable costs • Payroll and Benefits • Time sheet justifications • No capitalization of: • Executive Management • Corporate Accounting • Human Resources • Corporate Legal • Marketing
AcSEC ED on Plant, Property and Equipment (Revised) Removal Costs • Removal Costs other than those covered by FASB No. 143 • Removal costs to be expensed • SOP will not provide guidance on how to expense • At time of removal • Over the life of asset through Depreciation expense • RUS and Utilities overall record removal in depreciation expense
AcSEC ED on Plant, Property and Equipment (Revised) Disposals • When property is disposed of, remove cost from books • No guidance on income statement effects • Previous draft of SOP current period expense • Now group method allowed • Charge to depreciation
AcSEC ED on Plant, Property and Equipment (Revised) Component Accounting • Has always been required by RUS and Utility Accounting • Continuing Property Records • Record units are component accounting • Retire old record unit • Capitalize new record unit constructed • Old and new units should not be on
AcSEC ED on Plant, Property and Equipment (Revised) Disclosures • Present in basic financial statements or footnotes: • Gross carrying amounts of property, plant and equipment • Construction Work in progress • Accumulated Depreciation • Significant subcategories • E.g. Distribution, Transmission, etc RUS requirements already have such disclosure requirements
AcSEC ED on Plant, Property and Equipment (Revised) Replacement and Removal • Components replaced must be removed from books • Components constructed must be added to books • Less than components must be expensed • Agrees with RUS CPR/record unit requirements
AcSEC ED on Plant, Property and Equipment (Revised) Liquidated Damages • Liquidated damages used to reduce PP&E costs • Damages in excess of cost recognized as income • SOP summaries not clear when group accounting used • Charge excess to depreciation reserve • Would be consistent with SOP allowing group method of accounting
AcSEC ED on Plant, Property and Equipment (Revised) Mass-Asset Accounting • SOP will allow mass-asset (group-life) method of accounting • Final SOP will include criteria for utilizing mass-asset accounting
AcSEC ED on Plant, Property and Equipment (Revised) • Final SOP due in fourth quarter of 2003 • Implementation date expected to be for fiscal years beginning on or after December 15, 2004
Depreciation Issues RUS Bulletin 183-1, Depreciation Rates and Procedures • Most current issue dated October 28, 1977 • Requires depreciation rates be within specified ranges rates
Depreciation Issues RUS will be reviewing the depreciation bulletin in the next year • Extent of changes have not been determined • Review is part of an overall review of rules and regulations by RUS Staff
Depreciation Issues • Companies should do their own internal review of depreciation rates on a regular basis • Changes can be made to depreciation rates within the RUS ranges If the RUS ranges are believed to not be appropriate • Depreciation studies can be performed • By CPA Firms • By Engineering Firms • By Valuation consultants • By Coop with assistance from RUS Field accountants
Depreciation Issues • Depreciation studies must be submitted to RUS for approval • There are specific requirements for depreciation studies • Contact Jim Murray, Chief SRAB PARA 202-720-3719
Record Retention • RUS Bulletin 180-2, revised June 26, 2003 • Generally endorses FERC guidelines found in 18 CFR Part 125 • Provides new rules on storage media • Provides guidance on financial requirement and expenditure statements and patronage capital records
Cushion of Credit • Found in Part 1785 “Loan Account Computations, Procedures and Policies for Electric and Telephone Borrowers”. • Subpart B – RUS Cushion of Credit Account Computations and Procedures • Rural Economic Development Subaccount • Purpose is to promote rural economic development through grants and zero interest loans
Cushion of Credit • Payments made to a cushion of credit account: (Dr) 224.6 Advance Payments Unapplied – RUS Long-Term Debt – Debit (Cr) 131.1 Cash – General • Interest earned on the balance of funds: (Dr) 224.6 Advance Payments Unapplied – RUS Long-Term Debt – Debit (Cr) 419 Interest and Dividend Income
Cushion of Credit Form 7 Reporting: • The current portion of RUS debt is reported as a “Current Liability”. • A portion of the cushion of credit account balance may be reported as a reduction of the current maturities of RUS long-term debt. • Should be proportionally no greater than the current maturities amount is to the total RUS long-term debt.
Cushion of Credit • Interest earned appears as a reduction in the interest billed on the borrowers RUS notes and is shown separately on RUS Form 694 “Statement of Interest and Principal”. • Borrower must separate these amounts and report them accordingly. • Interest Income – A/C 419 • Interest Expense – A/C 427
Cushion of Credit A borrowers may reduce the balance of its cushion of credit account ONLY if the amount obtained from the reduction is used to make scheduled payments on loans made or guaranteed under the act.
Cushion of Credit Cushion of Credit and Revenue Deferral Plans: • All revenue deferral plans require segregating the CASH equivalent of all margins or revenues deferred in a special fund. • Cash does not have to be physically separated • One entity accomplished this by making payments to their cushion of credit account.
Sale or Transfer of Capital Assets • Amending 7 CFR Part 1717 and revising RUS Bulletin 115-1, Sales of Capital Assets by Borrowers
Sale or Transfer of Capital Assets Prior approval is not required when: • The borrower is not in default or restructured • Distribution borrowers have a TIER of 1.25 or better, DSC of 1.25 or better, OTIER of 1.1 or better, and ODSC of 1.1 or better based on the average or best 2 out of 3 most recent years
Sale or Transfer of Capital Assets • Power supply borrowers must have TIER of 1.05 or better and DSC of 1.0 or better • Sale will not reduce existing or future power requirements being furnished under a WPC pledged as security to the government • FMV is obtained for the assets
Sale or Transfer of Capital Assets • No employee or board member has a financial interest in the sale • Aggregate value of assets sold in any 12-month period is less than 10% of net utility plant for distribution borrowers and no more than $5M for power supply borrowers • Proceeds are handled in accordance with Part 1717.616(c)
Sale or Transfer of Capital Assets Part 1717.616(c) requires that: • Proceeds less than $5,000 may be deposited in the General Funds account. • Proceeds of $5,000 or more must be deposited in the Construction Fund – Trustee Account.
Storm Damage (FEMA) • RUS is developing new interpretations for storm damage • Attempt to provide maximum assistance to borrowers • Old rules: • FEMA reimbursements applied to specific items designated, or • On a prorata basis to storm costs - expenses, capital items, cost of removal
Storm Damage (FEMA) Revised interpretation: • If FEMA reimbursements are not specifically earmarked • Use to reimburse expense items first • Frees up RUS loan funds to reimburse construction projects • RUS will not finance expense items
Renewables - Not So New Hyrdo power -- run of the river Solar -- hot rocks & adobe baking Wind -- windmills for grain milling Geothermal -- geysers and spas Biomass -- burning peat & manure
Industrialization • Industry -- increased need for power and power sources • Coal • Oil • Natural Gas