P&U companies use these agreements when making investment decisions and securing financing. These long-term contracts usually specify the amount of commodity to be delivered and the transaction price. Given the volatile nature of commodities prices, the sales contracts often include clauses allowing for price adjustments if the underlying commodity prices change drastically over the life of the contract. Some contracts provide the buyers with various options regarding the amount of commodity that the producer will deliver. TRG members agreed a series of distinct goods or services need not be consecutively transferred. The series guidance also must be applied even when there is a gap or overlap in an entity’s transfer of goods or services if the other criteria are met.
Method B: Exclude ARP Revenue from Operating Income
Accounting for a contract that contains an option to purchase additional goods and services and a contract that includes variable consideration sometimes would result in minimal differences in the timing and measurement of revenue recognized in a reporting period. For example, the accounting for a contract that requires an entity to process transactions for a constant amount of consideration per transaction over a specified period likely would result in revenue recognized as each transaction is processed. This would be the case regardless of whether each transaction processed was considered an optional purchase or, instead, variable consideration for the entity’s service of processing transactions over the specified period. If each transaction was considered an optional purchase, an entity would not be required to disclose an estimate of the consideration received from the exercise of future options. In general, a transaction with another working interest owner will be accounted for under ASC 606 if the counterparty is considered a customer in the specific transaction. Companies should consider whether other applicable guidance—ASC 808, Collaborative Arrangements—should be applied when an arrangement is not with a customer.
Although a CEA counterparty may meet the ASC 606 customer definition, nonmonetary exchanges between two parties in the same line of business are outside the new standard’s scope and would be accounted for in accordance with ASC 845, Nonmonetary Transactions. This conclusion also would apply to a marketer that sells crude oil or gas to a refiner or gas processor and simultaneously buys back separate, refined products such as condensates or natural gas liquids. For nonmonetary exchange contracts with customers not in the same line of business, ASC 606 would apply. This is the first major principles-based standard that will require substantially more management judgment, supporting documentation and disclosure than previous strict criteria-based guidance. In some cases, companies may reach different conclusions on seemingly similar transactions, based on a company’s specific facts and circumstances. SEC comment letters on early adopters have focused on determination of single versus multiple performance obligations, especially management’s judgments, licensing arrangements, level of disaggregation and inconsistencies in the totality of company disseminated information.
- The SEC currently requires a public company that retrospectively adopts an accounting standard to provide five years of comparable data based on the new accounting policies.
- Some utilities have recognized ARP revenue in prior periods (when earned) but included customer charges relating to the ARP revenue in subsequent periods.
- Entities will need to make this disclosure in the notes to the financial statements, if not presented separately on the face of the financial.
- Companies should consider whether other applicable guidance—ASC 808, Collaborative Arrangements—should be applied when an arrangement is not with a customer.
- The performance obligation for the sale of oil and gas production simultaneously received and consumed—natural gas sold to and immediately consumed by a third-party power plant operator—would meet the criteria for over time recognition.
Entities will need to make this disclosure in the notes to the financial statements, if not presented separately on the face of the financial. The SEC previously announced it expects registrants to reflect TRG decisions as they implement the new guidance—any differences in accounting would need to be discussed with SEC staff. If price changes are caused by known or expected changes in the cost of delivering the service, P&U entities should use an input method to determine the progress toward satisfying the performance obligation instead of the practical expedient. The utility sector is a category of company stocks that provide basic services including electricity, natural gas, and water. Utilities earn a profit but are a public service and, as a result, have substantial regulation.
Step 4: Allocate the Transaction Price to Performance Obligations
Or, when a utility is privately-owned, it generates financial reports based on generally accepted accounting principles. A public utility is a business that performs a public service, and it’s normally regulated. AICPA Revenue Recognition Task Forces are charged with developing revenue recognition implementation issues that will provide helpful hints and illustrative examples for how to apply the new Revenue Recognition Standard. This is the expected cost to retire an asset, and a utility has to record this obligation up front, maybe years before an asset is actually retired.
- An entity not making this accounting policy election would apply the new revenue standard—as originally issued—in determining if those taxes should be included in the transaction price.
- This is the first major principles-based standard that will require substantially more management judgment, supporting documentation and disclosure than previous strict criteria-based guidance.
- Speeches by SEC officials emphasize the need for specific company judgments and not boilerplate language.
If you are interested in reviewing company filings, please contact the Division of Utility Accounting & Finance. Utilities need to buy a lot of assets, and they get the funding for it from bond issuances. So, the accounting staff has to account for the sale of bonds, and fun items like unamortized discounts or premiums on long-term debt – as well as paying off the bonds. Many P&U companies enter into arrangements to provide a commodity to another entity in exchange for a similar commodity at a different location. These “buy-sell” agreements aim to reduce transportation costs by exchanging the same commodity at different storage sites.
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If a P&U entity determines that the electricity and capacity represent separate performance obligations, the transaction price is divided between the two obligations. The entity would recognize revenue related to each obligation according to its own revenue recognition timing pattern. Under ASC 606, performance obligations and fulfillment of them determine revenue recognition.
The upfront payment should be included in the transaction price, which would be allocated by applying the ASU’s allocation method to the performance obligations identified (which may include a separate performance obligation for a material right). A separate performance obligation could exist if the option provides a material right to the customer that it would not receive without entering into that contract. Material right obligations must be separately valued to allocate part of the transaction price to those specific performance obligations. The identification of a material right affects the pattern of revenue recognition in Step 5. Entities will need to determine whether a single performance obligation is created in this manner to appropriately allocate variable consideration and apply the guidance on contract modification and changes in transaction price (see Step 3). This provision prevents an entity from having to allocate the transaction price on a relative standalone selling price basis power and utility entities revenue recognition task force to each increment of a distinct service in repetitive service contracts.
The RECs may be sold by themselves but are often sold on a bundled basis along with the electricity that created the RECs. There’s massive amounts of work to do in recording transactions in exactly the right accounts, and tracking fixed assets, and in a swarm of other areas. Construction of power generation and distribution facilities constitutes most of a utility’s capital expenditures, and that flows through a work order. For SEC reporting companies, Rule 5-03 of Regulation S-X still requires that the amount of excise taxes be shown on the face of the income statement (parenthetically or otherwise) if such taxes are included in revenues and are equal to 1 percent or more of the total.
The P&U entity in this example is providing the customer with both (a) goods/services and (b) financing (by shifting much of the payment to the end of the contract term). When accounting for take-or-pay contracts, managers should consider the reasons for the price changes when determining how to allocate the transaction price to the performance obligations. Depending on how P&U companies view these price changes, the metric for allocating the total transaction price to the individual performance obligations may vary between stand-alone selling price, contractual pricing, straight line, or other methods. The accounting standard is likely to develop further in this area to provide additional clarification. The first step in accounting for electricity and capacity arrangements is to consider both the existence of (a) embedded derivatives per ASC 815 – Derivatives and Hedging or (b) contract terms that qualify as leases under ASC 840 – Leases.
Where are utilities balance sheet?
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For example, imagine a customer who signs a five-year contract to purchase electricity from a P&U company. At the end of the contract’s first year, the customer cancels the last two years of the contract, while honoring the terms of the original agreement for years 2 and 3. To compensate the P&U company for this cancellation, the customer also makes a $1,000 settlement payment after negotiating with the P&U company. P&U companies with “buy-sell” agreements should reference Topic 845 – Nonmonetary Exchanges for additional guidance about accounting for these transactions.
The two parties will agree on a set price at which the customer will buy product and another price, usually lower, that serves as the penalty even if the product is not accepted by the customer. This structure of contract guarantees the supplier’s minimum level of future demand, thus reducing risk. We are the American Institute of CPAs, the world’s largest member association representing the accounting profession.
P&U companies often enter into “blend and extend” arrangements, where the supplier and customer renegotiate an existing contract by adjusting the pricing and extending the life of the contract. If electricity prices have dropped, the customer may negotiate a lower “blended” rate between the original contract rate and the current market price. Under ASC 605, P&U companies account for “blend and extend” contracts by applying the new “blended” rate prospectively to the remaining goods yet to be provided to the customer. Coordinates utility billing process from point of meter reading until the bills are delivered to post office for mailing. Divisional Reports regarding Affiliate and or Merger transactions are required to be filed with the Director of the Division of Utility Accounting & Finance at various times of the year.
FinREC asserts that contracts with stated, but changing, prices for a fixed quantity of goods do not qualify as variable consideration because the transaction price is known at inception. According to FinREC, P&U entities may decide to use either an input or an output method to determine revenue recognition over time, depending on the contract. For example, if the price escalations relate to changes in the cost of delivering the commodity, the P&U entity may decide to use an input method that includes transportation costs. Whatever measurement method the P&U entity selects, this method should be applied consistently for the specific performance obligation and similar performance obligations in other contracts.
Audit and Accounting Guide by AICPA
This estimate would be updated in each reporting period to reflect changes in facts and circumstances. Revenues are recorded at the transaction price, which is the amount the entity expects to be entitled to and which may be net of amounts paid on behalf of others (including royalties), discounts, and allowances, as applicable. Contracts for the forward sale of commodities often are priced by reference to forward commodity price curves that often are available for the key components of energy contracts (power, gas, capacity, etc.). If distinct, the modification is accounted for prospectively with the unrecognized consideration allocated to the remaining performance obligations and revenue recognized when (or as) the remaining performance obligations are satisfied.
Companies should establish an approach based on the facts and circumstances of their modifications and apply that approach consistently to similar fact patterns. Closing InventoryClosing stock or inventory is the amount that a company still has on its hand at the end of a financial period. Receive the latest financial reporting and accounting updates with our newsletters and more delivered to your inbox. In-depth analysis, examples and insights to give you an advantage in understanding the requirements and implications of financial reporting issues. You can change your consent settings at any time by unsubscribing or as detailed in our terms.
