In Reply Refer To:
OED-DRAP
Docket No. AI01-1-000
August 10, 2001
TO ALL JURISDICTIONAL PUBLIC UTILITIES, LICENSEES,
NATURAL GAS COMPANIES, AND OIL PIPELINE COMPANIES
SUBJECT: ACCOUNTING AND REPORTING FOR CERTAIN TYPES OF FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
INTRODUCTION
The Financial Accounting Standards Board has issued three pronouncements affecting the manner in which certain types of financial instruments and hedging activities are measured and reported in the financial statements. The pronouncements are:
- SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, effective for fiscal years beginning after December 15, 1993.
- SFAS No. 130, Reporting Comprehensive Income, effective for fiscal years beginning after December 15, 1997.
- SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, effective January 1, 2001, for calendar year companies.
These pronouncements changed the accounting and reporting for certain financial instruments and hedging activities, and established new standards for displaying comprehensive income and its components in a full set of general purpose financial statements.
The Commission's existing Uniform Systems of Accounts1 for jurisdictional entities do not specifically address the accounting and reporting matters contained in these pronouncements. The following guidance is being provided to all jurisdictional entities concerning the accounting and reporting of certain financial instruments and hedging transactions in the Annual Report Form Nos. 1, 1-F, 2, 2A and 6 for the year ending December 31, 2001.
1 See 18 C.F.R. Part 101 Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act (2001); 19 C.F.R Part 201 Uniform System of Accounts Prescribed for Natural Gas Companies Subject to the Provisions of the Natural Gas Act (2000); and 18 C.F.R. Part 352 Uniform System of Accounts Prescribed for the Oil Pipeline Companies Subject to the Provisions of the Interstate Commerce Act (2000).
1. ACCOUNTING FOR OTHER COMPREHENSIVE INCOME
Background: SFAS No. 115 and SFAS No. 130 require entities to account for certain items as Other Comprehensive Income and report those amounts in a new equity section of the balance sheet.
Question: What equity account should an entity use to record Other Comprehensive Income for reporting to the Commission?
Response: The existing Uniform Systems of Accounts for jurisdictional entities do not specifically contain an account for recording Other Comprehensive Income. Jurisdictional utilities, licensees and gas pipeline companies will reflect Other Comprehensive Income in a separate subaccount of Account 211, Miscellaneous Paid-In Capital. Oil pipeline companies will reflect the amount in a separate subaccount of Account 73, Additional Paid-In Capital.
2. ACCOUNTING FOR RECLASSIFICATION ADJUSTMENTS
Background: Under SFAS No. 130 an entity must record "reclassification adjustments" to remove amounts previously recorded in accumulated Other Comprehensive Income when the related transactions or events are ultimately recognized in earnings in subsequent periods.
Question: What account should jurisdictional entities use to record reclassification adjustments for reporting to the Commission?
Response: The Uniform Systems of Accounts do not provide for a reclassification adjustment account for amounts that must be reclassified from accumulated Other Comprehensive Income into earnings in subsequent periods. Therefore, jurisdictional entities will use a separate subaccount of Miscellaneous Paid in Capital to serve as their reclassification adjustment account to record amounts in earnings when the transactions or events that gave rise to the recognition of Other Comprehensive Income are ultimately included in earnings.
3. DISPLAYING THE COMPONENTS OF COMPREHENSIVE INCOME IN THE FERC ANNUAL REPORTS
Background: SFAS No. 130 does not prescribe a specific format for reporting comprehensive income but requires that an entity display net income as a component of comprehensive income in its financial statements. It permits a choice of displaying comprehensive income and its components in (a) one or two statements of financial performance, or (b) a statement of changes in equity.
Question: How should entities report to the Commission the items classified as Other Comprehensive Income in the schedules contained in the FERC Annual Report Form Nos. 1, 1-F, 2, 2A and 6?
Response: The existing schedules (e.g. Statement of Income or Comparative Balance Sheet) do not include a format or separate section for reporting Other Comprehensive Income. To promote consistency in reporting, entities shall report Other Comprehensive Income in the Notes to Financial Statements2schedule contained in the FERC annual report forms, using formats similar to the examples shown in the attached enclosure.
4. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
Background: SFAS No. 133 requires an entity to recognize certain derivative instruments as either assets or liabilities in the Statement of Financial Position and measure those instruments at fair value.
Question: What accounts should be used to record changes in the fair value of derivative instruments that are not designated as hedges?
Response: Public utilities, licensees, and natural gas companies will record the change in the fair value of derivative instruments that are not designated as hedges in Account 124, Other Investments, and reflect any gains or losses in Account 421, Miscellaneous Nonoperating Income, or Account 426.5, Other Deductions, respectively. Oil pipeline companies will record the change in fair value of derivative instruments not designated as hedges in Account 21, Other Investments, and reflect any gains or losses in Account 660, Miscellaneous Income Charges.
5. ACCOUNTING FOR FAIR VALUE HEDGES
Background: If certain criteria are met under SFAS No. 133, a derivative instrument may be designated as a fair value hedge. Under the special accounting for fair value hedges, any change in the fair value of a recognized asset, liability, or a firm commitment is recognized in earnings in the period of change together with the offsetting gain or loss on the hedged item attributable to the risk being hedged. The effect of this accounting is to record in earnings the extent to which the hedge is ineffective in achieving offsetting changes in fair value of the derivative instrument as compared to changes in the fair value of the item being hedged.
Question: How should a jurisdictional entity account for the changes in fair value of the item being hedged and the changes in fair value of the derivative instrument? Additionally, what income statement account should be used to record the ineffectiveness of the hedged transaction?
Response: Jurisdictional licensees, utilities and natural gas companies will record changes in the fair value of the carrying amount of the hedged item in a separate subaccount of the account that carries the item. Changes in the fair value of the derivative instrument will be recorded in Account 186, Miscellaneous Deferred Debits, or Account 253, Other Deferred Credits, as appropriate. The ineffective portion of the hedge transaction will be reflected in the same income or expense account that would have been used if the hedged item had been disposed of or settled. For example, the ineffective portion of a fair value hedge related to long term debt would be reflected in Account 427, Interest on Long-Term Debt.
Oil pipeline companies will record changes in the fair value of the carrying amount of the hedged item in a separate subaccount of the account that carries the item and record changes in the fair value of the derivative instrument in a deferred charge account. Similarly, the ineffective portion of the hedge transaction should be reflected in the same income or expense account that would have been used if the hedged item had been disposed of or settled.
Finally, jurisdictional entities will disclose in the Annual Report Form Nos. 1, 1-F, 2, 2A, and 6 filed with the Commission the impact the fair value hedge had on the carrying amount of the respective asset, liability, or firm commitment being hedged.
6. ACCOUNTING AND REPORTING OF CASH FLOW HEDGES
Background: If certain criteria are met under SFAS No. 133, a derivative instrument may be designated as a cash flow hedge. Under the special accounting for cash flow hedges the effective portion of the derivative's gain or loss is initially reported as a component of Other Comprehensive Income and the ineffective portion is reported in earnings.
Question: How should a jurisdictional entity account for the changes in fair value of a derivative instrument designated as a cash flow hedge?
Response: Jurisdictional licensees, utilities and natural gas companies will record changes in the fair value of the derivative instrument in Account 186, Miscellaneous Deferred Debits, or Account 253, Other Deferred Credits, as appropriate. The effective portion of the cash flow hedge should be recorded in a subaccount of Account 211, Miscellaneous Paid-In Capital. The ineffective portion of the hedge transaction will be reflected in the same income or expense account that would have been used if the hedged item had been disposed of or settled. For example, the ineffective portion of a cash flow hedge used to protect against the risk of increases in variable interest expense on long term debt would be reflected in Account 427, Interest on Long-Term Debt.
Oil pipeline companies will record changes in the fair value of the cash flow hedge in Account 44, Other Deferred Charges, or Account 63, Other Noncurrent Liabilities, as appropriate and record the effective portion of the cash flow hedge in a separate subaccount of Account 73, Additional Paid-In Capital. The ineffective portion of the cash flow hedge will be reported in earnings in Account 660, Miscellaneous Income Charges.
7. ACCOUNTING FOR REGULATORY ASSETS AND LIABILITIES
Question: How should an entity, under a cost of service rate regulation, account for changes in the fair value of derivative instruments and unrealized holding gains and losses on certain marketable securities?
Response: If it is probable that a rate setting body will include these amounts in the development of future cost based rates, then the entity must record these amounts as a regulatory asset in Account 182.3, Other Regulatory Assets, or Account 254, Other Regulatory Liabilities, as appropriate.
8. COST-OF-SERVICE TARIFFS/FORMULA RATE
Background: An entity has a cost-of-service tariff and/or a formula rate under which amounts billed each month will change based on amounts recorded in FERC's Uniform System of Accounts. Under the tariff/formula rate, only amounts recorded in certain specified accounts affect the monthly billings.
Question: May a jurisdictional entity include in its monthly billings: (1) amounts recorded in a separate subaccount of Paid in Capital related to items of accumulated Other Comprehensive Income, or (2) adjustments to asset or liability amounts resulting from fair value hedge accounting?
Response: Adoption of the accounting guidance contained in this letter is for FERC accounting and reporting purposes, and may not affect the measurement or periods in which amounts are included in a jurisdictional entities billing determinations without prior regulatory approval. If an entity's billing determinations would be affected by the adoption of the guidance contained in this letter, the entity shall make a filing with the proper rate regulatory authorities before implementing the accounting change for billing purposes.
9. ACCOUNTING AND REPORTING OF EMISSION ALLOWANCES
Background: The Uniform System of Accounts for jurisdictional electric utilities and licensees provides specific accounting guidance for exchange traded emission allowance futures contracts.
Question: Does this guidance letter change any of the existing accounting and reporting requirements for emission allowances?
Response: No. Jurisdictional public utilities and licensees will continue to follow the accounting and reporting instructions provided for in General Instruction No. 21 of 18 C.F.R. Part 101 for the costs and benefits associated with emission allowance transactions.
The Commission delegated authority to the Chief Accountant under 18 C.F.R. 375.303 to issue interpretations of the Uniform Systems of Accounts for public utilities, licensees, natural gas companies and oil pipeline companies. The guidance provided herein constitutes final agency action pursuant to this authority. Within 30 days of the date of this letter, interested parties may file a request for rehearing by the Commission under 18 C.F.R. 385.713.
John M. Delaware
Deputy Executive Director
and Chief Accountant
Enclosure
Enclosure
Sample formats that may be used to display comprehensive income in the Notes to Financial Statements schedule of the FERC Annual Reports for jurisdictional public utilities, licensees, natural gas and oil pipeline companies.
| STATEMENT OF COMPREHENSIVE INCOME | YEAR ENDED 12/31/0X |
|
|---|---|---|
| 1 | Net Income as Reported in FERC Form 1, 1-F, 2, 2A, or 6 | $500,000 |
| 2 | Other Comprehensive Income, Net of Tax: | |
| 3 | Foreign currency translation adjustments | $ 2,000 |
| 4 | Unrealized gains and (losses) arising during period | 10,000 |
| 5 | Less Reclassification Adjustment for gain included in income | (1,000) |
| 6 | Minimum pension liability adjustment | $ 0 |
| 7 | Total Other Comprehensive Income | $ 11,000 |
| 8 | Comprehensive Income | $ 511,000 |
Sample format of displaying other comprehensive income and its components in a statement of changes in equity in the Notes to the Financial Statements schedule of the FERC Annual Reports for jurisdictional public utilities, licensees, natural gas and oil pipeline companies.
| STATEMENT OF CHANGES IN EQUITY | ACCUMULATED BALANCE AT 12/31/0X | COMPREHENSIVE INCOME AMOUNT FOR THE YEAR ENDED 12/31/0X | |
|---|---|---|---|
| 1 | Retained Earnings Balance at 1/01/0X | $1,000,000 | |
| 2 | Net Income as Reported in the FERC Form No. 1, 1-F, 2, 2A, or 6 | $500,000 | $500,000 |
| 3 | Dividends Declared on Common Stock | $ (30,000) | |
| 4 | Retained Earnings Balance at 12/31/0X | $ 1,470,000 | |
| 5 | Accumulated Other Comprehensive Income (Subaccount of Additional Paid in Capital ) | ||
| 6 | Balance at 1/01/0X | $25,000 | |
| 7 | Foreign Currency Translation Adjustments | $2,000 | |
| 8 | Unrealized Gains (Losses) on Securities During Year | $10,000 | |
| 9 | Reclassification Adjustment | $(1,000) | |
| 10 | Minimum Pension Liability Adjustment | $ 0 | |
| 11 | Other Comprehensive Income | $11,000 | $11,000 |
| 12 | Comprehensive Income | $511,000 | |
| 13 | Accumulated Other Comprehensive Income Balance at 12/31/ 0X | $36,000 | |
| 14 | Paid In Capital Balance at 1/01/0X | $40,000 | |
| 15 | Changes During Year | $0 | |
| 16 | Paid In Capital Balance at 12/31/0X (Net of amounts shown on Line 13) | $40,000 | |
| 17 | Common Stock Balance at 1/01/0X | $100,000 | |
| 18 | Common Stock Issued | $0 | |
| 19 | Common Stock Balance at 12/31/0X | $100,000 | |
| 20 | Total Stockholders Equity | $1,646,000 |