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Questions and Answers from Power & Utilities IFRS Webcast on IAS 16 - Property, Plant and Equipment

The following questions were asked by the audience during our December 12, 2008, Power & Utilities IFRS (International Financial Reporting Standards) Webcast on IAS 16 - Property, Plant and Equipment. You will find the answers below. 

Does IFRS consider Vintage Year Accounting?

IFRS does not specifically address vintage year accounting. Since IFRS does permit similar components to be grouped, we believe that poles or similar common components could be grouped by the year they were installed and when retirements of a common component take place, the retirement could be recorded based on the average cost of the vintage retired.

Has Deloitte U.S. completed any research into whether the depreciation methods specific to rate regulated utilities such as Equal Life Group Method (ELG) are acceptable under IFRS? Has Deloitte U.S. separately assessed the different types of group depreciation methods used by utilities such as ELG vs. Average Service Life Method (ASL) and their acceptability under IFRS? 

We have some initial feedback from our auditors that ELG may be more acceptable under IFRS compared to the ASL.

We have not yet studied the acceptability of depreciation methods specific to rate regulated utilities under IFRS. However, we believe that to the extent ELG (or ASL) was applied to asset components, as defined in IAS 16, either method would be acceptable.

Have companies that have already adopted IFRS selected the revaluation method?

We are not aware of any power and utility companies operating in the U.S. that have selected the revaluation model.

Does IFRS have the same treatment as U.S. GAAP SFAS 58, Capitalization of Interest Cost in Financial Statements that Include Investments Accounted for by the Equity Method, an Amendment of FASB Statement No. 34, under which interest can be capitalized for investments accounted for by the equity method, provided that the investee's activities include the use of funds to acquire qualifying assets for its operations?

Investments accounted for under equity method are not included as qualifying assets under IAS 23, Borrowing Costs, paragraph 7 (this difference between IFRS and U.S. GAAP is also highlighted in paragraph BC 22.c of IAS 23).

Can you speak to the identification of Cash Generating Units (CGU) as it relates to IFRS? Because we are regulated, can we use the argument that an asset is not impaired (unless it is disallowed)?

The identification of CGU under IFRS is the same as in paragraph 10 of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). Under U.S. GAAP impairment is not recorded as long as the expected future cash flows from the asset on an undiscounted basis exceed the carrying amount of the CGU. However, under IFRS impairment is recorded when an asset's carrying amount exceeds the higher of - the asset's value in use (discounted present value of the asset's expected future cash flows) and fair value less costs to sell. 

Although theoretically you may be able to conclude that regulated entity's CGU is comprised of the entire system (no independent cash flows), the assets could be impaired if some assets are not allowed to earn a return or if some costs are disallowed.

With regard to impairment testing, has anyone considered the argument that fair value of the assets of a regulated operation would be equal to rate base? In other words, if our regulator does not allow us to earn a return on a capitalized cost, we would write off it off immediately for regulatory (and IFRS) purposes as the asset would not generate any future cash flows to our utility and therefore would be impaired.

Under SFAS 144 and SFAS 90, Regulated Enterprises—Accounting for Abandonments and Disallowances of Plant Costs, an amendment of FASB Statement No. 71, impairments of newly completed plants are recognized when costs are explicitly disallowed. In other circumstances, SFAS 144 impairments are not recognized unless the carrying amount of the asset in use exceeds its undiscounted cash flows so that if the regulator allows recovery of the asset, but not a return on it, the asset would presumably not be impaired under U.S. GAAP. Under IFRS the comparison is to discounted cash flows, so that if an asset did not earn a return, an impairment would presumably be recognized for the difference in the discounting (but the entire asset would not be written off).

We thought that if you had previously evaluated a contract for lease accounting under EITF 01-08, that you did not have to revisit that under IFRS. Is that correct?

Yes, you are correct, but EITF 01-08, Determining Whether an Arrangement Contains a Lease, provides the grandfathering option under which the EITF does not need to be applied to contracts entered into prior to May 28, 2003. IFRS does not provide this option and thus contracts that may have been scoped out of EITF 01-8 may still be leases under IFRIC 4, Determining Whether an Arrangement Contains a Lease.

Does IAS distinguish real estate transactions as in the U.S. as most power plants are deemed real estate? If so, is there language similar to paragraph 8 of SFAS 13, Accounting for Leases (SFAS 13)?

No, there is no comparative language to paragraph 8 of SFAS 13 under IFRS. Under IFRS, there is no difference in accounting between sale and leaseback transactions involving real estate and non-real estate assets. Also, IFRS does not distinguish between sales-type leases and other types of finance leases. 

Has the FERC started any review or analysis on the impacts of IFRS?

At the last EEI liaison meeting the FERC staff indicated that they were monitoring the SEC roadmap and IFRS developments, but we are not aware of any specific actions by FERC.

Do you think you would be able to defer the losses on early retirements as Regulatory Assets?

Such deferrals would not be permitted under IAS 16. The extent to which regulatory assets can be recognized under IFRS was discussed during Deloitte's Power & Utilities IFRS Webcast on Regulated Assets and Liabilities on December 19, 2008. Please visit for the Webcast presentation and recording. 

How can we obtain a listing of companies already reporting under IFRS?

We do not have a formal listing but are aware of the following companies in the power & utilities industry that use IFRS (in no particular order; not all report in the U.S.)
SUEZ, E.ON, RWE Group, ENEL, CEZ, Veolia Environment, Fortum, Gas Natural Group, Scottish & Southern Energy, Iberdola, Centrica, International Power plc, EDF Energy, National Grid plc.

I may have missed something but when we first implement IFRS, are we expected to identify gains and losses on early retirement and remove from accumulated depreciation?

In accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, you can either restate the historical cost of PP&E or elect to use the exemption, provided in paragraph 13 of IFRS 1, to use fair value as deemed cost. If you use historical cost, you need to re-compute all amounts as if all effective IFRS had always been applied. IAS 16 requires that gain/loss be recognized upon retirement and such deferred gains/losses embedded in accumulated depreciation would have to be removed from the property balances upon adoption of IFRS. As discussed at the Webcast, the Exposure Draft to provide additional exemptions under IFRS 1, if adopted, would permit rate-regulated entities an exemption to the initial application of IFRS to PP&E and accumulated depreciation. While the net cost could remain, any embedded gains/losses would have to be assigned to components and would impact prospective depreciation expense under IFRS.

How does IFRIC 12, Service Concessions (IFRIC 12), impact rate regulated (nuclear generation) companies?

IFRIC had discussed the possible recognition of regulatory assets as part of its project on IFRIC 12. The IFRIC concluded that entities applying IFRS should recognize only assets that qualified for recognition in accordance with the IASB’s Framework for the Preparation and Presentation of Financial Statements and relevant accounting standards. In other words, the IFRIC thought that an entity should recognize regulatory assets to the extent that they meet the criteria to be recognized as assets in accordance with existing IFRS. Whether the assets are labeled as ‘regulatory’ should not affect their recognition. As noted in our response to a question above, the IASB agreed today, December 18, 2008, to take on a project on rate-regulated activities and we will discuss this action at our IFRS Webcast on regulatory assets and liabilities on December 19, 2008.

I understand under IAS 16 there is a requirement to record as part of capitalization the estimated costs of removal of the asset. Could you provide your thoughts on this requirement with respect to interim replacements (i.e. poles, transmission lines) and how these interim replacements may be recorded as asset retirement obligations (AROs), or provisions meeting the constructive obligation criteria under IAS 37, Provisions, Contingent Liabilities and Contingent Assets?

This is a requirement under IAS 16, which is similar to the U.S. GAAP requirement to capitalize the amounts related to AROs under SFAS 143, Accounting for Asset Retirement Obligations (SFAS 143), as part of plant.  The scope of "constructive obligations" under IAS 16 and "legal obligations" under SFAS 143 appears to be somewhat different and might lead one to determine that the recording of AROs under IFRS would be interpreted more broadly. However, it is our understanding that in practice to date there have been no significant differences.

Does getting the regulated asset and liability issue resolved our way solve the gain/loss recognition issue with component depreciation (defer those gains/losses in regulatory accounts...)?

Yes, if the regulatory asset and liability issue is resolved to clarify that these types of regulatory assets and liabilities can be recognized under IFRS, normal gains/losses on PP&E retirements would likely continue to be deferred.

Can overhead costs that are directly attributable to the assets be capitalized under IFRS?

Paragraph 19 of IAS 16 specifically states that general overhead costs are not to be capitalized as part of PP&E but does not discuss costs specifically attributable to the asset. We do not believe that administrative and general costs are capitalized in practice under IFRS. The IASB has stated that the treatment of such expenditures is an accounting policy choice and the chosen policy should be consistent with one of the treatments available under IFRS. Note that these costs could be capitalized as part of inventory (paragraph 11 of IAS 2, Inventories) and internally generated intangible assets (paragraph 67(a) of IAS 38, Intangible Assets).

Can a company NOW componentize individual assets? If I build a new power plant today, can I componentize that plant, and that plant only, while continuing my legacy depreciation policies? This would limit the effort required to componentize at the time IFRS adoption is required.

A company could today componentize its existing or new assets under U.S. GAAP. The company would need to make sure that the new components did not result in a change in retirement units now used (which impacts capital vs. repair determinations in addition to depreciable life), which could be construed to be a change in accounting. A company would have to justify a change in retirement units/components and should not have different retirement units for existing and for new PP&E.

What is the source of U.S. GAAP that allows the deferral and amortization of a major inspection over the period until the next overhaul?

FASB Staff Position AUGAIR-1, Accounting for Planned Major Maintenance Activities, issued on September 8, 2006, is the specific standard that amended the Airline Guide to eliminate the Accrual Method as an acceptable method, but retained the Deferral, Built-in overhaul, and Direct expensing methods as acceptable.

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