Accounting and Financial Reporting for Leases

FEDERAL ENERGY REGULATORY COMMISSION

Washington, D.C. 20426

In Reply Refer To:

Office of Enforcement

Docket No. AI19-1-000

December 27, 2018

TO ALL JURISDICTIONAL PUBLIC UTILITIES AND LICENSEES, NATURAL

GAS COMPANIES, AND CENTRALIZED SERVICE COMPANIES

Subject:



Accounting and Financial Reporting for Leases

The Financial Accounting Standards Board (FASB) has issued Accounting

Standards Update (ASU) No. 2016-02,

Leases (Topic 842).

ASU No. 2016-02 amends

FASB Accounting Standards Codification, Topic 840,

Leases,

with the intent to increase

transparency and comparability among organizations by recognizing lease assets and

lease liabilities on the balance sheet and disclosing key information about leasing

arrangements. Under the FASB's new guidance, lessees are required to recognize on the

balance sheet the assets and liabilities for the rights and obligations created by lease

arrangements for operating leases with terms of more than 12 months. ASU No. 2016-02

is generally effective January 1, 2019 for generally accepted accounting principles

(GAAP) purposes. Commission staff received a number of inquiries from industry

participants regarding clarification on how to apply this ASU for purposes of regulatory

accounting and reporting to the Commission. The commenters sought clarity on how to

implement FASB's new lease accounting guidance within the framework and regulatory

intent of the Commission's existing requirements for lease accounting.

As discussed herein, jurisdictional entities will be permitted to record operating leases

that may be capitalized under ASU No. 2016-02 in the FERC balance sheet accounts that

have already been established for capital lease assets and liabilities. All other provisions

of lease accounting are not affected by this accounting guidance. This accounting

guidance is intended to have no impact on the existing ratemaking treatment or practices.

The Commission's accounting requirements are not intended to mirror changes in

FASB's Accounting Standards Codification, and the FASB updates should not be

construed as required for regulatory accounting and reporting to the Commission.

However, upon analysis, the Commission may issue accounting guidance to clarify how

provisions of an ASU can be reflected within the Commission's existing accounting and

financial reporting requirements. Accordingly, this accounting issuance is intended to

provide clarity and certainty on how jurisdictional entities should apply the

Docket No. An 9-1-000

Commission's accounting and reporting requirements related to lease arrangements in

response to ASU No. 2016-02.

ACCOUNTING FOR LEASES ON THE BALANCE SHEET AS A LESSEE

Based on the accounting regulations, Commission jurisdictional public utilities and

licensees, natural gas companies, and centralized service companies classify all leases as

either a capital lease or an operating lease. The Commission's accounting regulations

state that capital leases are recognized on the balance sheet in Account 101.1 (Property

Under Capital Leases), Account 227 (Obligations Under Capital Leases- Noncurrent),

and Account 243 (Obligations Under Capital Leases — Current).

The Commission's

accounting regulations do not require operating leases to be capitalized on the balance

sheet. Under ASU No. 2016-02, all leases including operating leases must be capitalized

if the lease term is more than 12 months.

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Question:

How should jurisdictional entities account for operating leases on the

balance sheet for Commission accounting and reporting purposes?

Response:

Under the Commission's accounting regulations, operating leases are

not required to be capitalized and reported in the balance sheet accounts established for

capital leases. However, a jurisdictional entity may choose to implement the ASU's

guidance to report operating leases with a lease term in excess of 12 months as right of

use assets, with corresponding lease obligations, in the balance sheet accounts established

for capital leases. Entities that choose to do so must: (1) record the capitalized operating

leases using the existing FERC balance sheet accounts for capital leases (Accounts 101.1,

227, and 243); (2) maintain unique subaccounts and auxiliary ledgers to separately

identify and track the capitalized operating lease amounts included in the capital lease

balance sheet accounts; (3) provide footnote disclosures in Notes to the Financial

Statements of the FERC Form Nos. 1, 1-F, 2, 2-A, and 60 of any amounts included in the

capital lease balance sheet accounts that relate to operating leases; (4) have in place

This accounting guidance does not amend the Commission's accounting

regulations for lease accounting. Rather, it provides guidance on lease accounting within

the existing regulated accounting framework.

See

18 C.F.R. Part 101 and Part 201

(2018), General Instructions Nos. 19 and 20; and Definitions Nos. 15 and 16 (Part 101)

and Nos. 18 and 19 (Part 201);

see also

18 C.F.R. Part 367 (2018), General Instructions

Nos. 18 and 19; and Definitions Nos. 25 and 26.

See

18 C.F.R. Part 101, Part 201, and Part 367 (2018). Part 101 also provides

Account 120.6 (Nuclear Fuel Under Capital Leases).

Docket No. AI19-1-000

strong internal controls to ensure that there is no impact to the existing ratemaking

treatment or practices for leases.

Question:

How should jurisdictional entities account for capital leases on the

balance sheet for Commission accounting and reporting purposes?

Response:

Jurisdictional entities must continue to follow the Commission's

current accounting regulations for capital leases.

Question:

Under ASU No. 2016-02, some land easements may now be

considered leases in the GAAP financial statements, whereas the Commission's

accounting regulations require the cost of land and land rights, including land

easements, to be reported in utility or gas plant accounts. How should

jurisdictional entities account for land easements on the balance sheet for

Commission accounting and reporting purposes?

Response:

Jurisdictional entities must continue to record land easements to the

appropriate utility or gas plant accounts. The Commission's accounting for easements

remains unchanged.

ACCOUNTING FOR LEASES ON THE INCOME STATEMENT AS A LESSEE

Under ASU No. 2016-02, capitalized lease assets are depreciated to expense accounts,

and interest expense on the lease obligation is recognized and reported on the income

statement. However, under the Commission's accounting regulations, depreciation of

capital lease assets, and accrued interest expense on lease obligations, are not recognized.

Rather, the Commission's regulations provide that the amounts recorded for the capital

lease asset and the related obligation are reduced by equal and offsetting amounts over

the lease terrn.

The Commission's accounting regulations only provide for the actual

amounts paid under a lease arrangement to be recorded on the income statement in the

appropriate rent expense account.

See

18 C.F.R. Part 101 and Part 201

(2018), Plant Instruction No. 55.

See

18 C.F.R. Part 101 and Part 201

367 (2018), General Instruction No. 19.

(2018), Plant Instruction No. 7, and Part 367

(2018), General Instruction No. 20, and Part

Docket No. AI19-1-000

Question:

Will jurisdictional entities be allowed to utilize the accounting

provisions of ASU 2016-02 for recording expenses associated with lease

arrangements for Commission accounting and reporting purposes?

Response:

No. Jurisdictional entities must continue to follow the Commission's

accounting regulations for recording expenses related to lease arrangements. There

should be no change to the expense account used to record the expense or to the amount

of expense recorded as a result of this accounting guidance.

ACCOUNTING FOR LEASES AS A LESSOR

Question:

Will there be any changes to the Commission's accounting for leases

from a lessor perspective?

Response:

No. Jurisdictional entities will continue to follow the Commission's

accounting regulations for recording lease arrangements for lessors.

DISCLOSURES AND FUTURE FILINGS TO THE COMMISSION

Question:

What are the required disclosures or filings to the Commission related

to changes made to a jurisdictional entity's accounting practice in response to

ASU No. 2016-02?

Response:

In addition to the footnote disclosures required in the response to

Question No. 1 above, jurisdictional entities should disclose any changes in accounting

practice in response to ASU No. 2016-2 in their respective FERC Forms filed to the

Commission quarterly and annually, within the Notes to the Financial Statements. The

disclosure should also provide a statement indicating how such amounts are included in

Commission jurisdiction cost-of-service rates.

To the extent a jurisdictional entity has a specific lease transaction that it proposes

to treat differently from the guidance provided herein, the entity should request the

Commission's approval prior to the implementation of its proposed accounting.

Additionally, to the extent that there will be any rate impacts resulting from proposed

changes in the jurisdictional entity's lease accounting, the entity should request the

Commission's approval prior to the implementation of its proposed accounting.

Docket No. AI19-1-000

The Commission delegated authority to act on this matter to the Director of the

Office of Enforcement or his designee under 18 C.F.R. § 375.311 (2018). The Director

has designated this authority to the Acting Chief Accountant. This letter constitutes final

agency action. Your company may file a request for rehearing with the Commission

within 30 days of the date of this order under 18 C.F.R. § 385.713 (2018).

Sincerely,

Steven D. Hunt

Acting Chief Accountant and Director

Division of Audits and Accounting

Office of Enforcement