Many times these operations are allowed a set markup on actual costs – however as actual costs are never known at the time of billing, they financial statements are constantly subject to adjustment for over and under billings.
Related Assets and Liabilities
As a result of the government regulated rates, the company will recognize an asset on the balance sheet if it has collected too much from customers, or a liability if too little has been collected in order to maintain the incurred costs. The assets are typically required by the government regulators, at a later date, to be utilized in the form of a rate reduction to customers or to be paid directly to the customers. Payments for utilities are typically offset against a customer’s bill as the costs are recurring. Liabilities for items which a regulated entity did not charge a high enough rate to recover their costs are later recovered in the form of a rate increase to customers. These rate increases are regulated by the government as well and require approval prior to an increased charge being made to the customer.
Abandonment of Plant
When a regulated operation, such as a power company abandons a power generating plant. In this case, any costs which are not probable of being recovered, must be written off. If part of these losses are to be recoverable, but less than the company’s normal rate of return, this part of the loss that shall be incurred is required to be recorded. If there are expected rate increase approvals that will offset, the operation must then accrete the asset at the company’s incremental cost of capital.
The most common type of regulated operation is a public utility company, however the amount of regulation facing them has been trending lower in recent times. The standards related o this industry has been made due to the rate setting process and the uncertainty surrounding items such as rate increases. As regulations allow the companies to set rates which cover their costs and a reasonable amount of profit, the uncertainty of the government approval process for the increase in rates has played a big part in the financial reporting standards related to them.
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