AGA Taxation Committee Meeting Accounting for Income Taxes: Recent Developments and Current Issues

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1 AGA Taxation Committee Meeting Accounting for Income Taxes: Recent Developments and Current Issues David J. Yankee Deloitte Tax LLP Accounting for Income Taxes: Recent Developments and Current Issues FASB developments Balance sheet classification Intra-entity transfer of assets Investments in affordable housing credit projects Employee share-based payment accounting improvements project FERC reporting Tax receivables overpayments and refunds UTP reporting Tax benefit related to interest expense Accounting method changes Tangible property regulations Accounting for effects of flow-through accounting Copyright 2015 Deloitte Development LLC. All rights reserved. 1

2 FASB income tax project Time line of key events February 2013 Financial Accounting Foundation (FAF) announced a Post-Implementation Review (PIR) of FASB Statement No. 109, Accounting for Income Taxes November 2013 FAF completed its PIR of Statement 109 and concluded: Statement 109 adequately achieved its intended purposes, although slightly complex Investors struggle to assess cash tax effects Stakeholders find the following to be operationally challenging: Intraperiod tax allocation Accounting for intercompany transfers of assets Indefinitely reinvested foreign earnings December 2013 FASB Response Letter to FAF PIR Report Will evaluate the PIR Report findings Copyright 2015 Deloitte Development LLC. All rights reserved. 2 FASB income tax project Time line of key events (cont.) August 2014 FASB added to its technical agenda a project to simplify the accounting for income taxes by eliminating: Classification of deferred taxes between current and noncurrent The exception to the income taxes accounting model that prohibits the recognition of income tax consequences of intra-entity asset transfers October 2014 Board voted to issue an exposure draft January 22, 2015 Two Accounting Standards Updates (ASUs) proposed as part of the simplification initiative Balance sheet classification Intra-equity transfer of assets May 29, 2015 End of comment period for the proposed ASUs Copyright 2015 Deloitte Development LLC. All rights reserved. 3

3 Balance sheet classification of deferred taxes File Reference No Classify all deferred taxes as noncurrent Jurisdictional netting still required Transition guidance Applies prospectively to all DTAs/DTLs (no restatement of prior periods) Effective dates Public business entities Annual periods, including interim periods within those annual periods, beginning after December 15, 2016 Early adoption not permitted All other entities One year later Allowed to adopt early, but not before the effective date for public companies and must adopt both issues if elect to early adopt Copyright 2015 Deloitte Development LLC. All rights reserved. 4 Income Taxes Overall Other Presentation Matters Deferred Tax Accounts In a classified statement of financial position, an entity shall separate classify deferred tax liabilities and assets into a current amount and a as noncurrent amounts amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting Paragraph superseded by Accounting Standards Update 2015-XX. The valuation allowance for a particular tax jurisdiction shall be allocated between current and noncurrent deferred tax assets for that tax jurisdiction on a pro rata basis For a particular tax-paying component of an entity and within a particular tax jurisdiction, all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions. Copyright 2015 Deloitte Development LLC. All rights reserved. 5

4 Balance sheet classification of deferred taxes Current and proposed accounting example Company has a net DTA of $750 as of the end of 20X1, as reflected below Company expects the following reversals of the its DTAs/(DTLs) in 20X2 Accounts receivable bad debt reserve $40 deductible Fixed assets $100 taxable Net operating loss (state) $50 deductible Balance sheet classification of the DTAs/(DTLs) at the end of 20X1: Copyright 2015 Deloitte Development LLC. All rights reserved. 6 Balance sheet classification of DTA valuation allowances Current and proposed accounting example Current guidance Proposed guidance Balance sheet as of Noncurrent DTA/(DTL) Current Non-current Current 12/31/20X1 Accounts receivable bad debt reserve Fixed assets (1,000) (1,000) (1,000) Net operating loss (state) Total DTA/(DTL) ($750) $100 ($850) $0 ($750) Company has a gross DTA of $250, a gross DTL of $1,000 and a valuation allowance related to the state NOL carryforward of $100 as of the end of 20X1. None of the state NOL carryforward is expected to reverse in 20X2. Under the current guidance, the valuation allowance is allocated between the current DTA and the non-current DTA on a pro rata basis. No allocation is necessary under the proposed guidance because the entire DTA would be classified as non-current. Current guidance Proposed guidance Balance sheet as of Noncurrent DTA/(DTL) Current Non-current Current 12/31/20X1 Accounts receivable bad debt reserve Fixed assets (1,000) (1,000) (1,000) Net operating loss (state) Valuation allowance (100)) (20) (80) (100) Net DTA/(DTL) ($850) $30 ($880) $0 ($850) Copyright 2015 Deloitte Development LLC. All rights reserved. 7

5 FERC guidance AI Accounting for Income Taxes 16. CLASSIFICATION OF CURRENT PORTION OF DEFERRED INCOME TAXES Question SFAS 109 requires entities that prepare classified statements of financial position to separate deferred tax liabilities and assets into current and noncurrent amounts. Should entities reclassify the current portion of deferred tax liabilities or assets to current accounts, such as Account 174, Miscellaneous Current and Accrued Assets, or Account 242, Miscellaneous Current and Accrued Liabilities, for FERC accounting and financial reporting purposes? Response No. All deferred tax liabilities and assets shall be recorded in Accounts 190, 281, 282, or 283, as appropriate, and the current portion of those amounts shall not be reclassified to other accounts for FERC reporting purposes. Copyright 2015 Deloitte Development LLC. All rights reserved. 8 Balance sheet classification of deferred taxes FERC-GAAP difference current rules FERC guidance All DTAs/DTLs are classified as non-current DTAs and DTLs are not netted ASC 740 A DTA or DTL related to a temporary difference with respect to an asset or liability is classified as current or noncurrent based on the classification of the related asset or liability If not related to an asset or liability, classify based on the expected reversal date of the temporary difference By taxing jurisdiction, report net current DTA or DTL and net non-current DTA or DTL FERC-GAAP difference Reclassification of current portion of DTAs/DTLs and present net DTAs/DTLs on a gross basis Copyright 2015 Deloitte Development LLC. All rights reserved. 9

6 Balance sheet classification of deferred taxes Summary FASB simplification initiative Would classify all deferred taxes as non-current in a classified balance sheet Would eliminate the requirement to allocate a valuation allowance on a pro rata basis between gross current and noncurrent DTAs Would be consistent with the balance sheet presentation of deferred taxes under IFRS and FERC Comment letters posted Copyright 2015 Deloitte Development LLC. All rights reserved. 10 Intra-entity transfer of assets File Reference No Eliminate prohibition on recognition of income taxes paid for intra-entity transactions and the related deferred tax asset on differences between the tax basis of the assets in a buyer s tax jurisdiction and their cost as reported in the consolidated financial statements The proposed Update would align the recognition of income tax consequences of intra-entity asset transfers with IFRS. IAS 12, Income Taxes, requires recognition of current and deferred income taxes resulting from an intra-entity asset transfer when the transfer occurs. Copyright 2015 Deloitte Development LLC. All rights reserved. 11

7 Intra-entity transfer of assets File Reference No (cont.) Transition guidance Entities would be required to apply the proposed amendments on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption for the recognition of the income tax consequences of intraentity asset transfers occurring before the effective date. Effective dates Public business entities Annual periods, including interim periods within those annual periods, beginning after December 15, 2016 Early adoption not permitted All other entities One year later Allowed to adopt early, but not before the effective date for public companies and must adopt both issues if elect to early adopt Copyright 2015 Deloitte Development LLC. All rights reserved. 12 Intra-entity transfer of assets Historical, current and pending guidance Historical guidance ARB 51 and SFAS No. 109, paragraph 9(e) Current guidance ASC and ASC (e) Pending guidance Proposed deletion of current ASC (e) A prohibition on recognition of a deferred tax asset for the intra-entity difference between the tax basis of the assets in the buyer s tax jurisdiction and their cost as reported in the consolidated financial statements. Income taxes paid on intra-entity profits on assets remaining within the group are accounted for under the requirements of Subtopic Proposed additional example of a temporary difference in ASC The difference between the tax basis of the asset in the buyer s tax jurisdiction and the cost of the asset reported in the consolidated financial statements as a result of an intra-entity asset transfer from one taxpaying entity to another taxpaying entity of the same consolidated group. Copyright 2015 Deloitte Development LLC. All rights reserved. 13

8 Intra-entity transfer of assets Sale of inventory example current rules Parent Inventory Sub A Sub B Tax rate = 30% Tax rate = 40% Selling price $ 150 Tax basis $ 150 Cost 100 Book basis 100 Margin $ 50 Difference no DTA $ 50 Tax rate 30% Consolidated Financial Statements Tax paid $ 15 Prepaid taxes $ 15 DTA $ 0 Taxes payable ($ 15) Tax expense $ 0 Tax expense deferred (e.g., recorded as a prepaid) pursuant to ASC No DTA recorded pursuant to ASC (e) Copyright 2015 Deloitte Development LLC. All rights reserved. 14 Intra-entity transfer of assets Sale of inventory example pending guidance Parent Inventory Sub A Sub B Tax rate = 30% Tax rate = 40% Selling Price $ 150 Tax basis $ 150 Cost 100 Book basis 100 Margin $ 50 Difference $ 50 Tax rate 30% DTA $ 20 Tax paid $ 15 Consolidated Financial Statements DTA $ 20 Taxes payable ($ 15) Tax benefit ($ 5) Current tax expense recognized DTA and deferred tax benefit recognized Copyright 2015 Deloitte Development LLC. All rights reserved. 15

9 Investments in qualified affordable housing projects ASU Elective alternative reporting for investments in qualified affordable housing projects Additional disclosure requirements for all investment in qualified affordable housing projects irrespective of method of accounting Transition guidance Applies retrospectively to all periods presented Effective dates Public business entities Annual periods and interim reporting beginning after December 15, 2014 Early application permitted All other entities Annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2015 Early application permitted Copyright 2015 Deloitte Development LLC. All rights reserved. 16 Investments in qualified affordable housing projects Historical, current and pending guidance Historical guidance EITF No , AICPA Statement of Position 78-9, Accounting for Investments in Real Estate Ventures Prior guidance ASC , ASC Elective effective yield method for qualified affordable housing projects Equity method or cost method Current guidance Amendments to ASC Elective proportional allocation method for qualified affordable housing projects Equity method or cost method Further development Amendments to ASC 810, Consolidation, by ASU Copyright 2015 Deloitte Development LLC. All rights reserved. 17

10 ASU Investments in qualified affordable housing projects summary ASU amends ASC to expand the scope of the exception originally provided by EITF 94-1 to report the pretax loss from investments in certain affordable housing projects as part of the tax provision and to modify the allocation of the cost of the investment Elective reporting for qualified investments Income (loss) before taxes (Loss) Income taxes (Tax benefit) Income (loss) Income Report pretax loss from qualified investments as part of the income tax provision Current Guidance Proportional amortization method General amortize initial cost of investment to in proportion to the tax credits and other benefits allocated to the investor Practical expedient amortize initial cost of investment in proportion to the tax credits allocated to the investor Prior Guidance Effective yield method Amortize initial cost of investment to provide a constant effective yield over the period that the tax credits are allocated to the investor Copyright 2015 Deloitte Development LLC. All rights reserved. 18 Investments in qualified affordable housing projects Criteria for elective alternative net income tax accounting Prior requirements New requirements for effective yield method for proportional amortization method The availability (but not necessarily the realization) of It is probable (higher threshold than the tax credits to the investor is guaranteed by MLTN) that the tax credits allocable to the creditworthy entity through a letter of credit, a tax investor will be available indemnity agreement, or another similar arrangement Not applicable The investor does not have the ability to exercise significant influence over the operating and financial policies of the limited liability entity Not applicable Substantially all of the projected benefits are from tax credits and other tax benefits (e.g., tax benefits from operating losses of the investment) The investor s projected yield based solely on cash The investor's projected yield based flows from guaranteed tax credits is positive solely on the cash flows from the tax credits and other tax benefits is positive The investor is a limited partner in the affordable housing project for both legal and tax purposes and the investor s liability is limited to its capital investment (no guarantee required) The investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor s liability is limited to its capital investment (same as prior requirement) Copyright 2015 Deloitte Development LLC. All rights reserved. 19

11 Proportional amortization method What about similar investments? EITF 94-1 The SEC Observer commented that the SEC staff believes that it would be inappropriate to extend the effective yield method of accounting to analogous situations ASU The Task Force also discussed whether the scope of the amendments in this Update should be extended to tax credit investments other than investments in qualified affordable housing projects.... The Task Force reached a consensus to limit the scope of the amendments in this Update to only investments in qualified affordable housing projects because it will more quickly address the concerns in practice about the income statement presentation of those investments. Copyright 2015 Deloitte Development LLC. All rights reserved. 20 Investments in qualified affordable housing projects Disclosure requirements ASC A reporting entity that invests in a qualified affordable housing project shall disclose information that enables users of its financial statements to understand the following: The nature of its investments in qualified affordable housing projects The effect of the measurement of its investments in qualified affordable housing projects and the related tax credits on its financial position and results of operations Copyright 2015 Deloitte Development LLC. All rights reserved. 21

12 Investments in qualified affordable housing projects Disclosure considerations ASC To meet the objectives in the preceding paragraph, a reporting entity may consider disclosing the following: The amount of affordable housing tax credits and other tax benefits recognized during the year The balance of the investment recognized in the statement of financial position Proportional amortization method the amount recognized as a component of income tax expense (benefit) Equity method the amount of investment income or loss included in pretax income Any commitments or contingent commitments including the amount of equity contributions that are contingent commitments and the year or years in which contingent commitments are expected to be paid The amount and nature of impairment losses during the year resulting from the forfeiture or ineligibility of tax credits or other circumstances Copyright 2015 Deloitte Development LLC. All rights reserved. 22 FASB employee share-based payment accounting improvements project August 2014 the FAF issued its PIR Report on Statement 123(R), Share-Based Payment October 2014 the FASB added a project to improve the accounting for share-based payment to employees in the following areas: Withholding requirements Presentation in the statement of cash flows Accounting for forfeitures Accounting for income taxes Exposure draft expected in the second quarter of 2015 Copyright 2015 Deloitte Development LLC. All rights reserved. 23

13 FASB employee share-based payment project Accounting for income tax aspects tentative decisions Accounting for income taxes upon vesting or settlement of awards The Board proposed excess tax benefits and deficiencies be recognized in the income statement. Prospective transition method The Board also decided to remove the requirement to delay recognition of an excess tax benefit until the tax benefit is realized. Modified retrospective transition method with a cumulative-effect adjustment recognized in equity Presentation of excess tax benefits on the statement of cash flows The Board decided to remove the requirement that employers present excess tax benefits as a cash inflow from financing activities and a cash outflow from operating activities. Retrospective transition method Copyright 2015 Deloitte Development LLC. All rights reserved. 24 FERC-GAAP reporting differences Summary of income tax reporting issues Common differences between the methods used for financial reporting of income taxes and for regulatory accounting of income taxes Balance sheet presentation of DTAs and DTLs Current vs. non-current Gross vs. netting Uncertain tax positions Classification of tax-related interest Classification of liabilities related to temporary differences Separate company financial statements Income tax allowances rate-regulated partnerships Copyright 2015 Deloitte Development LLC. All rights reserved. 25

14 FERC reporting Tax receivables overpayments and refunds Issues in what account(s) should the following tax receivables be recorded? IRS settlement results in a refund to be received Overpayment of estimated taxes to be applied to next year s taxes Overpayment of estimated taxes to be settled through tax-sharing agreement Considerations Is the account included in rate base? Formula rate templates FERC audits finding and recommendations Copyright 2015 Deloitte Development LLC. All rights reserved. 26 FERC reporting Tax receivables overpayments and refunds Relevant accounts 143 Other accounts receivable 165 Prepayments 236 Taxes accrued FERC 2014 Report on Enforcement (Docket No. AD ) Division of Audits and Accounting (DAA) continues to examine accounting that populates formula rate recovery mechanisms used in determining billings to wholesale customers. In recent formula rate audits, DAA observed certain patterns of noncompliance in the following areas: Tax Prepayments incorrectly recording tax overpayments not applied to a future tax year s obligation as a prepayment leading to excess recovery through working capital Copyright 2015 Deloitte Development LLC. All rights reserved. 27

15 Uncertain tax positions Overview of FERC guidance AI , Accounting and Financial Reporting for Uncertainty in Income Taxes Classification of interest and penalties Classification as current vs. non-current Temporary items impact of gross vs. net presentation Copyright 2015 Deloitte Development LLC. All rights reserved. 28 Classification of tax-related interest GAAP ASC provides that classification of interest (and penalties) is an accounting policy Disclosure of accounting policy per ASC Disclosure of amounts per ASC c Balance sheet classification should be consistent with income statement classification Tax-related interest is accounted for under ASC 740 regardless of the classification of interest Copyright 2015 Deloitte Development LLC. All rights reserved. 29

16 Classification of tax-related interest and penalties SEC and FERC SEC Rule of Regulation S-X Income tax expense. Include under this caption only taxes based on income. FERC What FERC accounts should jurisdictional entities use to record and report interest expense and penalties applicable to underpayment of income taxes? Classification of interest and penalties as income taxes is not permitted Account 431 interest expense Account penalties Copyright 2015 Deloitte Development LLC. All rights reserved. 30 Definitions of temporary difference Pre-FIN 48, ASC 740, FERC Prior to the adoption of FIN 48 SFAS No. 109, paragraph 289 A difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively Upon the adoption of FIN 48 (GAAP) ASC A difference between the tax basis of an asset or liability computed pursuant to the requirements in Subtopic for tax positions, and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively FERC reporting AI , footnote 2 Temporary difference as used here means a difference between the tax basis of an asset or liability as reflected or expected to be reflected in a tax return and its reported amount in the financial statements Copyright 2015 Deloitte Development LLC. All rights reserved. 31

17 Unrecognized tax benefits Classification ASC 740 Liabilities associated with UTBs should be classified as current liabilities to the extent that payment (or receipt) of cash is anticipated within one year Consider the reversal of temporary differences in accordance with the original filing position in the subsequent tax year UTB liabilities should not be combined with deferred tax liabilities and must be netted against deferred tax assets in certain specified circumstances FERC guidance Continue to treat temporary differences as non-current deferred taxes, even those that are payable within 12 months Copyright 2015 Deloitte Development LLC. All rights reserved. 32 Unrecognized tax benefits Classification FERC guidance Temporary items impact of gross vs. net presentation Certain aspects of FIN 48, if not implemented in accordance with the guidance contained herein, could reduce the usefulness of income tax data for ratemaking purposes and or otherwise be inconsistent with existing Commission accounting requirements Therefore, Commission jurisdictional entities should implement FIN 48 for Commission accounting and reporting purposes, but in doing so should comply with the guidance set forth below Copyright 2015 Deloitte Development LLC. All rights reserved. 33

18 Uncertain tax positions temporary differences FERC guidance How should jurisdictional entities account for unrecognized tax benefits related to temporary differences for Commission and reporting purposes? Recognition of a separate liability for any uncertainty related to temporary differences is therefore not necessary because the entity has already recorded a deferred tax liability for the item or would be entitled to record a deferred tax asset for the item if a separate liability for the uncertainty was recognized This practice results in the accumulated deferred income tax accounts reflecting an accurate measurement of the cash available to the entity as a result of temporary differences This is an important measurement objective of the Commission s Uniform Systems of Account because accumulated deferred income tax balances, which are significant in amount for most Commission jurisdictional entities, reduce the base on which cost-based, rate-regulated entities are permitted to earn a return Copyright 2015 Deloitte Development LLC. All rights reserved. 34 Presentation of UTB when attribute DTAs exist ASU issued July 18, 2013 UTB (or portion of a UTB) is presented as a reduction to the DTA for a net operating loss carryforward, a similar tax loss, or tax credit carryforward unless tax law prohibits settlement with NOL/tax credit (or tax law does not require use of the carryforward and entity does not intend to offset) ASC A, 10B Effective date and transition Prospective application to any UTBs that exist as of effective date Public companies interim and annual periods beginning after December 15, 2013 Non-public companies interim and annual periods beginning after December 15, 2014 Retrospective application permitted; early adoption permitted Copyright 2015 Deloitte Development LLC. All rights reserved. 35

19 Gross vs. net presentation of UTBs GAAP v. FERC Example facts Tax rates 35% federal rate, 5% state rate, 38.25% composite statutory rate Federal benefit of deduction of state income taxes = 1.75% Uncertain income tax positions Eligibility for a federal credit no impact on deductions or basis Timing of deduction of repair expenditures Federal tax benefit reported (gross) State tax benefit reported (gross) Federal benefit of deduction of state income tax Net benefit per tax return Gross Tax position amount Federal credit Repairs 2, (46) 1,000 Copyright 2015 Deloitte Development LLC. All rights reserved. 36 Gross vs. net presentation of UTBs GAAP v. FERC Example reporting of liabilities Assumes no NOL or credit carryforward GAAP reporting FERC reporting Tax position Liability for UTB (federal and state gross) DTL (federal and state gross) Federal DTA for state UTB liability or DTL Liability for UTB DTL (federal and state gross) Federal DTA for state UTB liability or DTL Federal credit (100) (100) Repairs (1,046) 46 (1,046) 46 Total (1,146) 46 (100) (1,046) 46 Copyright 2015 Deloitte Development LLC. All rights reserved. 37

20 Gross vs. net presentation of UTB liabilities with NOLs Example reporting of liabilities before and after ASU Assumes $13,072 NOL carryforward for federal and state purposes $5,000 net DTA $4,575 federal DTA, $654 state DTA, $229 federal DTL (on state DTA) Acceptable before ASU Acceptable before and after ASU Tax position Liability for UTB (federal and state gross) DTA or (DTL) (federal and state gross) Federal DTA or (DTL) for state liability or asset Liability for UTB (federal and state gross) DTA or (DTL) (federal and state gross) Federal DTA or (DTL) for state liability or asset Federal credit (100) Netted Repairs (1,046) 46 Netted 46 NOL carryforward 5,229 (229) 4,083 (229) Total (1,146) 5,229 (183) 4,083 (183) Copyright 2015 Deloitte Development LLC. All rights reserved. 38 Gross vs. net presentation of UTB liabilities with NOLs Example reporting of liabilities after ASU GAAP v. FERC Assumes $13,072 NOL carryforward for federal and state purposes $5,000 net DTA $4,575 federal DTA, $654 state DTA, $229 federal DTL (on state DTA) GAAP FERC DTA or (DTL) (federal and state gross) Federal DTA or (DTL) for state liability or asset Taxes accrued (liability for UTB) DTA or (DTL) (federal and state gross) Federal DTA or (DTL) for state liability or asset Liability Tax position for UTB Federal credit Netted (100) Repairs Netted 46 (1,046) 46 NOL carryforward 4,083 (229) 5,229 (229) Total 4,083 (183) (100) 4,183 (183) Copyright 2015 Deloitte Development LLC. All rights reserved. 39

21 Disclosures tabular rollforward Example Total State, perm, credits Temp items Unrecognized tax benefits, opening balance $XX $AA $BB Gross increases tax positions in prior periods XX AA BB Gross decreases tax positions in prior periods (XX) (AA) (BB) Gross increases current period tax positions XX AA BB Settlements (XX) (AA) (BB) Lapse of statute of limitations (XX) (AA) (BB) Unrecognized tax benefits, ending balance $XX $AA $BB Use in Form 10-K Use in FERC Form No. 1 Note: This annual disclosure is not required during interim periods, but quarterly MD&A disclosure of (de)recognition of material amounts may be required Copyright 2015 Deloitte Development LLC. All rights reserved. 40 FERC reporting Tax benefit related to interest expense Special Instructions Accounts 409.1, and B. The accruals for income taxes shall be apportioned among utility departments and to Other Income and Deductions so that, as nearly as practicable, each tax shall be included in the expenses of the utility department or Other Income and Deductions, the income from which gave rise to the tax. The tax effects relating to Interest Charges shall be allocated between utility and nonutility operations. The basis for this allocation shall be the ratio of net investment in utility plant to net investment in nonutility plant. Copyright 2015 Deloitte Development LLC. All rights reserved. 41

22 FERC reporting Changes in tax methods of accounting Instructions to Statement of Income for the Year 13. Enter on page 122 a concise explanation of only those changes in accounting methods made during the year which had an effect on net income, including the basis of allocations and apportionments from those used in the preceding year. Also, give the appropriate dollar effect of such changes. Pages = Notes to Financial Statements FERC audit report findings and recommendations Copyright 2015 Deloitte Development LLC. All rights reserved. 42 Tangible property regulations Normalization v. flowthrough of deferred tax expense In general, the book/tax differences arising from implementation of the tangible property regulations regarding capitalization are unprotected basis differences Not subject to the Section 168 deferred tax normalization requirements Accounting method changes to implement the tangible property regulations regarding dispositions are subject to the deferred tax normalization requirements Public utility commission notification requirements in Rev. Proc for 16 method changes related to depreciation or dispositions Significance of historical deferred tax accounting and ratemaking policies Proposals to normalize Section 481(a) adjustments (cumulative catch-up adjustments) associated with implementing the regulations or safe harbor guidance but flowing through ongoing tax benefits Copyright 2015 Deloitte Development LLC. All rights reserved. 43

23 Normalization method of accounting Adjustments to reserve Reg. Sec (l)-1(h)(2) (2) Adjustments to reserve (i) The taxpayer must credit the amount of deferred Federal income tax determined under subparagraph (l)(i) of this paragraph for any taxable year to a reserve for deferred taxes, a depreciation reserve, or other reserve account. The taxpayer need not establish a separate reserve account for such amount but the amount of deferred tax determined under subparagraph (l)(i) of this paragraph must be accounted for in such a manner so as to be readily identifiable. With respect to any account, the aggregate amount allocable to deferred tax under section 167(l) shall not be reduced except to reflect the amount for any taxable year by which Federal income taxes are greater by reason of the prior use of different methods of depreciation under subparagraph (l)(i) of this paragraph. An additional exception is that the aggregate amount allocable to deferred tax under section 167(l) may be properly adjusted to reflect asset retirements or the expiration of the period for depreciation used in determining the allowance for depreciation under section 167(a). Copyright 2015 Deloitte Development LLC. All rights reserved. 44 Adjustments to DTLs for Section 481(a) adjustments Rev. Proc As of the beginning of the year of change, the taxpayer will adjust its deferred tax reserve account or similar account in the taxpayer s regulatory books of account by the amount of the deferral of federal income tax liability associated with the Section 481(a) adjustment applicable to the public utility property subject to the application Within 30 calendar days of filing the federal income tax return for the year of change, the taxpayer will provide a copy of the completed application to any regulatory body having jurisdiction over the public utility property subject to the application. Public utility commission notification requirement for 16 of the listed automatic accounting method changes Copyright 2015 Deloitte Development LLC. All rights reserved. 45

24 Tangible property regulations Flowthrough accounting example Original cost 1,000 1,000 <Acc. Dep.> <200> <500> Books Tax Temp. Diff. DTL (40%) Adjusted basis normalized 481(a) adjustment - <500> Adjusted basis What s the journal entry to record the additional DTL? Regulatory Asset 333 Complies with the normalization requirements Eligible for FT Copyright 2015 Deloitte Development LLC. All rights reserved Deferred Tax Liability (account 282) Deferred Tax Liability (account 283) 133 May not comply with the Deferred Tax Benefit normalization 120 requirements Interim period tax provisions Discussion topics Use of ASC forecasted annual tax rates Fiscal year test periods Interim period regulatory reporting Allocation of total interim period tax provision between current and deferred components Estimating changes in deferred tax assets/liabilities Copyright 2015 Deloitte Development LLC. All rights reserved. 47

25 Copyright 2015 Deloitte Development LLC. All rights reserved. 48 This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. Copyright 2015 Deloitte Development LLC. All rights reserved. 49

26 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2015 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited