Power & Utility Revenue Recognition Task Force Issue status update August 2017
Implementation update Tariff-based sales Scope clarification Carve-out of alternative revenue programs led some to question whether any tariff sales were in scope of ASC 606 Task Force consensus that tariff-based sales are in scope For at-will customers, current contract limited to services rendered to date Some term contracts may exist (e.g., some commercial and industrial customers) RRWG and FinREC agreed with Task Force consensus and issue was released for exposure in Q1 2017 Public exposure period ended May 1, 2017 Final paper cleared at July 2017 FinREC meeting Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 1
Blend-and-extend ( B&E ) contract modifications Does a B&E modification represent a new agreement or a separate extension? If a separate extension, is a financing element present? Task Force did not reach consensus on B&E treatment Issue was elevated to the FASB staff for a Technical Inquiry ( TI ) TI conducted FASB staff believes both views can be supported Pick an approach and apply consistently; disclose approach if material to financial statements B&E does not lead to automatic financing conclusion Next step is RRWG review scheduled for August 17, 2017 RRWG expected to accept FASB staff position To be discussed at September 2017 FinREC meeting Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 2
Step vs. strip pricing Both pricing conventions common in the industry Historical practice of recognizing revenue at the invoice price Can same performance result in different revenue profiles? Task Force consensus that different revenue profiles can be supported Straight-line pattern consistent with treatment as a single performance obligation ( PO ) satisfied over time and application of an output method based on units delivered Step (or shaped) pattern supportable if contract price is consistent with value to customer in the specified delivery period (based on application of the invoice practical expedient) RRWG agreed with Task Force Discussed with FinREC in July 2017 Targeting public exposure in September Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 3
Variable consideration Dealing with various forms of price and volume variability Application of the constraint guidance (ability to fully constrain?) Analysis in TRG Paper No. 48 on customer options for additional goods and services Volume sold dictated by customer s customer General view that many forms of price variability can be linked to discrete delivery of power Task Force view that volume variability will often represent optional purchases (e.g., requirements contract) and that pricing often represents a marketing offer as opposed to granting a material right View applies whether volumes are dictated by customer or customer s customer (e.g., utility buying from independent power producer to serve end-user demand) Discussed with RRWG in April 2017 - RRWG agreed with Task Force Discussed with FinREC in July 2017 Issued for public comment on August 1 60 day comment period Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 4
Partial terminations Timing of recognition immediate or over remaining term? Can payment amount be objectively linked to the terminated deliveries? Was modification guidance in ASC 606 built to accommodate partial terminations? Task Force consensus that payments received for partial termination should be recognized immediately if objectively linked to terminated periods/deliveries RRWG disagreed with Task Force Issue was elevated to FASB staff for a TI TI conducted FASB staff agreed with RRWG; seller must apply modification guidance to a partial termination, which will generally result in deferred recognition Answer applies to payments made or received in connection with a partial termination Next step is RRWG review scheduled for August 17, 2017 RRWG expected to accept FASB staff position To be discussed at September 2017 FinREC meeting Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 5
Bundled arrangements (e.g., power purchase agreements, green power forwards) General: Identification of separate performance obligations Allocation of transaction price Timing of revenue (customer control) Focus on electricity, capacity, and renewable energy credits ( RECs ) (see next slide for REC update) Capacity specific: Stand ready = service Application of the series guidance Time-based measure of progress Task Force consensus on treatment Focus on whether items transfer to customer in the generation month Consider level of integration of products/services when assessing single vs. multiple POs; capacity and electricity will often be viewed as separate POs Capacity and electricity each treated as series and recognized in delivery/standready month; both eligible for the invoice practical expedient if conditions are met Discussed with RRWG in April 2017 RRWG agreed with Task Force Discussed with FinREC in July 2017 Targeting public exposure in September Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 6
Sales of self-generated (yet-to-be-certified) RECs PO satisfied over time or point in time? Impact of certification lag? Transfer of control upon generation of electricity or certification? Task Force consensus that RECs represent a point in time PO and revenue should be recognized upon generation of associated electricity Emphasis on completion of all obligations by seller, present right to payment and analogy to customer acceptance guidance (objective evidence of acceptance) Discussed with RRWG in April 2017 RRWG agreed with Task Force Discussed with FinREC in July 2017 FinREC agreed with Task Force but also felt that recognition upon certification could likely be supported depending on facts and circumstances; issue paper will be modified to reflect this view Targeting public exposure in September Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 7
Contributions in aid of construction ( CIAC ) Revenue vs. offset to property, plant, and equipment? Is CIAC akin to a reimbursement of set-up costs under ASC 606? Potential for significant change in practice if required to be reflected as revenue Potential for difference between regulatory accounting and GAAP Task Force reached consensus that CIAC is not required to be treated as revenue January 2017 P&U industry reps invited to attend FASB roundtable on preproduction costs Issue was subsequently elevated to the FASB staff for a TI TI conducted FASB agreed that CIAC in a regulated environment can continue to be treated as a reduction of utility plant (i.e., out of scope of ASC 606) Focus on nature of activity (nonrevenue) and inability to negotiate CIAC amount Next step is RRWG review scheduled for August 17, 2017 RRWG expected to accept FASB staff position To be discussed at September 2017 FinREC meeting Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 8
Stand-alone selling price ( SASP ) for commodities Alternatives to the forward curve? Replaced series for storable commodities issue Concern that forward curve would be de facto SASP for all commodity forwards satisfied at a point in time (i.e., those ineligible for the series guidance) Issue was elevated to the FASB staff for a TI TI conducted FASB indicated that forward curve is not required to be used for SASP; invoice price may be best indicator of SASP depending on facts and circumstances Next step is RRWG review scheduled for August 17, 2017 RRWG expected to accept FASB staff position To be discussed at September 2017 FinREC meeting Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 9
Alternative revenue programs ( ARP ) Separate presentation requirement for ARP revenue (new requirement) Proper presentation of revenue when billed through tariff (occurs after initial recognition of ARP revenue)? Recycle through ASC 606 revenue or treat as a balance sheet event (e.g., recovery of regulatory asset)? Task Force consensus that either approach should be acceptable RRWG did not conclude due to concerns about diversity Issue was elevated to the FASB staff for a TI TI conducted FASB staff believes both approaches can be supported Pick an approach and apply consistently; disclose approach if material to financial statements Next step is RRWG review scheduled for August 17, 2017 RRWG expected to accept FASB staff position To be discussed at September 2017 FinREC meeting Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 10
Collectibility Regulated utility sales to low-credit quality customers Step 1 of ASC 606 contract consideration must be probable of collection Ability to socialize credit losses through rates (i.e., a regulatory backstop ) Price concession? Task Force view that regulatory backstop should be part of overall assessment RRWG expressed double-counting concern Group of Task Force and other industry representatives met with FASB in March 2017 to discuss collectibility broadly Focus on full arsenal of credit mitigation techniques available to regulated utilities and purpose for collectibility screen (ensure transactions are valid and genuine ) FASB agreed with industry analysis and indicated that ASC 606 collectibility screen was generally consistent with current requirement that collectibility be reasonably assured (i.e., should not lead to change in practice) Task Force has lowered priority of this item; will consider addressing in the future if warranted based on constituent feedback Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 11
Sales of nonfinancial assets Replacing real estate sale rules Partial sales unit of account? FASB issued ASU 2017-05 in February 2017, which addresses partial sales of nonfinancial assets Task Force has dropped the issue and has no further plans to address Copyright 2017 Deloitte Development LLC. All rights reserved. Power & Utility Revenue Recognition Task Force 12
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