Chapter 12 — Other Investments and Special Situations

12.5 Regulated Entities

ASC 980-740

Income Taxes Applicable to Regulated Entities

25-1 For regulated entities that meet the criteria for application of paragraph 980-10-15-2, this Subtopic specifically:

Prohibits net-of-tax accounting and reporting
Requires recognition of a deferred tax liability for tax benefits that are flowed through to customers when temporary differences originate and for the equity component of the allowance for funds used during construction
Requires adjustment of a deferred tax liability or asset for an enacted change in tax laws or rates.

25-2 If, as a result of an action by a regulator, it is probable that the future increase or decrease in taxes payable for (b) and (c) in the preceding paragraph will be recovered from or returned to customers through future rates, an asset or liability shall be recognized for that probable future revenue or reduction in future revenue pursuant to paragraphs 980-340-25-1 and 980-405-25-1. That asset or liability also shall be a temporary difference for which a deferred tax liability or asset shall be recognized.

25-3 Example 1 (see paragraph 980-740-55-8) illustrates recognition of an asset for the probable revenue to recover future income taxes.

25-4 Example 2 (see paragraph 980-740-55-13) illustrates adjustment of a deferred tax liability when the liability represents amounts already collected from customers.

12.5.1 Regulated Entities Subject to ASC 980

Regulated entities preparing financial statements under U.S. GAAP would apply ASC 740 when determining the tax amounts to record. In addition, ASC 980-740 relies on the general standards of accounting for the effects of regulation in ASC 980 and, in a manner consistent with those standards, requires recognition of (1) an asset when a DTL is recognized if it is probable that future revenue will be provided for the payment of those DTLs and (2) a liability when a DTA is recognized if it is probable that a future reduction in revenue will result when that DTA is realized.

ASC 980-740-25-1 prohibits net-of-tax accounting on the basis that commingling assets and liabilities with their related tax effects confuses the relationship among the various classifications in financial statements. Therefore, in accordance with ASC 980-740-25-1, regulated entities should adjust the reported net-of-tax amount of construction in progress and plant in service to the pretax amount.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.