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What is a Regulatory Asset?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 September 2016
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    Conjecture Corporation
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A regulatory asset is an asset that is owned by a utility, but is controlled or regulated by a government regulatory agency. In most instances, the agency grants the utility the privilege of deferring the costs or revenues associated with the asset to the company’s balance sheet. This creates a situation in which the asset does not have to be posted on the income statement and charged against either the revenues or the expenses for the period covered by that statement.

The concept of a regulatory asset is recognized by a number of national revenue agencies around the world. One of the benefits of this type of asset reporting is that businesses get to maintain the asset on the balance sheet for as long as necessary. Only when costs associated with the asset are incurred, or when recoveries from customers that are relevant to the asset are realized is the value of the asset considered recognizable and recorded on the income statement. This creates a situation where the value of the asset does not have to be considered income or an expense for tax purposes until there is actually some activity with that asset.

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By recording a regulatory asset on the company balance sheet, there is no opportunity for the asset to be overlooked or omitted from the overall accounting process. The asset remains accounted for in some manner, which places the practice in compliance with generally accepted accounting principles as understood in countries like the United Kingdom, the United States, and Canada. One of the practical benefits associated with reporting the regulatory asset on the balance sheet is that the entries necessary to accurately report recoveries from customers or costs related to the asset when and as they occur are kept to a minimum.

In nations where a regulatory asset may be carried by a utility, most often an electrical or power company, the regulatory agency for that country determines the criteria that the asset must meet to qualify for this type of exemption from inclusion on the income statement. Since that criteria may vary slightly from one country to another, it is important to work with the regulatory agency where the business is based in order to make sure that any asset listed in this manner does comply with all relevant regulations. Doing so will help to ensure the accounting books are considered accurate and that the income that is reported for tax purposes is in accordance with prevailing guidelines.

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miriam98
Post 3

@nony - I agree, I think there would be some latitude in defining when the active period was for that asset.

The reality is that there are certain businesses that simply have to work hand in hand with regulatory agencies in order to get up and running.

You mentioned utilities. I believe the telecommunications industry is another business in that category – I worked in that industry for ten years, and they were up on regulations constantly. You can’t lay down thousands of miles of fiber without getting permits and such from the government.

Another industry would be oil and gas. I am guessing that a lot of their infrastructure would come under the heading of regulatory assets as

well.

The only downside that these businesses face is that they have to keep up with current regulations, since their assets have been somewhat tethered, in a sense, to government rules. I assume that they would stay abreast of current laws through regulatory monitoring and things like that.

nony
Post 2

@everetra - In general I agree, but what constitutes activity with the asset?

Are you saying that if a new power plant opens up, the moment they get their first customer they are obligated to put all of their regulatory assets in the income or expense columns of their ledger?

The article uses the phrase “recoveries from customers that are relevant to the asset,” which seems to leave some room for interpretation about when that relevant period occurs.

In either case, I am glad that a regulatory management asset enjoys a certain immunity, if you will, from tax liabilities for a certain period of time.

Otherwise, it would be difficult for very capital intensive companies to get up and running quickly. I don’t think businesses which provide viable services to thousands or millions of people should be penalized the moment that they open their doors.

everetra
Post 1

My company sells software to electrical utilities, and these are definitely businesses with regulatory assets. Utilities require huge infrastructure for their substations, power plants, transformers and so forth.

However, the key distinction that the article makes about how those assets impact the bottom line doesn’t apply to most utilities in the United States or those that we serve, in my opinion.

By that I am referring to the article’s statement that the asset is not incurred as an expense until some activity takes place with that asset. I would have to assume that all assets associated with our customers have already been put down on the ledger as income or expenses, because these utilities have been in business for quite some time.

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