The term regulatory asset refers to specific costs that a government agency permits a regulated utility to defer to its balance sheet. Accounting for regulatory assets allows public utilities to defer the recognition of certain costs; bypassing the income statement in the near term by moving these costs to the balance sheet.
FASB's SFAS 71 Accounting for the Effects of Certain Types of Regulation, provides GAAP guidance to those accounting standards that are unique to regulated utilities. Specifically, these companies may be permitted to defer certain costs to their income statement under certain conditions. Generally, regulated utilities may defer the recognition of certain costs if it is probable that through the ratemaking process there will be a corresponding increase to future rates.
In practice, companies will defer costs to a regulatory asset account if a written order is received from their regulators. This order must either implicitly or explicitly allow for such treatment, and the company must believe there is a probability of recovery. However, regulatory assets will be subject to prudence reviews as part of the ratemaking process and there is a possibility these costs will be denied. If that occurs, the costs would be immediately charged to income.
Deferring costs to a regulatory asset account allows the company to spread the expense over a longer period of time, thereby keeping rates low. Companies are usually allowed to defer items such as gas plant remediation costs, retirement obligations, storm damage and repair expenses, under-recovery of costs, energy efficiency programs, stimulus expenses, as well as certain fuel costs.
Regulatory assets are reported as part of the company's Form 10-K filing and will be classified into two groups. Current regulatory assets are those the company expects to recover through revenue sources in one operating cycle or one year, while non-current regulatory assets are expected to be recovered over a longer timeframe.
Management's Discussion and Analysis, Critical Accounting Estimates, Liquidity and Capital Resources, variable interest entities, regulatory liabilities, financing receivables, asset retirement obligation