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  • 1. Power & Utilities Whitepaper Series International Financial Reporting Standards: Income Tax Considerations for Power & Utilities Several foreign-owned U.S. power and utility (P&U) companies have converted to International Financial Reporting Standards (IFRS) for shareholder reporting purposes. However, most U.S.-based P&U companies are just beginning to consider how a conversion from U.S. generally accepted accounting principles (U.S. GAAP) would affect their Contacts financial reporting. The many P&U companies subject to rate regulation by governmental bodies face additional IFRS Solutions Center: issues and challenges that companies in other industries do not face. Further, it is possible that rate-regulated D.J. Gannon companies, already subject to regulatory accounting and reporting standards that differ from U.S. GAAP and National Leadership Partner Securities and Exchange Commission (SEC) reporting requirements, may be required to continue using historical IFRS Solutions Center Deloitte & Touche LLP regulatory accounting and reporting rules based on U.S. GAAP beyond the time that it becomes mandatory to use +1 202 220 2110 IFRS for shareholder reporting purposes. dgannon@deloitte.com Industry Contacts: There will be two major effects of a conversion to IFRS on corporate tax functions. The differences between IAS 12, For more information, Income Taxes, and FAS 109, Accounting for Income Taxes, will affect how companies account for income taxes on please contact: their income statements and balance sheets. In addition, the many pre-tax differences between U.S. GAAP and IFRS Greg Aliff will likely result in additional book-tax differences that will need to be considered for estimated tax payments, tax Vice Chairman U.S. Energy & Resources return preparation, and calculation of deferred tax provisions and assets/liabilities. Leader Deloitte LLP Introduction to the accounting standard +1 703 251 4380 galiff@deloitte.com IAS 12 and FAS 109 are conceptually similar, requiring a comprehensive balance sheet approach to accounting for income taxes, with deferred taxes provided on most temporary differences. Each standard generally requires Bill Graf Partner measurement of income taxes at enacted tax rates and allows for recognition of tax benefits at a “more-likely-than- Deloitte & Touche LLP not” amount. However, there are several areas of significant difference between the two existing standards and +1 312 486 2673 wgraf@deloitte.com numerous differences in the details, discussed more fully below. Andy Hickey As part of the conversion plan to IFRS by U.S. companies, the FASB and IASB are collaborating on the direction of Partner Deloitte & Touche LLP accounting for income taxes. The two standards boards had been working on a convergence process whereby it +1 212 436 5322 was anticipated FAS 109 would take on some characteristics of IAS 12 and vice versa. This convergence process ahickey@deloitte.com would have required adoption of a revised FAS 109 standard, after the short-term convergence process was Brian Murrell Partner completed and both standards were updated. Conversion to the revised IAS 12 would occur through the process Regulatory & Capital of general conversion to IFRS. Markets Consulting Deloitte & Touche LLP The timing and nature of the income tax convergence process is now uncertain due to the announcement by the +1 212 436 4805 bmurrell@deloitte.com FASB in August 2008 that it had indefinitely suspended its convergence efforts. The IASB process of amending Mike Reno IAS 12 is ongoing and a draft of the revised standard is expected to be published in early 2009. At this point, it is Partner, Deloitte Tax LLP uncertain whether or when a revised version of FAS 109 will be issued. +1 202 378 5027 mreno@deloitte.com Differences in accounting for income taxes Jan Umbaugh Following is a comparison of U.S. GAAP and IFRS related to accounting for income taxes under the current Partner Deloitte & Touche LLP standards as well as a comparison of the current FAS 109 and the expected revised version of IAS 12 based on +1 561 962 7706 informal direction provided by the IASB in the project convergence workplan. In addition, differences between the jumbaugh@deloitte.com general rules of FAS 109, and FAS 109 applicable to rate-regulated P&U companies due to the overlay of FAS 71, David Yankee Partner, Deloitte Tax LLP Accounting for the Effects of Certain Types of Regulation, as well as the regulatory reporting rules pertaining to +1 312 486 9842 accounting for income taxes, will also be described. The extent to which tax-related regulatory assets and liabilities dyankee@deloitte.com prescribed under FAS 71 will be allowable under IFRS is currently being considered by the IASB. Deloitte Center for Energy Solutions
  • 2. Uncertain Tax Positions Under U.S. GAAP, with the promulgation of FIN 48, Accounting for Uncertainty in Income Taxes, benefits of uncertain tax positions are only recognized when the probability of a tax position being sustained rises to a more- likely-than-not level. This is a two-step approach requiring both recognition based upon a more-likely-than-not threshold and then measurement of items meeting that threshold. This asset approach measures the tax benefit at an amount using a cumulative probability model. Interest and penalties accrued for uncertain tax positions can be classified as income taxes or as interest and penalties for income statement and balance sheet purposes under FIN 48. Currently, IFRS does not provide specific guidance related to accounting for uncertainty in income taxes. Absent specific guidance, most companies employ the principles of IAS 37, Provisions, Contingent Liabilities and Contingent Assets. Under this guidance, amounts of the recorded probable liability are determined using management’s best estimate, similar to the previous U.S. GAAP treatment of income tax reserves under FAS 5, Accounting for Contingencies. The IAS 12 exposure draft is expected to specifically address uncertain tax positions, however, it is expected to remain a divergent area between IFRS and U.S. GAAP. At this time, it is tentatively anticipated the IASB may change to a single-step probability-based weighted-average measurement model. In this model there is no recognition threshold; therefore, even positions not meeting the more-likely-than-not standard will be recognized and measured under IAS 12. In addition, IASB is expected to increase the required financial statement disclosures related to unrecognized tax benefits, which may require disclosure requirements more similar to those required under FIN 48. The different amounts of recognized tax benefits under the three measurement approaches are illustrated below for an uncertain tax position assumed to satisfy the FIN 48 recognition standard. Illustration: Below is an example of the amounts of tax benefit that would be recognized under IAS 37, FIN 48, and the method expected to be prescribed by the IAS 12 exposure draft. Assume the FIN 48 recognition standard of more-likely-than-not is met. Individual Probability Cumulative Probability Amount Sustained Weighted Probability A B C D=AxC 0% 0% $1,000 $0 10% 10% 750 75 40% 50% 500 200 30% 80% 250 75 20% 100% 0 0 $350 IAS 37: best estimate (amount in C for the highest likelihood in A) = $500 FIN 48: largest tax benefit MLTN to be realized (amount in C when B > 50%) = $250 Possible future IFRS approach: weighted average of probable outcomes (total of D) = $350 In Docket No. AI07-2-000, Accounting and Financial Reporting for Uncertainty in Income Taxes, (May 25, 2007), the Federal Energy Regulatory Commission (FERC) indicated that two aspects of FIN 48 are not permissible for regulatory reporting purposes and, thus, result in GAAP/FERC balance sheet and income statement classification differences. These areas are: • Interest and penalties For FERC reporting purposes, interest and penalties related to tax deficiencies should be charged to Account 431, Interest Expense and Account 426.3, Penalties, respectively. Further, classification of interest and penalties on tax deficiencies as income taxes is not permitted. Oil pipeline companies should charge interest expense and penalties related to tax deficiencies to Account 660, Miscellaneous Income Charges, and similarly exclude such amounts from classification as income taxes for regulatory accounting and reporting purposes. The FERC position regarding the classification of deferred tax liabilities related to uncertain temporary items results in GAAP/FERC balance sheet and income statement classification differences for regulated P&U companies that have opted to account for interest and penalties as income taxes for shareholder reporting purposes under U.S. GAAP.
  • 3. • Classification with respect to deferred tax liabilities related to uncertain temporary items FERC described the FIN 48 classification of deferred tax liabilities related to uncertain temporary items as frustrating the important measurement objective of pre-FIN 48 deferred tax liabilities, as used in determining rate base. FERC continues to use the pre-FIN 48 definition of temporary difference and indicates that recognition of a separate liability for any uncertainty related to temporary differences is unnecessary. The FERC position results in GAAP/ FERC balance sheet and income statement classification differences. It is possible that accounting for uncertainty in income taxes could remain a difference between shareholder reporting and regulatory reporting after a conversion to IFRS. Assuming no change in the FERC reporting requirements, it is likely that there will continue to be differences in accounting for uncertain tax positions for shareholder reporting and regulatory reporting purposes even after a conversion to IFRS. Balance Sheet Classification of Deferred Tax Assets and Liabilities Under U.S. GAAP, deferred assets and liabilities are generally classified as current or non-current in accordance with the classification of the underlying balance sheet account with the book/tax difference. However, under IAS 12, all deferred tax balances are classified as non-current. At this time, it is anticipated that the U.S. GAAP methodology will be adopted for IFRS purposes. The balance sheet classification of deferred tax assets and liabilities is another area in which there currently is a GAAP/FERC balance sheet classification difference. Under Docket No. AI93-5, Accounting for Income Taxes (April 23, 1993), the entire deferred tax liability and asset balances should be recorded in Accounts 190 (Accumulated Deferred Income Taxes), 281 (Accumulated Deferred Income Taxes – Accelerated Amortization Property), 282 (Accumulated Deferred Income Taxes - Other Property) or 283 (Accumulated Deferred Income Taxes – Other), as appropriate, and classified as non-current for regulatory accounting purposes. Although the current IFRS is similar to the FERC reporting standard, it appears that differences between shareholder and regulatory reporting will exist by the time U.S. enterprises convert to IFRS. Measurement of Deferred Tax Assets and Liabilities – Tax Rate The use of enacted, rather than historical, tax rates to measure deferred tax assets and liabilities is an example of a conceptual similarity between FAS 109 and IAS 12. However, there are differences in the details between the two standards and the ratemaking practices embodied in FAS 109 will need to be addressed during IFRS conversion by regulated P&U companies. FAS 109 mandates that an enterprise use rates that have been enacted. The preservation of historical tax rates rather than only reflecting enacted tax rates in setting rates (prices) by regulators is reflected in the financial reporting of P&U companies subject to FAS 71. In the case of a reduction in corporate tax rates where it is probable that the “excess” deferred tax liability must be returned to ratepayers, regulated P&U companies measure the deferred tax assets and liabilities using the enacted tax rates and establish a regulatory liability for amounts that will be refunded or otherwise used to reduce prices. Further, regulatory liabilities (or regulatory assets, in the case of a tax rate increase for which it is probable that the deficiency in net deferred tax liabilities will be recovered from ratepayers) are temporary differences, resulting in the tax-on-tax gross-up of the difference between deferred taxes at the historical tax rates and at the enacted tax rates. Under IFRS, an enterprise must use the tax rate that has been enacted or “substantively enacted” to calculate deferred income taxes. Under IAS 12, a tax rate is substantively enacted if the law is at a stage where further stages are merely administrative. It is anticipated that the IASB will amend IAS 12 to require that enacted tax rates be used in U.S. jurisdictions while retaining its present rule regarding the use of substantively enacted rates for measurement of deferred tax assets and liabilities for other jurisdictions. Whether the shareholder or regulatory reporting continues to reflect the ratemaking economics in these situations may depend in part on the IASB taking action regarding the status of regulatory assets and liabilities under IFRS and whether the regulators convert to IFRS. The excess deferred income taxes created by the reduction in corporate tax rate by the Tax Reform Act of 1986 are protected by the normalization requirements of the Internal Revenue Code. These rules govern whether excess deferred taxes reduce regulatory tax expense and rate base and the extent to which either may be reduced in a given year. The normalization requirements apply to the manner in which regulated rates are set as well as to periodic reporting in a regulated P&U company’s regulatory books of account. As IFRS conversion developments occur, regulated P&U companies must consider whether their regulatory books of account will remain in compliance with the normalization requirements upon implementation of the forthcoming changes. It is possible that regulated P&U companies may need to seek private letter rulings or, as an industry group, approach Treasury or the IRS to modify the normalization requirements to be compatible with accounting for income tax changes under IFRS.
  • 4. Investment Tax Credit (ITC) Under U.S. GAAP, an entity may recognize the benefits of investment tax credits realized using either the deferral method or the flow-through method. The deferral method is considered the preferred method under U.S GAAP because it matches recognition of the income tax benefit with depreciation expense of the associated property. The flow-through method, whereby the credit reduces income tax expense in the year the credit arises, is a permissible method for U.S. GAAP purposes. Most regulated P&U companies use the deferral method. In general, the deferral method is required pursuant to the normalization rules for ITC claimed on property placed in service after 1970. There is no specific guidance for the treatment of ITC under IFRS. The accounting for ITC is explicitly beyond the scope of IAS 12 and IAS 20, Accounting for Governmental Grants and Disclosure of Governmental Assistance. IAS 34, Interim Financial Reporting, indicates that certain tax benefits and credits that are similar to government grants may be recognized in full in an interim period. This may imply that the ITC is recognized in full in the year in which it arises. Accounting for ITC is not currently within the scope for the short-term income tax convergence project. Absent specific IFRS guidance, regulated P&U companies must consider how the principles of various IFRS pronouncements apply and, depending on their decisions, whether their regulatory books of account will remain in compliance with the normalization requirements upon IFRS conversion. It is possible that regulated P&U companies may need to seek private letter rulings or, as an industry group, approach Treasury or the IRS to modify the normalization requirements to be compatible with accounting for income tax changes under IFRS. Flow-through Accounting Flow-through accounting for deferred taxes generated in certain regulatory jurisdictions and related to certain types of temporary differences results in significant effective tax rate reconciliation adjustments for many P&U companies subject to FAS 71. This practice results in significant regulatory assets for many P&U companies, including those utilities that ceased the practice of originating differences years ago, but are still flowing back the impact of prior flow-through. This regulatory accounting practice is not addressed in IFRS and, of course, may be affected in part by the decision of the IASB regarding the status of regulatory assets and liabilities under IFRS and whether the regulators convert to IFRS. These future events will determine whether the shareholder or regulatory reporting continues to reflect the ratemaking economics in these situations or the differences between ratemaking and financial statements with respect to flow-through accounting will revert to a disclosure item as under APB 11, Accounting for Income Taxes. Balance Sheet Classification of Valuation Allowances Under U.S. GAAP, an enterprise recognizes the gross amount of deferred tax assets, with reduction of such amount by establishment of a contra-asset valuation allowance for the amount for which realization is not probable. Under IFRS, an enterprise must recognize the deferred tax asset amount for which realization is probable, rather than using a separate valuation allowance. As of the current time, it is expected that the forthcoming IAS 12 exposure draft will provide guidance similar to that of FAS 109. Additionally, the IASB has tentatively indicated that the IASB definition of “probable” means “more likely than not” as utilized in FAS 109. Separate Company Financial Statements The accounting for income taxes in U.S. GAAP separate company financial statements of subsidiaries is complicated because, despite the apparent permissible allocation alternatives in paragraph 40 of FAS 109, the SEC and FERC have preferred methods and their preferred methods differ. FAS 109 does not prescribe a single allocation method and instead states that allocation of the consolidated income tax provision to members of the consolidated group should be “systematic, rational and consistent with the broad principles established by this Statement.” FAS 109 describes a “separate return” approach as a method that meets this requirement. Under a separate return approach, each member’s tax provision is calculated as if it were a separate taxpayer filing a separate return. The sum of the amounts allocated to the individual members of the group may not equal the consolidated amount. Accordingly, a consolidated entry may be required under this approach. Per SEC Staff Accounting Bulletin Topic 1-B-1 (No. 55), Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity (Question 3), and numerous SEC Comment Letters, the separate return approach described in FAS 109 is preferred by the SEC. However, FERC requires the “stand-alone” approach for determining income tax expense for entities included in a consolidated return (AI93-5-000 (April 23, 1993)). Under a stand-alone approach, the sum of the individual income tax provisions would equal the consolidated income tax provision as the consolidated provision and its components are allocated to the group based on each member’s contribution to the consolidated total. The “stand-alone” approach is similar to what some companies refer to as the “pro-rata” approach and can be viewed as a “top- down” or “parent-company-down” approach. Although this method would appear to be permissible under FAS 109, it is not the method preferred by the SEC. If the stand-alone method is used for U.S. GAAP reporting, the company should clearly describe the method used.
  • 5. If a company uses the separate return approach for financial reporting purposes, the FERC requirements will not be met. In such a situation, if there are material differences, to avoid a FERC compliance issue, an adjustment is required in the FERC Form 1 or 2. On the other hand, if a company uses the stand-alone approach, it will satisfy the FERC requirements, but may not meet the SEC requirements. The accounting for income taxes in IFRS separate company financial statements of subsidiaries is not addressed by IAS 12. It is expected that the forthcoming IAS 12 exposure draft will provide guidance similar to that of paragraph 40 of FAS 109. It is not clear whether differences between shareholder reporting and regulatory reporting of tax provisions in separate company financial statements will continue after a conversion to IFRS. Interim Reporting Under APB 28, Interim Financial Reporting, and FIN 18, Accounting for Income Taxes in Interim Periods, the U.S. GAAP guidance on interim period reporting, use of the forecasted annual effective tax rate by the entity is required. During interim periods, the estimated annual effective tax rate is applied to year-to-date income to compute the year-to-date tax applicable to this income. Amounts related to significant unusual or infrequently occurring items, prior period items, discontinued operations, extraordinary items and cumulative effects of changes in accounting are not included in the calculation. Rather, the income tax expense or benefit related to these discrete items is recognized in the interim period in which the items occur. IAS 34 requires utilization of the best estimate of the weighted-average annual income tax rate that is expected for the full financial year. Similar to U.S. GAAP, under IFRS there is an exception for tax benefits that relate to a one- time event. There is also an IFRS exception for tax benefits that are akin to governmental grants. Tax Base U.S. GAAP does not provide a definition for tax base. Companies with tax basis balance sheets, as opposed to companies that focus on cumulative temporary differences without taking the final step of using these amounts to associating these differences with specific balance sheet items, have effectively formed a view as to how to calculate the tax basis in their assets and liabilities. Under IFRS, determination of tax base is dependent on the manner of expected recovery and numerous examples of how to compute tax base in specific assets and liabilities with book/tax differences are provided in IAS 12. It is anticipated that the accounting standards boards may decide to adopt a new joint definition of tax base to be utilized in the future. The current IFRS definition of tax base is conceptually consistent with the definitions inherent in U.S. GAAP-based tax basis balance sheets. This revision to IAS 12 is expected to clarify that the IFRS definition of tax base and reinforce that the formal IFRS definition is the same as the concept of tax basis employed historically in developing a tax basis balance sheet for FAS 109 purposes. Calculation of Tax Benefits Related to Share-based Compensation Under U.S. GAAP, FAS 123R, Share-based Payment, requires that deferred tax assets be recorded for share-based compensation based on the amount of cumulative compensation cost recorded for financial statement reporting purposes. The deferred tax assets generated are measured based on the fair market value of the options on the grant date(s). Although a stock option may be “out of the money,” a deferred tax asset is recorded under U.S. GAAP and is generally not adjusted for changes in the fair value of the underlying stock prior to the exercise or expiration of the option. The benefit of the excess tax deduction over financial statement compensation cost is recorded as an increase to additional paid-in capital (APIC) when the deduction is realized. Any unrealized deferred tax assets are removed through equity or the income statement, dependent on the availability of the APIC pool. Under IFRS, the deferred tax assets recorded for share-based compensation are based on the amount of expected future tax benefit, as measured at the end of each reporting period with reference to the current share price. Thus, in a jurisdiction where the tax deduction is based on intrinsic value, a deferred tax asset is recognized only when the option is “in the money.” Therefore, for those companies that issue compensatory options with a strike price equal to the fair value of the stock on the grant date, appreciation in the value of the stock will be required in order to recognize a tax benefit for the financial statement compensation expense. The tax benefit of the tax deduction in excess of the financial statement compensation expense under IFRS is recorded as a credit to equity. Any deferred tax assets that are not realized are removed through the income statement. Since the tax impact fluctuates with the current share price, unlike the compensation expense recognized in the financial statements, there may be more volatility in the effective tax rate.
  • 6. Accounting differences with income tax impact There exist a multitude of pre-tax accounting differences between U.S. GAAP and IFRS. As many acceptable tax methods of accounting are based on financial accounting methods under U.S. GAAP, conversion to IFRS necessitates assessment of corresponding changes in method of accounting for tax purposes. Key considerations in this process include the permissibility or preferability of the specific financial reporting standards as tax methods. If the pre-tax IFRS methods are permissible and desirable for tax purposes, companies need to assess whether it is necessary to obtain advance consent from the National Office of the IRS for the change in tax method of accounting and determine how the cumulative effect of the change is taken into account for tax purposes. The new IFRS methods of accounting may result in a mandatory change in tax method of accounting (e.g., resulting from the LIFO conformity requirement) or may affect the timing of the recognition of an item for tax purposes (e.g., certain revenue recognition methods that limit tax deferral to the time period in which the deferral persists for book purposes). Methods of accounting for which the tax method of accounting has historically followed the book method, but for which a book-tax difference will exist due to conversion to IFRS, will result in incremental recordkeeping requirements due to the need to preserve the former accounting data historically used for tax purposes in order to maintain the tax method of accounting subsequent to IFRS conversion. Further, a decision as to whether the tax function or another part of the company should maintain the historical calculations needed for tax reporting purposes must be made. Inventory Valuation The cost of inventory under both U.S. GAAP and IFRS generally includes direct expenditures of getting inventories ready for sale, including overhead and other costs attributable to the purchase or production of inventory. IAS 2, Inventories, requires use of either the first-in first-out (FIFO) method or the weighted-average cost method. Further, IFRS requires that the same costing formula be used for all inventories with a similar nature and use to the entity. Most regulated gas distribution utilities have purchased gas adjustment (PGA) or similar clauses to recover gas costs and several of these gas distribution utilities have for years used the last-in first-out (LIFO) method of accounting for gas inventories. During periods of rising prices, the LIFO costing method leads to higher recognized costs of sales and, with PGA clauses, more-timely rate recovery. However, LIFO is not a permitted method of inventory accounting under IFRS. In addition, a LIFO conformity requirement exists for U.S. tax purposes: a taxpayer may not use LIFO for tax purposes unless LIFO is also used for financial reporting purposes. Unless the tax law is changed, LIFO taxpayers will need to revert to a non-LIFO tax method of accounting for tax purposes upon adoption of IFRS for financial reporting purposes. The financial reporting effects of adopting IFRS are charged or credited to retained earnings, but the cumulative effect of a voluntary LIFO termination is recognized in taxable income over four years. P&U sector companies using LIFO will need to discuss with their regulatory commissions whether a change from LIFO will also occur for purposes of setting PGA rates and, if so, whether there will be a transition period. If LIFO is also discontinued for purposes of setting PGA rates, the price charged for gas will be reduced for a period of time to reflect the low cost prior LIFO layers, but rate base will be increased to reflect the more current costs of gas inventory. For companies without PGA clauses, a change from the LIFO method accelerates the payment of taxes because a lower cost of goods sold deduction is recognized for tax purposes due to recapture of the LIFO reserve through recognition of the Section 481(a) adjustment while sales prices are otherwise unaffected. With a PGA clause and a change from LIFO for PGA rate-setting purposes also, there is an adverse dollar-for-dollar impact on cash flow because revenues will be lower to reflect the liquidation of LIFO layers, but there will be no impact on current or deferred tax liability over the four-year Section 481(a) adjustment period. Plant Accounting A conversion to IFRS is expected to change the way U.S. companies account for research and development costs, plant impairments, construction cost reimbursements, asset retirement obligations and interest capitalization (accrual of allowance for funds used during construction (AFUDC)). Further the asset componentization approach under IFRS will cause smaller units of property to be used than normally employed under U.S. GAAP. This will result in several depreciable lives for what may be accounted for as a single asset with a single depreciable life for U.S. GAAP (or tax) purposes. This could increase the likelihood of expenditures related to plant in service being capitalized as opposed to being treated as a repair (period cost). The Treasury and IRS re-proposed regulations regarding capitalization of costs related to tangible assets in March 2008. The regulations cover numerous topics, including the proper unit of account to determine whether a “repair” cost is currently deductible or a capitalizable addition for tax purposes. The regulations are expected to be finalized
  • 7. in 2009 and it is not known whether the new rules will apply prospectively (e.g., to expenditures after a certain date) or in the customary manner in which accounting method changes are implemented for tax purposes (i.e., with a cumulative catch-up adjustment). The calculations pertaining to certain issues covered by the new regulations may be facilitated by a conversion to asset componentization for financial reporting purposes. To the extent there is flexibility available in applying asset compentization principles for IFRS purposes, it would be convenient if the IFRS approach would be such that information needed for the tax analysis under the final capitalization regulations were already available due to use for financial reporting purposes under IFRS. Further, if regulated P&U utilities transition from using AFUDC to using general interest capitalization rules under IFRS, there may be similar opportunities to incorporate the various sub-methods of tax accounting for interest capitalization into the approach to be used for financial reporting purposes. Regulatory Assets and Liabilities Under U.S.GAAP, regulated P&U companies defer costs and recognize liabilities for financial reporting purposes under FAS 71 in a manner consistent with the economics of ratemaking. In most situations, favorable book/tax differences are reported with respect to regulatory assets. In recent years, there have been numerous cases and rulings addressing whether gains deferred as regulatory liabilities for U.S. GAAP purposes may also be deferred for tax purposes. As has been stated, it is uncertain whether regulatory assets and liabilities will be allowed to be recorded under IFRS. Unlike many other pre-tax accounting method changes upon conversion to IFRS, this area may result in fewer book/tax differences. What IFRS conversion means for tax departments of P&U companies Tax departments of P&U companies will need to understand the impact a conversion to IFRS will have on the financial and regulatory accounting for income taxes as well as the calculations of taxable income and the associated tax liability. In addition, tax departments will need to assess the effects of conversion on tax accounting software applications, accounting policies and procedures, internal control standards, and human resources. A conversion from U.S. GAAP to IFRS will impact a company’s effective tax rate in several ways. Although the pre-tax differences between U.S. GAAP and IFRS will affect the denominator of the effective tax rate computation, many of the differences will have a corresponding effect on deferred taxes and, thus, not impact the effective tax rate. However, several differences between FAS 109 and IAS 12 will change a company’s total tax provision. For example, accounting for flow through of deferred taxes and changes in tax rates may change for regulated P&U companies and would affect the timing of the recognition of tax expense. The timing of the recognition of ITC may also change. Other differences between U.S. GAAP and IFRS that could impact effective tax rates include accounting for uncertain tax positions and share-based payments. It is worthwhile to project a company’s tax provision and effective tax rate under IFRS throughout the company’s process of preparing for the transition to IFRS. Companies not using a comprehensive tax provision system that interfaces with a plant accounting system will be especially challenged during a conversion to IFRS, particularly if flow-through accounting is still used for ratemaking purposes. P&U companies using a comprehensive tax and plant software system may find themselves creating and re-creating additional “cases” to facilitate computation of book basis and required deferred taxes under various scenarios. These scenarios may include the impact on prior years, depending on judgments made in applying IFRS 1, First-time Adoption of IFRS, and depending on whether their regulatory bodies convert to IFRS at the same time that the SEC does. As an industry, regulated P&U companies will be greatly impacted by a conversion to IFRS. P&U companies may be faced with maintaining another set of books and preparing financial statements under another set of reporting requirements. In order to prepare for a conversion, the company’s tax department should be cognizant of the IASB and FASB convergence efforts, the SEC’s transition plans, regulators’ actions in regards to conversion to IFRS and rulemaking affecting tax benefits protected by the normalization rules, and accounting and systems changes occurring within the company as part of conversion to IFRS.
  • 8. Resources Deloitte has extensive IFRS experience in the P&U industry. With thousands of IFRS-experienced professionals in our global network, we provide a comprehensive array of services related to IFRS. As a multidisciplinary organization, we can help companies address a wide range of IFRS issues. Deloitte offers companies assistance with: • Evaluating the potential impacts of IFRS • Assessing readiness for IFRS conversions • Implementing IFRS conversions, providing support with technical research, project management, and training • Addressing the implications of IFRS in such areas as tax, finance operations, technology, and valuation Deloitte’s U.S. Energy & Resources group: We proudly serve power and utilities clients, helping them address their most critical challenges in order to deliver value for their shareholders and execute initiatives designed to further their strategic objectives. Save these dates Overview of Our Power & Utilities Group: March 26, 2009 Utility Industry Book/ • Audits half of the Fortune 1000 utilities and energy companies Tax Differences Orlando, FL • Provides accounting and enterprise risk services to 79% of the Fortune 500 utilities and energy companies Please register online at: • Provides consulting services to the entire top 10 utilities and energy companies in the Fortune 1000 www.deloitteconference. com/profile/web/40737 • Provides financial advisory services to 9 out of 10 utilities and energy companies in the Fortune 1000 For more information, • Provides tax services to the entire top 10 utilities and energy companies in the Fortune 1000 please contact: USEnergyTaxSeminars@ • More than 1,500 U.S. practitioners serving the industry, including over 350 partners, principals and directors deloitte.com Power & Utilities industry involvement: Our practitioners understand that leadership demands active participation across the industry’s diverse community. March 27, 2009 Accounting for Income We actively participate in the following organizations: Taxes: Rate-regulated • American Gas Association Utilities Orlando, FL • Edison Electric Institute Please register online at: www.deloitteconference. • Electric Power Supply Association com/profile/web/40737 • United States Energy Association For more information, please contact: Thought leadership: USEnergyTaxSeminars@ • 2008 Deloitte Electric Consumer Survey deloitte.com • 2008 Deloitte Utility Commissioners Survey April 20-21, 2009 Deloitte Energy • 2008 Deloitte Energy Conference Summary Report Conference Washington, D.C. • The Risk Intelligent Enterprise: ERM for the Energy Industry For more information, Technical Publications: please contact: energyconference@deloitte. • Power & Utilities Accounting, Financial Reporting and Tax Update com • Energy Quarterly Brief Deloitte’s online resources: For a wealth of online resources related to IFRS, visit www.deloitte.com/us/ifrs. Available materials include newsletters, whitepapers, pocket guides, timelines, webcasts, podcasts, and more. International accounting resources: The International Accounting Standards Board (IASB) develops international financial reporting standards for general purpose financial statements. Visit the IFRS section of www.iasb.org for additional details and copies of the standards. As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Member of Deloitte Touche Tohmatsu Copyright © 2008 Deloitte Development LLC. All rights reserved.