An Evaluation Of SFAS No. 71: Regulated Enterprises

Abstract

In December 1982, the Financial Accounting Standard Board (FASB) issued SFAS No. 71 which became effective in fiscal years beginning after December 15, 1983. This statement regulates the accounting practices of regulated enterprises. The major controversial aspects of SFAS No. 71 are: (1) requiring special accounting for regulated industry, (2) capitalization of future revenues, (3) treatment of refund, and (4) impacts of SFAS No. 71 on financial reporting and rate cases. Given these controversies and new developments in the electric utility industry, the FASB has issued an exposure draft to revise some of the provisions of SFAS No. 71. The revisions as stipulated in December 19, 1985 exposure draft amend the accounting treatment of phase-in-plan, abandonments, and disallowances of costs of newly completed plants. Questions such as, whether Generally Acceptable Accounting Principle (GAAP) should be formulated for each industry (e.g. regulated/nonregulated), impact of SFAS No. 71 on financial reporting and rate cases, and accounting treatments of refund are not forcefully addressed in the exposure draft.

As an input to current deliberations on SFAS No. 71 this study explores investor owned utility company’s opinions concerning the controversial aspect of the statement specified above. In addition, the study reviews major issues addressed in the exposure draft amending SFAS No. 71.