Tax Reform and ADIT

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Preparing for provisional tax accounting updates due to regulatory guidance.

The Tax Cuts and Jobs Act, signed into law on December 22, 2017, has placed a responsibility on companies to understand the various complexities within the law and to assess the accounting and financial reporting impacts on their organizations. For rate-regulated utilities, certain changes in tax law have put a spotlight on the interplay of rate-making and accounting activities. In particular, the reduction of the top corporate income tax rate from 35% to 21% has initiated a cascade of activities for rate-regulated utilities.

As with other entities whose accounting is governed by the rules of ASC 740, rate-regulated utilities recognized a re-measurement of accumulated deferred income taxes as of the period of enactment of the law. Unlike unregulated industries, utilities further recognized a regulatory liability to represent the impact of excess deferred income taxes on future rates. In SAB 118, the SEC has allowed companies to continue to update their original tax reform entries quarterly, over the duration of a one year measurement period, as additional guidance from the Department of Treasury, IRS, or other organizations is released.

Many utilities, after recognizing the impact of tax reform and recording a regulatory liability related to excess accumulated deferred income taxes, have chosen to offset subsequent amortizations of deferred income taxes with a revenue item. In effect, this accounting allows the utilities to defer the revenue impacts associated with refunds of excess accumulated deferred income taxes until such time as utilities can enter into rate proceedings and/or receive rate orders from their individual regulatory jurisdictions. Other utilities, including some who are outside of a rate case test year or annual update proceeding, have elected to announce rate reductions and to begin to reduce customer rates utilizing either the Average Rate Assumption Method or an Alternative Method, such as the Reverse South Georgia Method.

In each case, as individual regulatory bodies provide further guidance or definitive rate orders, based on the principles of ASC 980, utilities are tasked with aligning their accounting with the economic realities of their business. Utilities should prepare their accounting systems, subledgers, and underlying tax data to allow for any changes in accounting treatment that may be necessary in order to continue to align with the manner in which utilities are filing rates. This includes a clear identification of accumulated deferred income tax positions related to property governed by specific regulatory jurisdictions as well as the delineation of tax positions based on the tax return events that gave rise to them, as these tax return events commonly dictate the protected vs un-protected status under IRS normalization rules.

The Lucasys Toolkit provides tax and accounting departments with free calculation engines to better understand their preparedness for and ease of compliance with existing or upcoming rate orders and other guidance from regulatory bodies. Individual tools include:

ADIT Auditor allows rate-regulated utilities to provide audit-ready proof of compliance with Federal normalization requirements, including audit of ARAM rates, normalization treatment, and expected turn-around of excess and deficient accumulated deferred income taxes. No registration required.

ARAM Calc Lite provides a single vintage/asset class computation of ARAM (Average Rate Assumption Method) vs RSGM (Reverse South Georgia Method). Simply follow the prompts to input information about your vintage/asset class. No registration required.

ARAM Calc is a full-service offering that enables tax organizations at rate-regulated utilities to optimize the tax performance of their fixed assets in compliance with the Tax Cuts and Jobs Act. ARAM Calc works with your existing systems and processes to increase the value of your existing solutions.

Vadim Lantukh