New lease accounting standard

How the new lease standard will have an impact on the power and utilities industry

The changes introduced by the new lease standard could potentially have a significant impact on regulated utilities and others in the power and utilities (P&U) industry because of their extensive use of assets under contracts, which may qualify as leases. This spotlight considers implications of the standard on P&U entities, including power purchase agreements, transportation and storage contracts, pole attachments and easements, and what entities should consider in making the determination to apply lease accounting under ASC 842.

As nonpublic power and utilities entities implement the standard, they may benefit from the industry insights we have included in this spotlight.

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The bottom line

• The Financial Accounting Standards Board (FASB) issued ASU 2016-02,¹ its final standard on leases, on February 25, 2016, and the International Accounting Standards Board (IASB) issued its final standard, IFRS 16,² on January 13, 2016. The primary objective of the leases project was to address the current off-balance-sheet financing concerns related to a lessee’s operating leases.

• When entities are determining whether a contract is or contains a lease under the new standard, they will need to assess whether (1) performance of the contract depends on the use of an identified asset and (2) the customer obtains the right to control the use of the identified asset for a particular period. Control of the right to use an identified asset under ASC 842 is different from the assessment that is required under today’s guidance and therefore may affect the determination of whether an off-take arrangement (e.g., a power purchase agreement (PPA)) is a lease.

• Although the FASB and IASB (collectively, the Boards) agreed to bring most leases onto the balance sheet for lessees and reached agreement on a lessee’s initial measurement of the related assets and liabilities, the Boards differed on the lessee’s subsequent measurement. The FASB decided on a dual-model approach, while the IASB will require a single-model approach.

• The renewable energy sector may see significant changes and experience challenges as a result of ASC 842, particularly in an entity’s determination of whether the contract is or contains a lease (e.g., in the assessment of the impact of involvement in the generating asset’s design and in the determination of how to evaluate certain rights that affect the operation of the generating asset).

• The new standard, which is effective for calendar periods beginning January 1, 2019, for public business entities (PBE)³ and January 1, 2021,⁴ for all other entities, represents a significant change to lease accounting, and as a result, entities will likely face significant implementation challenges during the transition period and beyond.

• As part of Deloitte’s Roadmap Series, A Roadmap to Applying the New Leasing Standard is designed to serve as a detailed resource and in-depth technical guide for entities adopting ASC 842.

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How Deloitte can help

Our services include help with accounting interpretations, advice, and recommendations on the various stages of standard implementation, vendor selection, process revisions, system changes, including development of system business requirements, new system implementations, and tax analysis. Deloitte has also developed a user-friendly, web-based tool to help entities maintain lease data and perform lease calculations under the new standard. Specific areas of assistance are:

• Contract assessment: Reviewing existing contracts to determine the new standard’s effect.

• Accounting policies and technical guidance: Reviewing and/or assisting in the development of processes and policies to appropriately apply accounting requirements.

• Process challenges: Implementing a standardized process for consistent reporting and application throughout an entity.

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