# Presentation: 442078

## Rural Utilities Service

**Ken Ackerman**
**Assistant Administrator**
**Program Accounting and Regulatory Analysis**
- NRECA
- 2003 Tax, Accounting and Finance Conference
- Chicago, Illinois
- July 29, 2003

##  TOPICS 

**Funding Levels**
**Accounting Issues**
**Other Issues and Programs**
**Audit Issues**

## Electric Program

- 			    **  ****	****Presidents****	****Committee****	**** NRECA                     **
**	****	****	****	****  ****FY 2004****	****  FY 2004****	****FY 2004****	**
**Hardship****	****	****	****$    240 M****	****$    240 M ****	****$    240 M  **
**Municipal Rate****	****	****	****$    100 M****	****$ 1,000 M****	****$ 1,000 M**
**Guaranteed - FFB****	****	****$ 1,500 M****	****$ 2,000 M****	****$ 1,900 M  **
**Guaranteed - CFC/CoBank****	****$     100 M****	****$    100 M****	****$    100 M**
**Treasury Rate****	****	****	****$     700 M****	****$    750 M****	****$    760 M**
**	**
**Totals ****	****           ****	****	****	****$ 2,640 M****	****$ 4,090 M****	****$ 4,000 M**
- _      _

## Electric Program

## Statement of Financial Accounting Standard No. 143, Accounting for Asset Retirement Obligations
Issued in June 2001
Effective for fiscal years beginning after June 15, 2002

- Issued in June 2001
- Effective for fiscal years beginning after June 15, 2002

*Asset Retirement Obligations*

## Asset Retirement Obligations

- FERC final rule issued April 9, 2003
- Order No. 631
- Effective for fiscal years beginning on or after January 1, 2003
- Creates new accounts and revises existing definitions, descriptions and instructions

## New Accounts
230, Asset retirement obligations
New plant account in each functional category
403.1 Depreciation expense for asset retirement obligations
411.10 Accretion expense

- 230, Asset retirement obligations
- New plant account in each functional category
- 403.1 Depreciation expense for asset retirement obligations
- 411.10 Accretion expense

*Asset Retirement Obligations*

## Asset Retirement Obligations

- Adoption is retroactive and shall be recognized as a cumulative effect of a change in accounting principle
- At adoption, the liability and related asset will be recognized as if FAS No. 143 had been in effect for all periods.

## Asset Retirement Obligations

- RUS issued a letter June 25, 2003, providing guidance for adopting FERC Order No. 631
- RUS will create Account 403.8 for depreciation expense associated with asset retirement obligations
- RUS will not require separate subsidiary records for the cost of removal included in depreciation rates on assets not covered by FAS No. 143

## Guarantees  

- FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
- Issued November 2002
- Effective for guarantees issued or modified after December 31, 2002

## Guarantor must disclose:
Nature of guarantee
Maximum potential future payments
Carrying amount of liability, if any
Nature of recourse provisions

- Nature of guarantee
- Maximum potential future payments
- Carrying amount of liability, if any
- Nature of recourse provisions

***Guarantees*****  **

## Does not apply to guarantees issued between either parents and their subsidiaries or corporations under common control.
Does not encompass indemnifications or guarantees of an entity’s own future performance

- Does not encompass indemnifications or guarantees of an entity’s own future performance

***Guarantees*****  **

## Variable Interest Entities

- FASB Interpretation No. 46, Consolidation of Variable Interest Entities (VIE)
- Effective for VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date
- May be applied prospectively with a cumulative-effect adjustment as of the date it is first applied or by restating previously issued statements for one or more years

## Variable Interest Entities

- Subject to the provisions of this interpretation if:
- Equity investment at risk is not greater than the expected losses of the entity, or
- Holders of the equity investment at risk, as a group, lack the ability to exercise a controlling financial interest.

## Variable Interest Entities

- Controlling financial interest means:
- Direct or indirect ability to make decisions about the entities activities through voting rights or similar rights;
- Obligation to absorb expected losses if they occur; or
- The right to receive the expected residual returns of the entity

## Variable Interest Entities

- Primary Beneficiary
-    An entity must consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both.

## Statement of Financial Accounting Standard No. 150

- FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity
- Issued in May 2003
- Effective for financial instruments entered into or modified after May 31, 2003

## SFAS No. 150

- May affect patronage capital allocated
- Applicable to financial instruments which are mandatorily redeemable at a specified or determinable date or upon an event certain to occur
- By-laws which call for mandatory retirement of patronage capital allocated to an estate

## AcSEC ED on Plant, Property and Equipment (Revised)

- SOP keeps 4-Stage framework
- 	Preliminary
- 	Preacquisition
- 	Construction/Acquisition
- 	In-service

## AcSEC ED on Plant, Property and Equipment (Revised)

- RUS concerned with Stage 1 Preliminary
- 	Calls for expensing costs
- 	Long Range Plans etc.
- Normally deferred and capitalized
- Would be expensed
- 	RUS expenses when determination made _not_ to construct

## AcSEC ED on Plant, Property and Equipment (Revised)

- RUS agrees with Stages 2, 3, 4
- 	Requirements similar to USOA in each
- 	Capitalize identifiable costs on construction
- 	Expense items which are not components

## AcSEC ED on Plant, Property and Equipment (Revised)

- G&A Expenses
- Allows capitalization of identifiable costs
- Payroll and Benefits
- Time sheet justifications
- No capitalization of:
- Executive Management
- Corporate Accounting
- Human Resources
- Corporate Legal
- Marketing

## AcSEC ED on Plant, Property and Equipment (Revised)

- Removal Costs
- Removal Costs other than those covered by FASB No.  143
- Removal costs to be expensed
- SOP will not provide guidance on how to expense
- At time of removal
- Over the life of asset through Depreciation expense
- RUS and Utilities overall record removal in depreciation expense

## AcSEC ED on Plant, Property and Equipment (Revised)

- Disposals
- When property is disposed of, remove cost from books
- No guidance on income statement effects
- 	Previous draft of SOP current period expense
- 	Now group method allowed
- Charge to depreciation

## AcSEC ED on Plant, Property and Equipment (Revised)

- Component Accounting
- Has always been required by RUS and Utility Accounting
- 	Continuing Property Records
- Record units are component accounting
- 	Retire old record unit
- 	Capitalize new record unit constructed
- 	Old and new units should not be on

## AcSEC ED on Plant, Property and Equipment (Revised)

- Disclosures
- Present in basic financial statements or footnotes:
- Gross carrying amounts of property, plant and equipment
- Construction Work in progress
- Accumulated Depreciation
- Significant subcategories
- E.g. Distribution, Transmission, etc
- RUS requirements already have such disclosure requirements

## AcSEC ED on Plant, Property and Equipment (Revised)

- Replacement and Removal
- Components replaced must be removed from books
- Components constructed must be added to books
- Less than components must be expensed
- Agrees with RUS CPR/record unit requirements

## AcSEC ED on Plant, Property and Equipment (Revised)

- Liquidated Damages
- Liquidated damages used to reduce PP&E costs
- Damages in excess of cost recognized as income
- SOP summaries not clear when group accounting used
- Charge excess to depreciation reserve
- Would be consistent with SOP allowing group method of accounting

## AcSEC ED on Plant, Property and Equipment (Revised)

- Mass-Asset Accounting
- SOP will allow mass-asset (group-life) method of accounting
- Final SOP will include criteria for utilizing mass-asset accounting

## AcSEC ED on Plant, Property and Equipment (Revised)

- Final SOP due in fourth quarter of 2003
- Implementation date expected to be for fiscal years beginning on or after December 15, 2004

## Depreciation Issues

-   RUS Bulletin 183-1, Depreciation Rates and Procedures
- 	Most current issue dated October 28, 1977
- 	Requires depreciation rates be within specified ranges rates

## Depreciation Issues

-   RUS will be reviewing the depreciation bulletin in the next year
- Extent of changes have not been determined
- Review is part of an overall review of rules and regulations by RUS Staff

## Depreciation Issues

- Companies should do their own internal review of depreciation rates on a regular basis
- Changes can be made to depreciation rates within the RUS ranges
- If the RUS ranges are believed to not be appropriate
- Depreciation studies can be performed
- By CPA Firms
- By Engineering Firms
- By Valuation consultants
- By Coop with assistance from RUS Field accountants

## Depreciation Issues

- Depreciation studies must be submitted to RUS for approval
- There are specific requirements for depreciation studies
- Contact Jim Murray, Chief SRAB PARA
- 202-720-3719

## Record Retention

- RUS Bulletin 180-2, revised June 26, 2003
- Generally endorses FERC guidelines found in 18 CFR Part 125
- Provides new rules on storage media
- Provides guidance on financial requirement and expenditure statements and patronage capital records

## Cushion of Credit

- Found in Part 1785 “Loan Account Computations, Procedures and Policies for Electric and Telephone Borrowers”.
- Subpart B – RUS Cushion of Credit Account Computations and Procedures
- Rural Economic Development Subaccount
- Purpose is to promote rural economic development through _grants_ and _zero interest_ loans

## Cushion of Credit

- _Payments made to a cushion of credit account_:
- 	(Dr) 224.6 Advance Payments Unapplied – RUS          	     Long-Term Debt – Debit
- 	(Cr) 131.1 Cash – General
- _Interest earned on the balance of funds_:
- 	(Dr) 224.6 Advance Payments Unapplied – RUS 	      	     Long-Term Debt – Debit
- 	(Cr) 419 Interest and Dividend Income

**Notes:**
Interest is earned at a 5% per year rate.  

## Cushion of Credit

- _Form 7 Reporting_:
- The current portion of RUS debt is reported as a “Current Liability”.
- A portion of the cushion of credit account balance may be reported as a reduction of the current maturities of RUS long-term debt.
- Should be proportionally no greater than the current maturities amount is to the total RUS long-term debt.

**Notes:**
BEGIN WITH: 
Previously RUS required the balance in the cushion of credit account to be reported on the RUS Form 7 as a reduction of the RUS long-term debt balance.  

## Cushion of Credit

- Interest earned appears as a reduction in the interest billed on the borrowers RUS notes and is shown separately on RUS Form 694 “Statement of Interest and Principal”.
- Borrower must separate these amounts and report them accordingly.
- Interest Income – A/C 419
- Interest Expense – A/C 427

## Cushion of Credit

-    A borrowers may reduce the balance of its cushion of credit account ONLY if the amount obtained from the reduction is used to make scheduled payments on loans made or guaranteed under the act.

## Cushion of Credit

- _Cushion of Credit and Revenue Deferral Plans_:
- All revenue deferral plans require segregating the CASH equivalent of all margins or revenues deferred in a special fund.
- Cash _does not_ have to be physically separated
- One entity accomplished this by making payments to their cushion of credit account.

## Sale or Transfer of Capital Assets

- Amending 7 CFR Part 1717 and revising RUS Bulletin 115-1, Sales of Capital Assets by Borrowers

## Sale or Transfer of Capital Assets

- Prior approval is not required when:
- The borrower is not in default or restructured
- Distribution borrowers have a TIER of 1.25 or better, DSC of 1.25 or better, OTIER of 1.1 or better, and ODSC of 1.1 or better based on the average or best 2 out of 3 most recent years

## Sale or Transfer of Capital Assets

- Power supply borrowers must have  TIER of 1.05 or better and DSC of 1.0 or better
- Sale will not reduce existing or future power requirements being furnished under a WPC pledged as security to the government
- FMV is obtained for the assets

## Sale or Transfer of Capital Assets

- No employee or board member has a financial interest in the sale
- Aggregate value of assets sold in any 12-month period is less than 10% of net utility plant for distribution borrowers and no more than $5M for power supply borrowers
- Proceeds are handled in accordance with Part 1717.616(c)

## Sale or Transfer of Capital Assets

- Part 1717.616(c) requires that:
- Proceeds less than $5,000 may be deposited in the General Funds account.
- Proceeds of $5,000 or more must be deposited in the Construction Fund – Trustee Account.

## Storm Damage (FEMA)

- RUS is developing new interpretations for storm damage
- Attempt to provide maximum assistance to borrowers
- Old rules:
- FEMA reimbursements applied to specific items designated, or
- On a prorata basis to storm costs - expenses, capital items, cost of removal

## Storm Damage (FEMA)

- Revised interpretation:
- If FEMA reimbursements are not specifically earmarked
- Use to reimburse expense items first
- Frees up RUS loan funds to reimburse construction projects
- RUS will not finance expense items

## Renewables - Not So New

-   Hyrdo power  -- run of the river
-   Solar  -- hot rocks & adobe baking
-   Wind  -- windmills for grain milling
-   Geothermal  -- geysers and spas
-   Biomass  --  burning peat & manure

**Renewables - Not So New**

**Notes:**
Use of Biomass is not so new
  like many other renewable sources, such as hydropower, solar, wind, and geothermal resources.
The run of the river has driven waterwheels
Solar power has been captured in hot rocks and open air baking
Windmills harnessed the wind for grain milling
And steam and hot water have been captured from geysers and spas.
For centuries, people have recognized the energy value of animal and agricultural waste, burning for heat.  In some less developed countries, this practice continues today.

## Industrialization

- Coal
- Oil
- Natural Gas

**Industrialization**

**Notes:**
As our world became industrialized, our appetite for fossil fuel increased to satisfy those needs.
Coal and oil were plentiful and efficient but not very clean.
Clean-up projects for fossil fuel projects were costly.
Along with their cleaner sibling, natural gas, these fuels are dwindling.

## Renewable Energy

- 205 RUS borrowers offer green pricing to their members
- 18 power supply
- 187 distribution
- 31 RUS borrowers report ownership of renewable energy generation resources
- 8 power supply
- 23 distribution
- Total ownership is 70.5 MW

## Renewable Energy

- 23 RUS borrowers use some form of biobased product – mainly biodiesel and ethanol
- 3 power supply
- 20 distribution

## RUS & National Commitments

- Promote renewable energy sources
- RUS will finance
- Commercially available technology
- Viable projects
- Entities with cooperative structure and goals
- Asked for: Priority to Biomass Projects
-      4% financing

## RUS Renewables Webpage

- Renewables Page added to RUS Website
- http://www.usda.rus.gov/electric/renewables
- Conferences
- Special Interest Meetings
- News You Can Use

## Telecommunications Program 

**	****Loans:****	****                **$1.45 billion		$418 million
**	****Grants:                  **$  10 million		$    2 million
**	**

**2003**

**Program**

**2004 *****(proposed)***

*Telecommunications Program*

## Broadband – Section 601 of RE Act...

** ***Purpose and Eligibility*

- To provide loans and loan guarantees for the cost of construction, improvement, and acquisition of facilities and equipment for broadband service in eligible rural communities.

##  Broadband...Purpose and Eligibility

- A legally organized entity providing or proposing to provide service to any incorporated or unincorporated place that:
-   Has no more than 20,000 inhabitants;
-   Is not located in an area designated as a standard   metropolitan statistical area; and
-   Has sufficient authority to enter into a contract with  RUS and carry out the purposes of the loan.

** **Broadband...*Purpose and Eligibility*

##  Broadband...Purpose and Eligibility

- State or local governments are eligible only if, no later than 90 days after publication of 7 CFR Part 1738, no other eligible entity is already offering or has committed to offer broadband service in that community.

** **Broadband...*Purpose and Eligibility*

##  Broadband...Purpose and Eligibility

** **Broadband...*Purpose and Eligibility*

- New construction and improvements to existing facilities;
- Broadband facilities leased under the terms of a capital lease (limited to 2 years);
- Facilities that RUS determines are necessary to serve subscribers **located in** eligible rural communities that are **located outside** of eligible rural communities;

***Eligible Purposes ******...***

##  Broadband...Purpose and Eligibility

** **Broadband...*Purpose and Eligibility*

- Acquisitions; and
- Refinancing existing Telecommunications Program debt made under the RE Act.

***Eligible Purposes****** ******...***

## Local TV

**The LOCAL TV Act:**_** **_
**Signed On December 21, 2000 - **
***Intended to facilitate access, on a technologically neutral basis, to local television station signals in unserved areas and underserved rural areas.***

## Local TV

**Mandatory Funding: **
**The Farm Bill provided $80 million in budget authority  -- equates to approximately $1 billion in 80% loan guarantees.**
**A Board,**** **consisting of the Secretaries of Agriculture, Treasury, and Commerce and the Chair of the Federal Reserve approve the guarantees.

## Local TV

**Priority: **
**1st - to projects that will serve the largest number of households in unserved areas. **
**2nd - to projects that will serve the largest number of households in underserved areas.**

## Local TV

**Priority: **
**The Board must balance these priorities with projects that will serve remote, isolated communities *****(including noncontiguous States)***** in areas that are unlikely to be served through market mechanisms.**

## Community Connect

**Community Connect Program:**
**$20 million in grants is available through a national competition to provide broadband service on a *****“community-oriented connectivity”***** basis.**
_**Applications**_**:  Were accepted through**
**                         ****November 5, 2002.**
***Go Online:****** *****www.usda.gov/rus/telecom/**

## Community Connect

**Community Connect Program:**
**               ****Broadband services must be**
**               ****provided to rural schools,**
**               ****libraries, education centers, health care providers, law enforcement agencies, and public safety organizations.**
**A community center, accessible “free of charge for two years,” must also be made available.**

## 2003 GAO Yellow Book Revisions

- Redefines audit types and services
- Financial Audits
- Attestation Engagements
- Performance Audits
- Provide consistency in field work and reporting requirements
- Strengthen standards and clarify language

## GAO Auditor Independence Standards

- Issued January 25, 2002
- Applicable for audit periods beginning after October 1, 2002
- Standards can be found at _www.gao.gov/govaud/ybk01.htm_

## GAO Auditor Independence Standards

- Independence issues fall into 3 general categories:
- Personal
- External
- Organizational
- In the past, independence issues centered on personal rather than organizational independence

## GAO Auditor Independence Standards

- Based on two overarching principles:
- Auditors should not perform management functions or make management decisions
- Auditors should not audit their own work or provide non-audit services in situations where the amounts or services involved are significant/material to the subject matter of the audit

## GAO Auditor Independence Standards

- May not provide bookkeeping/ recordkeeping services
- Limits payroll processing services
- Permits basic accounting assistance such as draft financial statements from trial balance, adjusting entries approved by management, draft disclosures based on management’s information

## Peer Review

- In accordance with paragraph 1773.5, to qualify to audit RUS borrowers, a CPA must enrolled in a peer review program and must have undergone a satisfactory peer review within the last 3 years.
- It is the borrower’s responsibility to assure that the CPA is in compliance.
- In recent months, loans have been delayed because CPAs were not in compliance with the regulations.

## Change of Auditor

- 7 CFR 1773.4, Borrower Responsibilities, requires that the board select a qualified CPA to perform the annual financial audit of the company’s books and records.
- In the event of a change of auditor, RUS must be notified, in writing, of the change at least 90 days prior to the as of audit date.

## Comparative Financial Statements 

-   In accordance with 7 CFR Part 1773, Policy on Audits of RUS Borrowers, paragraph 1773.31, the CPA must prepare a written report on _***comparative***_ balance sheets, statements of revenue and patronage capital, and statements of cash flow.  This report must be signed by the CPA and cover _***all***_ statements presented.

## Electric Accounting Course

- RUS Electric Accounting Course offered by the USDA Graduate School
- Currently in the process of being revised and updated
- Anticipated completion early in 2004

## RUS Field Accountants

-         **Vacant**
**NM Headquarters**

**Talley**

**Husby**

**Haas**

**Partrich**

**Garrett**

**Kirby**

**G. Kaufman**

**Martin**

**Baker**

**Bunch**

**Lacomb**

**Rich**

**E. Johnston**

**Stevens**

**Vacant**

**Dotson**

**Henry**

**Gustin**

**Mueller**

**K.Johnson**

**Elam**

**Benson**

**Yager**

**Clark**

-   **  ****Vacant**
**NY Headquarters**

**Dellavedova**

**E. Kaufmann**
**   ****(Idaho)**

**Haas**
**(Kansas)**

**Vacant**

**Schafer**

**E. Kaufmann**

*RUS Field Accountants*

## RUS Electric 

*RUS Electric *
*General Field Representatives*

## Job Opportunities

- Field Accountants
- Texas
- Pennsylvania / New York / New England
- New Mexico / Arizona
- South Dakota
- Staff Accountants - Washington, DC
- Systems Accountants - Washington, DC

## http://www.usda.gov/rus/

- _http://www.usda.gov/rus/_

## ?