FEDERAL ENERGY REGULATORY COMMISSION 

Washington, D.C. 20426 

In Reply Refer To: 

Office of Enforcement 

Docket No. AI19-1-000 

December 27, 2018 

TO ALL JURISDICTIONAL PUBLIC UTILITIES AND LICENSEES, NATURAL 

GAS COMPANIES, AND CENTRALIZED SERVICE COMPANIES 

Subject: Accounting and Financial Reporting for Leases 

The Financial Accounting Standards Board (FASB) has issued Accounting 

Standards Update (ASU) No. 2016-02, Leases (Topic 842). ASU No. 2016-02 amends 

FASB Accounting Standards Codification, Topic 840, Leases, with the intent to increase 

transparency and comparability among organizations by recognizing lease assets and 

lease liabilities on the balance sheet and disclosing key information about leasing 

arrangements. Under the FASB's new guidance, lessees are required to recognize on the 

balance sheet the assets and liabilities for the rights and obligations created by lease 

arrangements for operating leases with terms of more than 12 months. ASU No. 2016-02 

is generally effective January 1, 2019 for generally accepted accounting principles 

(GAAP) purposes. Commission staff received a number of inquiries from industry 

participants regarding clarification on how to apply this ASU for purposes of regulatory 

accounting and reporting to the Commission. The commenters sought clarity on how to 

implement FASB's new lease accounting guidance within the framework and regulatory 

intent of the Commission's existing requirements for lease accounting. 

As discussed herein, jurisdictional entities will be permitted to record operating leases 

that may be capitalized under ASU No. 2016-02 in the FERC balance sheet accounts that 

have already been established for capital lease assets and liabilities. All other provisions 

of lease accounting are not affected by this accounting guidance. This accounting 

guidance is intended to have no impact on the existing ratemaking treatment or practices. 

The Commission's accounting requirements are not intended to mirror changes in 

FASB's Accounting Standards Codification, and the FASB updates should not be 

construed as required for regulatory accounting and reporting to the Commission. 

However, upon analysis, the Commission may issue accounting guidance to clarify how 

provisions of an ASU can be reflected within the Commission's existing accounting and 

financial reporting requirements. Accordingly, this accounting issuance is intended to 

provide clarity and certainty on how jurisdictional entities should apply the 
Docket No. An 9-1-000 

Commission's accounting and reporting requirements related to lease arrangements in 

response to ASU No. 2016-02.1 

ACCOUNTING FOR LEASES ON THE BALANCE SHEET AS A LESSEE 

Based on the accounting regulations, Commission jurisdictional public utilities and 

licensees, natural gas companies, and centralized service companies classify all leases as 

either a capital lease or an operating lease. The Commission's accounting regulations 

state that capital leases are recognized on the balance sheet in Account 101.1 (Property 

Under Capital Leases), Account 227 (Obligations Under Capital Leases- Noncurrent), 

and Account 243 (Obligations Under Capital Leases — Current).2The Commission's 

accounting regulations do not require operating leases to be capitalized on the balance 

sheet. Under ASU No. 2016-02, all leases including operating leases must be capitalized 

if the lease term is more than 12 months. 

1. Question: How should jurisdictional entities account for operating leases on the 

balance sheet for Commission accounting and reporting purposes? 

Response: Under the Commission's accounting regulations, operating leases are 

not required to be capitalized and reported in the balance sheet accounts established for 

capital leases. However, a jurisdictional entity may choose to implement the ASU's 

guidance to report operating leases with a lease term in excess of 12 months as right of 

use assets, with corresponding lease obligations, in the balance sheet accounts established 

for capital leases. Entities that choose to do so must: (1) record the capitalized operating 

leases using the existing FERC balance sheet accounts for capital leases (Accounts 101.1, 

227, and 243); (2) maintain unique subaccounts and auxiliary ledgers to separately 

identify and track the capitalized operating lease amounts included in the capital lease 

balance sheet accounts; (3) provide footnote disclosures in Notes to the Financial 

Statements of the FERC Form Nos. 1, 1-F, 2, 2-A, and 60 of any amounts included in the 

capital lease balance sheet accounts that relate to operating leases; (4) have in place 

This accounting guidance does not amend the Commission's accounting 

regulations for lease accounting. Rather, it provides guidance on lease accounting within 

the existing regulated accounting framework. See 18 C.F.R. Part 101 and Part 201 

(2018), General Instructions Nos. 19 and 20; and Definitions Nos. 15 and 16 (Part 101) 

and Nos. 18 and 19 (Part 201); see also 18 C.F.R. Part 367 (2018), General Instructions 

Nos. 18 and 19; and Definitions Nos. 25 and 26. 

See 18 C.F.R. Part 101, Part 201, and Part 367 (2018). Part 101 also provides 

Account 120.6 (Nuclear Fuel Under Capital Leases). 

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Docket No. AI19-1-000 

strong internal controls to ensure that there is no impact to the existing ratemaking 

treatment or practices for leases. 

2. Question: How should jurisdictional entities account for capital leases on the 

balance sheet for Commission accounting and reporting purposes? 

Response: Jurisdictional entities must continue to follow the Commission's 

current accounting regulations for capital leases. 

3. Question: Under ASU No. 2016-02, some land easements may now be 

considered leases in the GAAP financial statements, whereas the Commission's 

accounting regulations require the cost of land and land rights, including land 

easements, to be reported in utility or gas plant accounts. How should 

jurisdictional entities account for land easements on the balance sheet for 

Commission accounting and reporting purposes? 

Response: Jurisdictional entities must continue to record land easements to the 

appropriate utility or gas plant accounts. The Commission's accounting for easements 

remains unchanged.3 

ACCOUNTING FOR LEASES ON THE INCOME STATEMENT AS A LESSEE 

Under ASU No. 2016-02, capitalized lease assets are depreciated to expense accounts, 

and interest expense on the lease obligation is recognized and reported on the income 

statement. However, under the Commission's accounting regulations, depreciation of 

capital lease assets, and accrued interest expense on lease obligations, are not recognized. 

Rather, the Commission's regulations provide that the amounts recorded for the capital 

lease asset and the related obligation are reduced by equal and offsetting amounts over 

the lease terrn.4 The Commission's accounting regulations only provide for the actual 

amounts paid under a lease arrangement to be recorded on the income statement in the 

appropriate rent expense account. 

3 See 18 C.F.R. Part 101 and Part 201 

(2018), Plant Instruction No. 55. 

4 See 18 C.F.R. Part 101 and Part 201 

367 (2018), General Instruction No. 19. 

(2018), Plant Instruction No. 7, and Part 367 

(2018), General Instruction No. 20, and Part 

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Docket No. AI19-1-000 

4. Question: Will jurisdictional entities be allowed to utilize the accounting 

provisions of ASU 2016-02 for recording expenses associated with lease 

arrangements for Commission accounting and reporting purposes? 

Response: No. Jurisdictional entities must continue to follow the Commission's 

accounting regulations for recording expenses related to lease arrangements. There 

should be no change to the expense account used to record the expense or to the amount 

of expense recorded as a result of this accounting guidance. 

ACCOUNTING FOR LEASES AS A LESSOR 

5. Question: Will there be any changes to the Commission's accounting for leases 

from a lessor perspective? 

Response: No. Jurisdictional entities will continue to follow the Commission's 

accounting regulations for recording lease arrangements for lessors. 

DISCLOSURES AND FUTURE FILINGS TO THE COMMISSION 

6. Question: What are the required disclosures or filings to the Commission related 

to changes made to a jurisdictional entity's accounting practice in response to 

ASU No. 2016-02? 

Response: In addition to the footnote disclosures required in the response to 

Question No. 1 above, jurisdictional entities should disclose any changes in accounting 

practice in response to ASU No. 2016-2 in their respective FERC Forms filed to the 

Commission quarterly and annually, within the Notes to the Financial Statements. The 

disclosure should also provide a statement indicating how such amounts are included in 

Commission jurisdiction cost-of-service rates. 

To the extent a jurisdictional entity has a specific lease transaction that it proposes 

to treat differently from the guidance provided herein, the entity should request the 

Commission's approval prior to the implementation of its proposed accounting. 

Additionally, to the extent that there will be any rate impacts resulting from proposed 

changes in the jurisdictional entity's lease accounting, the entity should request the 

Commission's approval prior to the implementation of its proposed accounting. 

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Docket No. AI19-1-000 

The Commission delegated authority to act on this matter to the Director of the 

Office of Enforcement or his designee under 18 C.F.R. § 375.311 (2018). The Director 

has designated this authority to the Acting Chief Accountant. This letter constitutes final 

agency action. Your company may file a request for rehearing with the Commission 

within 30 days of the date of this order under 18 C.F.R. § 385.713 (2018). 

Sincerely, 

Steven D. Hunt 

Acting Chief Accountant and Director 

Division of Audits and Accounting 

Office of Enforcement 

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