Question

Duke Energy Corporation’s 2012 annual report to shareholders contains the following note disclosure (edited for brevity):
Cost-based Regulation. Duke Energy accounts for its regulated operations in accordance with applicable regulatory accounting guidance . . . Accordingly, Duke Energy records assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities . . .
AFUDC and Interest Capitalized. In accordance with applicable regulatory accounting guidance, Duke Energy records AFUDC, which represents the estimated debt and equity costs of capital funds necessary to finance the construction of new regulated facilities. The equity component of AFUDC is a non-cash amount . . . AFUDC is capitalized as a component of the cost of Property, Plant and Equipment.

Required:
1. Explain why Duke Energy alerts investors and other readers of its GAAP financial statements to the fact that it “records assets and liabilities that result from the regulated ratemaking process.”
2. As you will learn in Chapter 10, GAAP does not allow firms to capitalize as a cost of construction the “equity costs” of funds needed to finance construction projects. GAAP does allow debt interest costs to be capitalized under certain circumstances. Explain why Duke Energy alerts investors and other readers of its GAAP financial statements to the “capitalization” of AFUDC.
3. Briefly describe the unique accounting-related conflicts of interest that arise in regulated electric utility companies such as Duke Energy.



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  • CreatedSeptember 10, 2014
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