Battery storage, power contracts could be impacted by revenue recognition change

A new accounting rule is expected to have a relatively minimal impact on the power sector, but experts still anticipate some noteworthy changes in coming years.

Publicly traded companies have started adhering to an updated revenue recognition standard promoted by the Financial Accounting Standards Board. The group has long sought to make contracts reported in financial statements more consistent across all industries.

The new rule, formally known as Accounting Standards Codification 606, or ASC 606, requires revenue-generating arrangements to be reported in a uniform manner. It is a transparency effort by the Financial Accounting Standards Board to address how companies should disclose customer contracts, performance obligations and prices.

Electric utilities are already ahead of the curve on disclosures, according to executives at "Big Four" accounting firms Deloitte, PwC, EY and KPMG. But the new rule could have implications for disclosures related to retail, battery storage and power purchase agreements, among other areas.

"For the most part, I would expect almost everything to fall under 606," said Darin Kempke, the leader of KPMG's power and utilities practice. "Then it's just a matter of the disclosure, breaking out the pieces as to what [the contract] is, the nature of it, whether it's contractual, non-contractual and what ranges of prices may be applicable to those lines."

Kempke said both regulated and competitive markets are affected by the new standard but to varying degrees. For the former, utilities have to disclose the tariffs charged to each of its customer classes, be it residential, commercial or industrial. And alternative revenue programs such as connection fees and decoupling mechanisms need to be defined in detail.

Competitive retailers are subject to ASC 606 as well. All their product offerings, like a bundle deal for electricity and home security, must be laid out, Kempke said.

"You're going to see a lot more traditional rate-regulated utilities and tariff-based revenues for your retail customers ... Really, we're not seeing any change there in terms of the timing of revenue recognition," said Susan Bell, a partner at EY's North American power and utilities center.

"So that then brings into question things that are not retail," she continued, invoking wholesale contracts such as power purchase agreements. "When they're selling the power, then there's the potential of those contracts being revenue," thus requiring recognition.

Eric Knachel, a senior partner in Deloitte's professional practice group, cautioned that while utilities are on the right track with ASC 606, disclosures will require more time and effort than previously expected.

Using a math class analogy, he said the new standard is "as if your teacher isn't just demanding that you show your work, but it's a separate problem that you write another essay explaining the approach you chose, why you chose it, what assumptions you made. In many instances it feels like a separate problem that you have to answer."

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Operational, storage impacts

Those interviewed emphasized there is more to the new standard than just disclosures. "Once companies begin to deal with the accounting implications, the broader impact to the business becomes the area of greater emphasis," Knachel said.

ASC 606 will prompt firms to look across the board, according to Knachel. Legal departments will revisit or change terms of certain contracts, and information technology divisions will be required to gather and report data mandated under the new rule. Even compensation packages tied to revenue or other financial metrics could be affected.

"In order to fully comply with the standard and have an appropriate system of internal controls, there may need to be some changes made," said Chris Bolash, a partner at EY's financial accounting advisory services practice.

Bell sees battery storage as an area that power companies may need to focus on in the future to comply with revenue recognition standards, particularly with storage systems potentially becoming a greater segment of a company's overall generation mix.

She described how some western utilities are bundling long-term power contracts with energy storage and managed services, or are contemplating doing so. "Then you have to evaluate, what are your different performance obligations? How would you allocate revenue from a contract like that?" Bell postulated.

"That's going to be more of a consideration in the future as battery storage continues to evolve and grow and become greater," she continued. "But it has not been as much for most utilities in this initial [ASC 606] implementation."

Generally, Bell said, "Whether you're selling batteries or any sort of smart technology that goes with your utility usage, then you're going to have to think about how to evaluate the contracts and capture the right information to make the accounting decisions."

Some interviewed acknowledged that the new standard could be seen as "much ado about nothing," because many utilities already do a good amount of reporting. However, "I think we and others, and certainly the standard-setters, view it as a good thing," said Sean Riley, a partner at PwC's national power and utilities practice.

"Overall I think it was the right process," Kempke said. "It's taken many, many, many years to get a revenue standard, and it wasn't going to be happy for everybody. But for at least this industry, despite all the hard work and effort that everybody made, I think you've gotten, really, to the right answer."