Rural Utilities Service

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Rural Utilities Service

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

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TOPICS

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

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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

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Electric Program
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Asset Retirement Obligations

• 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

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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

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Asset Retirement Obligations

• 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

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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.

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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

10
Guarantees

• FASB Interpretation No. 45, Guarantors
  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

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Guarantees

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

12
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 entitys own future performance

13
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

14
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.

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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

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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 entitys expected losses
  if they occur, receive a majority of the entitys
  expected residual returns if they occur, or both.

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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

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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

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AcSEC ED on Plant, Property and Equipment
(Revised)

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

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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

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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

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AcSEC ED on Plant, Property and Equipment
(Revised)

• GA Expenses
• Allows capitalization of identifiable costs
• Payroll and Benefits
• Time sheet justifications
• No capitalization of
• Executive Management
• Corporate Accounting
• Human Resources
• Corporate Legal
• Marketing

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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

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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

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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

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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

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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

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AcSEC ED on Plant, Property and Equipment
(Revised)

• Liquidated Damages
• Liquidated damages used to reduce PPE 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

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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

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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

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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

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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

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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

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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

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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

36
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

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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

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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.

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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

40
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.

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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.

42
Sale or Transfer of Capital Assets

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

43
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

44
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

45
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)

46
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.

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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

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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

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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
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Industrialization

• Industry -- increased need for power and power
  sources
• Coal
• Oil
• Natural Gas

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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

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Renewable Energy

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

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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

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RUS Renewables Webpage
Renewables Page added to RUS Website http//www.u
sda.rus.gov/electric/renewables Conferences Speci
al Interest Meetings News You Can Use
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Telecommunications Program
Broadband Loan and Grant Programs Loans
1.45 billion 418 million Grants
10 million 2 million
2003
Program
2004 (proposed)
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Purpose and Eligibility

• Broadband Section 601 of RE Act

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.
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BroadbandPurpose and Eligibility

• Who is eligible?
• 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.

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BroadbandPurpose and Eligibility

Who is eligible? 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.
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BroadbandPurpose and Eligibility
Eligible Purposes
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
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BroadbandPurpose and Eligibility
Eligible Purposes
Acquisitions and Refinancing existing
Telecommunications Program debt made under the RE
Act.
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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.

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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.
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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.
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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.
65
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/tele
com/
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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.
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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

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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

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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

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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

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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 managements information

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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 borrowers 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.

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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 companys 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.

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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.

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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

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RUS Field Accountants
E. Kaufmann (Idaho)
E. Kaufmann
Gustin
Mueller
Schafer
Vacant NY Headquarters
Dellavedova
K.Johnson
Henry
Vacant
Elam
Husby
Dotson
Benson
Clark
G. Kaufman
E. Johnston
Haas
Yager
Talley
Kirby
Bunch
Vacant NM Headquarters
Partrich
Martin
Rich
Garrett
Haas (Kansas)
Stevens
Lacomb
Baker
Vacant
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RUS Electric General Field Representatives
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Job Opportunities

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

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http//www.usda.gov/rus/
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