Regulated Energy and Utility Market Challenges - IFRS compliance challenges in Fixed Asset Management processes
Vertically integrated utilities have large assets in form of their generation stations and their components. This part of the business is regulated in some countries. Through the regulatory environment, the government gets involved in various aspects of utilities viz., pricing, Secured energy supply, Pressure to reduce carbon footprint etc.,. Equally there are some accounting challenges that are posed through regulations and reporting norms. This blog talks about one such challenge faced by generators on the way in which they manage and report their generation Assets and their significant components.
One of the common challenges that utilities come across as a part of their financial reporting is the way in which they report their large Assets in generation stations. The generation stations are a combination of large and complex assets and components. These assets and components are subjected to extreme climatic and operating conditions and they require periodic maintenance and sometimes replacement. The classification of ‘Significant components’ that are parts of the asset is stipulated by IFRS. It stipulates that these significant components and their depreciation should be identified separately. This may be alright for new plants, but for old plants it is always a challenge because record keeping for old plants and reporting didn’t have this need.
In such cases, it is a generally accepted practise for the utility to look at their Work and Asset management system, look for the work that was done on the assets and work out the components, their history and the work that were done on them. This practise also forces the utility to have a focus on keeping a record for all the maintenance, overhaul schedules and the amount expended on these maintenance jobs.
The other challenge is the way in which depreciation is calculated for components which have a shorter life than the actual asset itself. In such cases, it is generally a good practise to set that component to its shorter useful life and let it depreciate to its recoverable amount over that period of time. It is also acceptable to let the remaining carrying amount of the component to be derecognised on replacement and the cost of the replacement to be capitalised.
IFRS also clearly stipulates what parts of the expenses for such assets and components can be capitalised and what part of it can be expensed. The normal thumb rule is to let the cost of performing outage maintenance to be capitalised, if the expense can be justified that it helped the future economic benefit or revenue generation by the asset.
Since more and more vertically integrated utilities are forced to adopt IFRS and move away from GAAP or any applicable reporting standards, the need to have a structured back office implementation is increasing. Generally such vertically integrated utilities tend to have a robust state of the art Enterprise Asset Management install base duly supported by a financial and reporting solution. Oracle EAM, Oracle Financials and Hyperion reporting solutions are better suited to help these utilities have systems and processes that are industry wide best practices and quickly let them comply with the compliance norms.
