A regulatory asset is an asset that is owned by a utility, but is controlled or regulated by a government regulatory agency. In most instances, the agency grants the utility the privilege of deferring the costs or revenues associated with the asset to the company’s balance sheet. This creates a situation in which the asset does not have to be posted on the income statement and charged against either the revenues or the expenses for the period covered by that statement.
The concept of a regulatory asset is recognized by a number of national revenue agencies around the world. One of the benefits of this type of asset reporting is that businesses get to maintain the asset on the balance sheet for as long as necessary. Only when costs associated with the asset are incurred, or when recoveries from customers that are relevant to the asset are realized is the value of the asset considered recognizable and recorded on the income statement. This creates a situation where the value of the asset does not have to be considered income or an expense for tax purposes until there is actually some activity with that asset.
By recording a regulatory asset on the company balance sheet, there is no opportunity for the asset to be overlooked or omitted from the overall accounting process. The asset remains accounted for in some manner, which places the practice in compliance with generally accepted accounting principles as understood in countries like the United Kingdom, the United States, and Canada. One of the practical benefits associated with reporting the regulatory asset on the balance sheet is that the entries necessary to accurately report recoveries from customers or costs related to the asset when and as they occur are kept to a minimum.
In nations where a regulatory asset may be carried by a utility, most often an electrical or power company, the regulatory agency for that country determines the criteria that the asset must meet to qualify for this type of exemption from inclusion on the income statement. Since that criteria may vary slightly from one country to another, it is important to work with the regulatory agency where the business is based in order to make sure that any asset listed in this manner does comply with all relevant regulations. Doing so will help to ensure the accounting books are considered accurate and that the income that is reported for tax purposes is in accordance with prevailing guidelines.
