Chapter 11 - Solution Manual

A regulator may direct a regulated entity to include

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A regulator may direct a regulated entity to include an amount for a contingency in allowable costs for rate-making purposes even though the amount does not meet those criteria for recording. If the regulator requires the entity to remain accountable for any amounts charged pursuant to such rates and not yet expended for the intended purpose, the resulting increased charges to customers create a liability (see paragraph 980-405-25-1(b)). FASB ASC 11-7 Hedging and Gas Balancing Arrangements Search gas balancing arrangement 932-815-55 > Gas-Balancing Arrangements 55-1 A gas-balancing arrangement is a situation where Entities A and B are partners in a gas well. During the current period, Entity B may decide not to sell any gas because it does not have a purchaser or because market conditions are unfavorable. Accordingly, Entity A (the overtaker) agrees to take all the gas production for the period and sells it to its customer. In the future, Entity B has the right to take more gas than its interest would otherwise allow to make up for Entity A's overtake. Alternatively, A may make payment in kind (using gas from a different well) or pay cash to Entity B. Room for Debate Debate 11-1 Team 1 Argue for presenting redeemable preferred stock as debt The SEC prohibits the presentation of mandatorily redeemable preferred stock as equity. Since, there are only three balance sheet elements, assets, liabilities and equity, if redeemable preferred stock is not equity, then it must be a liability under the present accounting model as described in the conceptual framework. SFAC No. 6 defines liabilities as the probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. This definition implies that a liability has three characteristics: (1) it embodies a present duty to another entity(ies) that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, on demand, (2) the duty
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251 obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice, and (3) the transaction or other event obligating the entity has already happened. The first characteristic and third characteristics inherent in this definition are easily satisfied by examining the very nature of redeemable preferred stock. Mandatorily redeemable preferred stock embodies an obligation to redeem it at a specified price and time. It thus embodies a nondiscretionary obligation to transfer enterprise assets to the holder, which suggests that it may be a liability rather than equity. In addition, the transaction or event obligating the entity was the issuance of the preferred stock.
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