Accounting Requirements for RUS Electric Borrowers

DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1767

RIN 0572-AA23

Accounting Requirements for RUS Electric Borrowers

AGENCY: Rural Utilities Service, USDA.

ACTION: Final rule.

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SUMMARY: This final rule amends the Rural Utilities Service's (RUS)

regulations on accounting policies and procedures for RUS electric

borrowers as set forth in RUS's regulations concerning Accounting

Requirements for RUS Electric Borrowers, Uniform System of Accounts.

This final rule eliminates the requirement that RUS borrowers place the

difference between the amount accrued for postretirement

[[Page 55424]]

benefits during the year and the amount paid on a ``pay-as-you-go''

basis in an external, irrevocable trust to be used solely for

postretirement benefits. RUS borrowers may, however, elect to

voluntarily fund their postretirement benefit obligations. This final

rule sets forth new accounting interpretations that address the

requirements of recently issued pronouncements of the Financial

Accounting Standards Board concerning the accounting for postemployment

benefits and the accounting for certain investments in debt and equity

securities.

In addition, this final rule also sets forth a new accounting

procedure for storm damage costs and the associated funds received from

the Federal Emergency Management Administration (FEMA). It also

clarifies the accounting prescribed for computer software costs by

specifying the accounts to which generalized software costs should be

amortized and to which the costs of maintaining, updating, and

converting files should be expensed.

In addition, this rule will identify the organizational unit within

RUS to which borrower requests for departures from or interpretations

of the RUS Uniform System of Accounts (USoA) should be submitted.

This regulation will facilitate the effective and economical

operation of a business enterprise and ensure that adequate and

reliable financial records be maintained.

EFFECTIVE DATE: This rule is effective December 1, 1995.

FOR FURTHER INFORMATION CONTACT: Ms. Roberta D. Purcell, Chief,

Technical Accounting and Auditing Staff, Borrower Accounting Division,

Rural Utilities Service, AG Box 1523, room 2221, South Building, U.S.

Department of Agriculture, Washington, DC 20250, telephone number (202)

720-5227.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This final rule has been determined to be not significant for the

purposes of Executive Order 12866 and therefore has not been reviewed

by OMB.

Regulatory Flexibility Act Certification

The Administrator, RUS, has determined that the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.) does not apply to this final

rule.

Information Collection and Recordkeeping Requirements

In compliance with the Office of Management and Budget (OMB)

regulations (5 CFR Part 1320) which implement the Paperwork Reduction

Act of 1980 (Pub. L. 96-511) and section 3504 of that Act, the

information collection and recordkeeping requirements contained in this

final rule have been approved by the Office of Management and Budget

under control number 0572-0002. Comments regarding these requirements

may be sent to the United States Department of Agriculture, Clearance

Office, OIRM, room 404-W, Washington, DC 20250 or to the Office of

Management and Budget, Office of Information and Regulatory Affairs,

room 10102, Washington, DC 20503.

National Environmental Policy Act Certification

The Administrator, RUS, has determined that this final rule will

not significantly affect the quality of the human environment as

defined by the National Environmental Policy Act of 1969 (42 U.S.C.

4321 et seq.). Therefore, this action does not require an environmental

impact statement or assessment.

Catalog of Federal Domestic Assistance

The program described by this final rule is listed in the Catalog

of Federal Domestic Assistance Programs under number 10.850--Rural

Electrification Loans and Loan Guarantees. This catalog is available on

a subscription basis from the Superintendent of Documents, the United

States Government Printing Office, Washington, DC 20402.

Executive Order 12372

This final rule is excluded from the scope of Executive Order

12372, Intergovernmental Consultation. A Notice of Final Rule entitled

Department Programs and Activities Excluded from Executive Order 12372

(50 FR 47034) exempts RUS electric loans and loan guarantees from

coverage under this Order.

Executive Order 12778

This final rule has been reviewed under Executive Order 12778,

Civil Justice Reform. This final rule: (1) Will not preempt any state

or local laws, regulations, or policies, unless they present an

irreconcilable conflict with this rule; (2) Will not have any

retroactive effect except as stated herein; and (3) Will not require

administrative proceeding before parties may file suit challenging the

provisions of this rule. This final rule will not have any retroactive

effect unless RUS borrowers have not properly complied with generally

accepted accounting principles. Generally accepted accounting

principles, as issued by the Financial Accounting Standards Board and

its predecessors, are applicable to all financial reporting entities,

including RUS borrowers, regardless of whether RUS publishes its

interpretations. In accordance with generally accepted accounting

principles, the accounting principles set forth in Statement of

Financial Accounting Standards No. 112, Employers' Accounting for

Postemployment Benefits (Statement No. 112), and Statement of Financial

Accounting Standards No. 115, Accounting for Certain Investments in

Debt and Equity Securities (Statement No. 115), should have been

adopted by all RUS borrowers for fiscal years beginning after December

15, 1993. The interpretations of these Statements of Financial

Accounting Standards issued by RUS in this final rule instruct

borrowers in the proper accounts to be used within the framework and

requirements of the RUS Uniform System of Accounts. Therefore, this

final rule will have no retroactive effect except for borrowers that

did not properly implement Statements No. 112 and No. 115 when and as

required by generally accepted accounting principles.

Background

In order to facilitate the effective and economical operation of a

business enterprise, adequate and reliable financial records must be

maintained. Accounting records must provide a clear and accurate

picture of current economic conditions from which management can make

informed decisions in charting the company's future. The rate-regulated

environment in which an electric utility operates causes an even

greater need for financial information that is accurate, complete, and

comparable with that of other electric utilities.

RUS, as a federal lender and mortgagee, and in furthering the

objectives of the Rural Electrification Act of 1936 (RE Act) (7 U.S.C.

901 et seq.) has a legitimate programmatic interest and a substantial

financial interest in requiring adequate records to be maintained. In

order to provide RUS with financial information that can be analyzed

and compared with the operations of other borrowers in the RUS program,

all RUS borrowers must maintain financial records that utilize uniform

accounts and uniform accounting policies and procedures. The standard

RUS security instrument, therefore, requires borrowers to maintain

their books, records, and accounts in accordance with methods and

principles of accounting prescribed

[[Page 55425]]

by RUS in the USoA for its electric borrowers.

To ensure that borrowers consistently account for and apply the

provisions of recent pronouncements of the Financial Accounting

Standards Board, the USoA must be revised and updated as changes in

generally accepted accounting principles occur. RUS is, therefore,

adding two new accounting interpretations to Section 1767.41,

Accounting Methods and Procedures Required of All RUS Borrowers, that

address the accounting requirements recently set forth in Statement of

Financial Accounting Standards No. 112, Employers' Accounting for

Postemployment Benefits (Statement No. 112), and Statement of Financial

Accounting Standards No. 115, Accounting for Certain Investments in

Debt and Equity Securities (Statement No. 115). Statement No. 112

establishes the standards of financial accounting and reporting for

employers who provide benefits to former or inactive employees after

employment but before retirement while Statement No. 115 establishes

the standards of financial accounting and reporting for investments in

debt securities and for investments in equity securities that have

readily determinable fair values. Copies of Statements of Financial

Accounting Standards may be obtained from the Order Department of the

Financial Accounting Standards Board, 401 Merritt 7, P.O. Box 5116,

Norwalk, Connecticut 06856-5116.

RUS is also amending accounting Interpretation No. 626, Rural

Economic Development Loan and Grant Program, to establish the

accounting policies and procedures for the Rural Economic Development

Grant program recently established by the Rural Business and

Cooperative Development Service.

Interpretation No. 604, Deferred Compensation, sets forth the

specific accounting entries and the balance sheet reporting

requirements for participation in the National Rural Electric

Cooperative Association's (NRECA) Deferred Compensation Program. Under

the terms of this program, a portion of an employee's current salary

may be deferred until such time as the employee retires or terminates

employment. The employer makes a contribution into the deferred

compensation fund in an amount equal to the salary deferred. As such,

the borrower records both an asset and a liability--an asset in the

amount of the contributions to the fund and a liability to that

employee for future payment of the deferred compensation. Current RUS

procedures require the asset and liability to be offset for financial

reporting purposes. Financial Accounting Standards Board Interpretation

No. 39, Offsetting of Amounts Related to Certain Contracts, states that

the offsetting of assets and liabilities in the balance sheet is

improper except where a right of offset exists and a right of offset

exists only when each of two parties owes the other determinable

amounts. Contributions to the deferred compensation fund are payable to

the borrower and, as such, the right of offset does not exist. RUS is,

therefore, amending Interpretation No. 604 to comply with generally

accepted accounting principles by requiring the asset and liability to

be reported separately.

In December 1990, the Financial Accounting Standards Boards issued

Statement of Financial Accounting Standards No. 106, Employers'

Accounting for Postretirement Benefits Other than Pensions (Statement

No. 106). Statement No. 106 requires reporting entities to accrue the

expected cost of postretirement benefits during the years in which the

employee provides service to the reporting entity. Prior to the

issuance of Statement No. 106, most reporting entities accounted for

postretirement benefit costs on a ``pay-as-you-go'' basis; that is,

costs were recognized when paid, not when the employee provided service

to the reporting entity in exchange for the benefits.

A postretirement benefit plan is a deferred compensation

arrangement in which an employer promises to exchange future benefits

for an employee's current services. Postretirement benefits include,

but are not limited to, health care, life insurance, tuition

assistance, day care, legal services, and housing subsidies provided

outside of a pension plan.

The RUS USoA parallels the USoA prescribed by the Federal Energy

Regulatory Commission (FERC) for electric utilities and, as such, is

consistent with the standards of financial accounting for the electric

utility industry as a whole. As FERC amends its USoA, RUS reviews the

appropriateness and applicability of each amendment and proposes

revisions, as necessary, to the RUS USoA.

On December 17, 1992, FERC issued its policy statement on

postretirement benefits. Included in its statement was the requirement

that natural gas pipelines and public utilities make cash deposits into

an external, irrevocable trust fund, in amounts that are proportional

and, on an annual basis, equal to the annual test period allowance for

postretirement benefits. RUS reviewed and analyzed these accounting

policies and procedures, including the funding requirement, and

promulgated these requirements in its USoA. The RUS USoA requires RUS

borrowers to fund the liability associated with postretirement benefit

costs by making cash deposits into an irrevocable trust.

Since the issuance of the final rule, RUS borrowers and their

representatives through the NRECA, have questioned the necessity for

RUS borrowers to fund their postretirement benefit obligations. FERC

and a majority of state utility commissions require funding for the

inclusion of postretirement benefit expenses in rates in order to deter

investor-owned utilities from arbitrarily increasing postretirement

benefit costs. Due to the many variables involved in estimating

postretirement benefit costs, the cost incorporated into rates can

easily be manipulated if an investor-owned utility desires to increase

cash flow through increased accruals of postretirement benefit costs.

By requiring utilities to fund an amount equal to the postretirement

benefit costs that were recovered through rates, much of the incentive

for investor-owned utilities to overestimate postretirement benefit

costs is eliminated.

The ratepayers/consumers, and investors/owners of an RUS electric

borrower, because of its cooperative organizational structure, are one

in the same. RUS cooperatives do not, therefore, have this same

incentive to over estimate postretirement benefits costs because

profits do not accrue to a separate, different class of investors/

owners. In fact, RUS electric borrowers have no incentive to

overestimate postretirement benefit costs to increase rates since the

investors/owners are the same as the ratepayers/consumers. RUS has,

therefore, eliminated, through the publication of this final rule, the

funding requirement currently contained in Section 1767.41,

Interpretation No. 627, Postretirement Benefits. RUS borrowers may,

however, elect to voluntarily fund their postretirement benefit

obligations.

Finally, RUS is revising Section 1767.13, Departures from the

Prescribed RUS Uniform System of Accounts, and Section 1767.14,

Interpretations of the RUS Uniform System of Accounts, to specifically

identify the organizational unit within RUS to which requests for

departures from and interpretations of the RUS USoA should be

addressed. This revision should assist borrowers in filing requests and

should expedite the review process within RUS.

[[Page 55426]]

Comments

A proposed rule entitled Accounting Requirements for RUS Electric

Borrowers, published September 2, 1994, at 59 FR 45631, invited

interested parties to submit comments on or before November 1, 1994.

Twenty-seven comments were received which included submissions from

NRECA, RUS electric borrowers, certified public accounting firms, and

statewide organizations. The comments submitted by NRECA were based

upon a joint review of the proposed rule by the Accounting and

Depreciation Committee, a subcommittee of the Generation and

Transmission Managers Association Technical Advisory Committee, and the

Distribution Systems Accounting and Tax Committee. The following

paragraphs address the various topics that were discussed by the

commenters.

Effective Date of Changes

Comment. Three commenters requested that RUS recognize the

significant administrative burden placed on borrowers when changes in

accounting methods are imposed at year end and encouraged RUS to

implement all final rulemakings at the beginning of a year.

Response. RUS is sympathetic to the commenters' concerns and, in no

instance, is it RUS's intent to wait until year end to implement or

prescribe new accounting requirements. Regulations issued by RUS are,

however, reviewed for legal sufficiency by the Office of General

Counsel. RUS regulations are also reviewed by the Office of Management

and Budget and the Federal Register before final publication. This

review process can be lengthy and time consuming. As a result, a

regulation that is scheduled to be published well in advance of a

year's end may not be published as anticipated. While RUS could delay

publication of a final rule until after year's end; in many instances,

the regulation addresses Statements of Financial Accounting Standards

issued by the Financial Accounting Standards Boards that must be

implemented by year end. In these circumstances, RUS believes that the

benefits derived by its borrowers from having ready access to

accounting guidance outweigh the impositions that may be created by a

year-end publication date.

Section 1767.13, Departures From the Prescribed RUS USoA

Comment. Paragraph (d) of Section 1767.13, Departures from the

Prescribed RUS USoA, requires borrowers to obtain RUS approval prior to

implementing the provisions of Statements of Financial Accounting

Standards No. 71, Accounting for the Effects of Certain Types of

Regulation (Statement No. 71); No. 90, Regulated Enterprises--

Accounting for Abandonments and Disallowances of Plant Costs (Statement

No. 90); and No. 92, Regulated Enterprises--Accounting for Phase-in

Plans (Statement No. 92). One commenter suggested that a reference to

Statement of Financial Accounting Standards No. 101, Regulated

Enterprises--Accounting for the Discontinuance of Application of FASB

Statement No. 71 (Statement No. 101), be included as it impacts upon

regulatory enterprises as do the aforementioned statements. The same

commenter argued that RUS cannot establish generally accepted

accounting principles and, therefore, RUS regulations should not

prohibit or require advance approval of the adoption of accounting

standards except as to filings with RUS.

Response. RUS's intent in requiring approval of departures from the

prescribed RUS USoA was to implement the provisions of Article II,

Section 12 of the standard form of RUS security instrument which

requires RUS borrowers to, at all times, keep and safely preserve

proper books, records, and accounts in which full and true entries will

be made of all of the dealings, business and affairs of the Mortgagor,

in accordance with the methods and principles of accounting prescribed

in the USoA. This covenant and requirement is in each and every

standard form of RUS security instrument and has been a requirement for

numerous years. Pursuant to Section 4 of the RE Act, this covenant is

one of many terms and conditions prescribed by the Administrator of RUS

relating to the expenditure of the moneys loaned and the security

therefore with respect to loans and loan guarantees.

This rule is not an attempt at establishing generally accepted

accounting principles nor is it intended to prohibit borrowers from

adhering to the standards issued by the Financial Accounting Standards

Board. It is intended to insure that similar transactions are accounted

for in a consistent manner in accordance with the USoA and to allow RUS

to properly evaluate a borrower's operating performance. Consistency in

the application of accounting methodologies is critical if RUS is to

properly evaluate a borrower's financial condition, programmatic

performance, and ultimately its creditworthiness.

Statements Nos. 71, 90, and 92 allow rate-regulated enterprises to

defer current period expenses and revenues beyond that allowed for

nonregulated enterprises provided that certain criteria are met.

Included among the criteria is the requirement that an enterprise's

rates for regulated services or products provided to its customer are

established by or are subject to approval by an independent, third-

party regulator or by its own governing board empowered by statute or

contract to establish rates that bind customers. Because the vast

majority of RUS borrowers are not subject to rate regulation by state

public utility commissions, their boards of directors, under the

provisions of Statement No. 71, may defer current period income and

expense items without the intervention of an independent third-party.

As such, a borrower could defer current period expenses and, as a

result, not meet the financial ratio requirements set forth in its

mortgage. RUS implemented this requirement for purposes of assuring

that loans and loan guarantees are repaid. Therefore, RUS does not

believe that this requirement should be revised at this time.

Statement No. 101, however, is a more conservative standard in that

it establishes the reporting requirements for enterprises that no

longer meet the criteria for application of Statement No. 71. It does

not permit the deferral of income or expense items that might

arbitrarily inflate a borrower's financial ratios. Therefore, RUS

believes that there is no benefit to the Federal government of imposing

a requirement that borrowers obtain RUS approval prior to implementing

the provisions of Statement No. 101.

Comment. The revisions proposed to Section 1767.13 were intended to

specify to whom, in RUS, requests for departures from the USoA and

approvals of deferrals under Statements Nos. 71, 90, 92 were to be

addressed. The proposed rule identified the Director of the Borrower

Accounting Division (BAD) as the contact for such requests. Two

commenters expressed concern that the area offices should be consulted

as part of the approval process.

Response. All requests for approvals of departures from the USoA

and implementations of deferral plans are processed by the Borrower

Accounting Division. RUS can provide a more timely response to a

borrower's request if it is submitted directly to the division that has

been delegated the authority to review such requests. A request for

approval of a departure from the USoA is a technical interpretation

and, as

[[Page 55427]]

such, is reviewed, processed, and approved by the Director, BAD. A

request for approval of a deferral plan, however, involves not only the

accounting aspect of the deferral, but the eventual impact upon RUS's

loan security, as well. Such requests are, therefore, processed and

reviewed by BAD for technical accuracy and approved by the area office.

RUS believes that this process is the most effective and efficient use

of human resources and provides the most timely response to our

borrowers. For these reasons, no revisions were made in the final rule.

Comment. Section 1767.13 requires borrowers to obtain approval

before implementing an expense or revenue deferral plan. Two commenters

recommended that more latitude be given to borrowers who utilize

deferral plans when loan security is not adversely affected by

deferrals of immaterial dollar amounts. Specifically, the commenters

recommended that revenue and expense deferrals that, when combined with

all other deferrals, are less than a specified percentage of net

utility plant or a specified percentage of equity be exempted from RUS

approval.

Response. RUS agrees, in part, that immaterial deferrals that do

not impact upon loan security could be exempt from RUS approval.

However, there is a question as to what constitutes an immaterial

deferral. RUS will consider, in the next proposed revision of Part

1767, establishing materiality thresholds for approvals of both

deferral plans and departures from the USoA.

Comment. Two commenters recommended that RUS establish a time frame

in which decisions on requests for approvals of deferral plans,

departures from and interpretations of the USoA will be made by RUS.

Response. RUS recognizes the importance of obtaining a timely

response to approval requests. However, RUS believes that the

establishment of specific time frames for such approvals would be

impractical under the circumstances. Approvals are often delayed

because a borrower has submitted incomplete or insufficient

information. The time required for additional correspondence and the

uncertainty of when the additional information will be submitted is out

of RUS' control. As previously discussed in the comment section, RUS

has undertaken steps to ensure that requests are processed and reviewed

in the most efficient manner practicable. For these reasons, RUS has

not instituted approval time frames in this final rule.

Section 1767.14, Interpretation of the RUS Uniform System of Accounts

Comment. Three commenters requested that RUS clarify whether

requests for interpretations of the USoA must be posed in writing or if

oral requests were acceptable.

Response. It is common practice for RUS to address borrower,

certified public accountant (CPA), and industry questions orally and,

in effect, provide interpretations of the USoA. In order to be able to

rely on an interpretation and in order for RUS to maintain uniformity

throughout the program, interpretations should be addressed, in

writing, and Section 1767.14 has been revised accordingly.

Section 1767.41, Accounting Methods and Procedures Required of All RUS

Borrowers

Interpretation No. 136, Storm Damage

Comment. Two commenters supported the accounting for storm damage

as prescribed in Accounting Interpretation No. 136; however, they

recommended that the interpretation be expanded to include the

accounting for the administrative fee paid by FEMA.

Response. RUS agrees with the recommendation and has revised the

final rule accordingly.

Interpretation No. 401, Computer Software

Comment. Three commenters questioned whether the cost of

applications software should be deferred in Account 186, Miscellaneous

Deferred Debits. One commenter specifically recommended capitalizing

the cost in Account 301, Organizations. The other commenters argued

that there is essentially no difference between generalized software

and applications software and that it is more appropriate to capitalize

both into a plant account and record depreciation.

Response. In accordance with a Technical Practice Aid issued by the

American Institute of Certified Public Accountants, the cost of

computer software purchased for internal use in activities other than

research and development should be capitalized and depreciated over its

estimated useful service life in accordance with Accounting Research

Bulletin No. 43, Chapter 9, Depreciation, Paragraph 5. RUS, therefore,

agrees with the commenters that recommended that applications software

be capitalized and depreciated in a manner similar to that of

generalized software. Interpretation No. 401 has been revised

accordingly.

Comment. Interpretation No. 401 requires that all costs incurred in

the revision of software or in the maintenance, updating, and

conversion of files, and all costs of computer software having a useful

service life of less than 1 year be charged to expense in Account 921,

Office Supplies and Expenses, in the period incurred. One commenter

argued that Account 921 is not always the most appropriate account in

which to classify such costs. Rather, the costs should be

functionalized to the various construction, retirement, operations, and

maintenance accounts based upon the activity being supported.

Response. The note to Account 921 specifically states that office

expenses that are clearly applicable to any category of operating

expenses other than the administrative and general category should be

included in the appropriate account in such category. Account 921 does

not, however, permit capitalization of any portion of these costs. In

this final rule, RUS has clarified Interpretation No. 401 to allow such

costs to be recorded in the appropriate functional operating expense

accounts; however, capitalization to either construction or retirement

activities is not permitted.

Interpretation No. 604, Deferred Compensation

Comment. Interpretation No. 604 sets forth the accounting

requirements associated with the NRECA Deferred Compensation Program.

It requires that the accumulated change in the fund value resulting

from investment gains or losses to be recorded as an increase/decrease

in the asset and liability accounts. One commenter took issue with this

accounting methodology and recommended that increases in the fund be

accounted for as an increase in the asset with an offsetting credit to

interest income. Because the cooperative has an obligation to pass the

investment earnings along to the employee, the commenter recommended

that the liability account should be increased with an offsetting

charge to interest expense.

Response. In response to this comment, RUS contacted NRECA to

obtain a better understanding of the internal operations of the

Deferred Compensation Program. When an employer offers a deferred

compensation arrangement to an employee, the amount of the annual

contribution (deferred compensation), currently an amount up to $7,500,

is determined. The cooperative then invests these funds with NRECA in

the cooperative's name. The funds are invested in the Homestead Fund

which currently consists of four funds--the

[[Page 55428]]

Short-term Bond Fund, the Value Fund, the Short-term Government

Securities Fund, and the Daily Income Fund. Detailed investment

information is maintained for each cooperative by participant. While

the employee selects the funding program and bears its risk through the

benefits ultimately derived, the cooperative retains legal ownership of

the investments.

The accounting currently set forth in Interpretation No. 604

assumed that the cooperative bore the investment risk and has,

therefore, been revised accordingly.

Interpretation No. 626, Rural Economic Development Loan and Grant

Program

Comment. Three commenters objected to recording the funds received

from a Rural Economic Development Grant as income. Rather, the

commenters believed that the economic development grant funds are more

in the nature of a capital item provided by Congress to promote

particular purposes and should therefore, be recorded in Account 208,

Donated Capital. The commenters argue that classifying these grant

funds as income distorts a RUS borrower's financial statistics as well

as adversely impacts upon the 85% member income test a cooperative must

meet in order to remain income tax exempt.

Response. The establishment of a revolving loan program by the

grantee of a Federal grant creates special concerns from an accounting

perspective. The customary Federal grant is made for a specific project

or purpose. The income to the grantee is offset by the costs incurred

in the project, thereby eliminating any net income effect. When a

revolving loan program is established by the grantee, the grantee

incurs no immediate expense with which to offset the grant funds. While

there may be the incidental costs of administering the loan program, no

additional costs are incurred unless a loan is defaulted upon. In fact,

under the Rural Business and Cooperative Development Service's grant

program, after the initial grant funds have been loaned and repaid, the

borrower may charge a reasonable rate of interest on its revolving

loans. The grant program may, therefore, actually become income

producing.

Additionally, because 7 CFR Part 1703, Subpart B, Rural Economic

Development Loan and Grant Program, is somewhat ambiguous as to the

final disposition of the grant funds upon termination of the revolving

loan program, further accounting concerns are raised.

The accounting for a rural economic development grant is therefore,

dependent upon the grant agreement itself. If the agreement requires

the grantee to repay the grant upon termination of the revolving loan

program, the funds must be recorded as a liability. If the grant

agreement stipulates that there is no obligation for repayment, the

funds should be recorded as a permanent infusion of capital. If,

however, the agreement is silent as to the final disposition of the

grant funds, the funds must be recorded as income. The final rule has

been revised accordingly.

Interpretation No. 627, Postretirement Benefits

Comment. Of the 27 comments received, only two commenters believed

that RUS should continue to require borrowers to fund their

postretirement benefit obligations. Those opposed to the funding

requirement argued that the funding of postretirement benefits is an

issue of importance to utility management, rate regulators, and

employees; however, it should be of little importance to a utility's

lenders. They argue that cash set aside in an external trust for the

sole purpose of financing postretirement benefits could adversely

affect loan security as cash that would otherwise be available to meet

debt service would be available only for postretirement benefits. Those

in favor of funding argued that unfunded benefits present a risk of

future loan defaults. The beneficiaries of the unfunded benefits will

be co-creditors along with the Federal government and the ratepayers/

owners of the cooperatives will place their own self interest ahead of

the fiscal integrity of the cooperative, thereby failing to raise rates

when necessary to meet their Federal debt service obligations.

Response. While the risk exists that the ratepayers/owners of a

certain few borrowers may benefit at the detriment of the Federal

government, the vast majority of RUS borrowers are financially sound,

fiscally responsible entities. The funding requirement, as currently

set forth, significantly limits a borrower's investment options. It

also limits flexibility in managing a borrower's operations and may put

a borrower at a competitive disadvantage. While RUS strongly encourage

borrowers to fund their postretirement benefit obligations for the

reasons proffered above, RUS considers its current funding requirement

to be unduly burdensome. Similarly, because funding in an irrevocable

trust may, in fact, impair repayment of loans, RUS believes that it

would not be undertaking a substantial risk if it were to eliminate the

funding requirement. For these reasons, no revision was made to the

final rule.

Comment. Interpretation No. 627 requires RUS borrowers to have

rates in place sufficient to recover their current period

postretirement benefit expense and any amortization of the transition

obligation at the time of adoption of Statement No. 106. Evidence of

such rate recovery in the form of a board resolution or commission

order must be submitted to RUS. One commenter argued that the

submission of a board resolution is unnecessary. Special attention is

not required by the board of directors for other types of expenses and

should not, therefore, be mandated for postretirement benefits.

Response. Prior to the issuance of Statement No. 106, many

utilities argued that rate-regulated enterprises should be allowed to

continue to account for postretirement benefits on a ``pay-as-you-go''

basis provided that postretirement benefit costs were included in rates

on a similar basis. RUS, in Interpretation No. 627, specifically

requires its borrowers to adopt the accrual accounting provisions of

Statement No. 106 and prohibits its borrowers from remaining on the

``pay-as-you-go'' basis. Inherent in this concept is the recovery,

through rates, of the annual accrual for postretirement benefit costs.

While RUS agrees that the board is not asked to specifically address

other current period operating expenses unless they have been deferred

under the provisions of Statements Nos. 71, 90, and 92, postretirement

benefit costs, the controversy over accrual versus ``pay-as-you-go''

accounting, presents a more contentious issue. The requirement for

submission of the board resolution or commission order evidences

adoption of the accrual accounting provisions as required by Statement

No, 106 and Interpretation No. 627 and for this reason, no change has

been made to the final rule.

Comment. Interpretation No. 627 acknowledges that the transition

obligation resulting from the adoption of Statement No. 106 may be

deferred in accordance with the provisions of Statement No. 71 provided

RUS approval is obtained. One commenter indicated that the Emerging

Issues Task Force (EITF) in EITF No. 92-12, Accounting for OPEB Costs

by Rate-Regulated Enterprises, limits the combined deferral-recovery

period authorized by the regulator to approximately twenty years from

the date of adoption of Statement No. 106. The commenter recommended

that RUS refer to EITF 92-12 in its regulation and adopt its provision

accordingly.

[[Page 55429]]

Response. Interpretations of generally accepted accounting

principles are perpetually issued by the EITF and the AICPA. RUS has

not, therefore, attempted to address each interpretation in its

rulemakings unless RUS borrowers are specifically affected. Because all

deferrals require RUS approval, RUS is able to monitor compliance with

EITF 92-12 at the approval stage and it is not RUS's intention to

approve a deferral that will conflict with the interpretation. For this

reason, no revision was made to the final rule.

Comment. Interpretation No. 627 provides journal entries for the

various events associated with postretirement benefits. Included among

the events journalized is a borrower's voluntary funding of its

postretirement benefit obligation. The journal entry prescribes a debit

to Account 228.3X, Accumulated Provision for Pensions and Benefits--

Funded, and a credit to Account 131.1, Cash--General. One commenter

agreed with the journal entry provided that the funds were placed in an

external, irrevocable trust. The commenter further proffered that if

the borrower is merely segregating funds to be used to pay obligations

in the future, reducing the postretirement benefit obligation is

inappropriate.

Response. RUS agrees with the commenter and has revised the final

rule to reflect two journal entries--one reflecting funding into an

external, irrevocable trust and a second reflecting a segregation of

funds.

Interpretation No. 629, Investments in Debt and Equity Securities

Comment. Several commenters specifically agreed with the accounting

set forth in Interpretation No. 629; however, three commenters

suggested that RUS address unrealized gains and losses on available-

for-sale securities held as part of a decommissioning fund.

Specifically, the commenters recommended that such gains and losses

should increase or decrease the reported value of the fund.

Response. The accounting for nuclear decommissioning costs and

their funding has long been an issue of debate and is currently being

reviewed by the Federal Energy Regulatory Commission and the Financial

Accounting Standards Board. It was RUS's intention not to address this

subject matter in any forum until such time as a consensus was drawn.

However, based upon the public belief that addressing available-for-

sale securities held in a nuclear decommissioning fund will clarify

this interpretation, RUS has revised Interpretation No. 629 to require

unrealized holding gains and losses to increase or decrease, as

appropriate, the reported value of the decommissioning fund.

List of Subjects in 7 CFR Part 1767

Electric power, Loan programs-energy, Rural areas, Uniform System

of Accounts.

For the reasons set out in the preamble, RUS hereby amends 7 CFR

chapter XVII as follows:

PART 1767--ACCOUNTING REQUIREMENTS FOR RUS ELECTRIC BORROWERS

1. The authority citation for part 1767 continues to read as

follows:

Authority: 7 U.S.C. 901 et seq.; 7 U.S.C. 1921 et seq.; Pub. L.

103-354, 108 Stat. 3178 (7 U.S.C. 6941 et seq.).

2. Section 1767.13 is amended by revising paragraphs (a), (c)

introductory text, and (d) to read as follows:

Sec. 1767.13 Departures from the prescribed RUS Uniform System of

Accounts.

(a) No departures are to be made to the prescribed RUS USoA without

the prior written approval of RUS. Requests for departures from the RUS

USoA shall be addressed, in writing, to the Director, Borrower

Accounting Division (BAD).

* * * * *

(c) If any state regulatory authority with jurisdiction over an RUS

borrower prescribes accounting methods or principles for the borrower

that are inconsistent with the provisions of this part, the borrower

must immediately notify the Director, BAD, and provide such documents,

information, and reports as RUS may request to evaluate the impact that

such accounting methods or principles may have on the interests of RUS.

* * * * *

(d) RUS borrowers will not implement the provisions of Statement of

Financial Accounting Standards (SFAS) No. 71, Accounting for the

Effects of Certain Types of Regulation, SFAS No. 90, Regulated

Enterprises--Accounting for Abandonments and Disallowances of Plant

Costs, SFAS No. 92, Regulated Enterprises--Accounting for Phase-in

Plans, without the prior written approval of RUS. Requests for approval

shall be addressed, in writing, to the Director, BAD.

* * * * *

3. Section 1767.14 is revised to read as follows:

Sec. 1767.14 Interpretations of the RUS Uniform System of Accounts.

To maintain uniformity in accounting, borrowers must submit

questions concerning interpretations of the RUS USoA, in writing, to

the Director, BAD, for consideration and decision.

(Approved by the Office of Management and Budget under control

number 0572-0002)

4-6. In Sec. 1767.18, make the following changes:

a. In the table of contents listing under ``Other Property and

Investments'', entries for Accounts 123.3, 123.4, 124.1, 124.2 are

added in numerical order.

b. In the table of contents listing under ``Current and Accrued

Assets'', the entry for Account 131.12 is put in numerical order and

entries for Accounts 131.13 and 131.14 are added in numerical order.

c. Paragraph C. of Account 123 is revised, and Account 123.3,

Investment in Associated Organizations-Federal Economic Development

Loans, and Account 123.4, Investment in Associated Organizations-Non-

Federal Economic Development Loans, are added in numerical order.

The additions and revision read as follows:

1767.18 Assets and other debits.

* * * * *

Assets and Other Debits

* * * * *

Other Property and Investments

* * * * *

123.3 Investment in Associated Organizations--Federal Economic

Development Loans

123.4 Investment in Associated Organizations--Non-Federal Economic

Development Loans

* * * * *

124.1 Other Investments--Federal Economic Development Loans

124.2 Other Investments--Non-Federal Economic Development Loans

* * * * *

Current and Accrued Assets

* * * * *

131.13 Cash--General--Economic Development Grant Funds

131.14 Cash--General--Economic Development Non-Federal Revolving

Funds

* * * * *

123 Investment in Associated Companies

* * * * *

C. Account 123 shall be subaccounted as follows:

123.1 Patronage Capital from Associated Cooperatives

123.3 Investment in Associated Organizations--Federal Economic

Development Loans

123.4 Investment in Associated Organizations--Non-Federal Economic

Development Loans

[[Page 55430]]

123.11 Investment in Subsidiary Companies

123.21 Subscriptions to Capital Term Certificates--Supplemental

Financing

123.22 Investment in Capital Term Certificates--Supplemental

Financing

123.23 Other Investments in Associated Organizations

* * * * *

123.3 Investment in Associated Organizations--Federal Economic

Development Loans

This account shall include investment advances of Federal funds

received from a Rural Economic Development Grant to associated

organizations for authorized rural economic development projects.

123.4 Investment in Associated Organizations--Non-Federal Economic

Development Loans

This account shall include investment advances of non-Federal funds

from the Rural Economic Development Grant revolving fund to associated

organizations for authorized rural economic development projects.

* * * * *

7. In 1767.18, paragraph C of Account 124 is added preceeding Note

A, and Account 124.1, Other Investments--Federal Economic Development

Loans, and Account 124.2, Other Investments--Non-Federal Economic

Development, are added to read as follows:

* * * * *

124 Other Investments

* * * * *

C. Account 124 shall be subaccounted as follows:

124.1 Other Investments--Federal Economic Development Loans

124.2 Other Investments--Non-Federal Economic Development Loans

* * * * *

124.1 Other Investments--Federal Economic Development Loans

This account shall include investment advances of Federal funds

received from a Rural Economic Development Grant to nonassociated

organizations for authorized rural economic development projects.

124.2 Other Investments--Non-Federal Economic Development Loans

This account shall include investment advances of non-Federal funds

from the Rural Economic Development Grant revolving fund to

nonassociated organizations for authorized rural economic development

projects.

* * * * *

8. In Sec. 1767.18, paragraph B of Account 131 is revised, Account

131.12 is put in numerical order, and Account 131.13, Cash--General--

Economic Development Grant Funds, and Account 131.14, Cash--General--

Economic Development Non-Federal Revolving Funds, are added in

numerical order to read as follows:

* * * * *

131 Cash

* * * * *

B. Account 131 shall be subaccounted as follows:

131.1 Cash--General

131.2 Cash--Construction Fund--Trustee

131.3 Cash--Installation Loan and Collection Fund

131.4 Transfer of Cash

131.12 Cash--General--Economic Development Loan Funds

131.13 Cash--General--Economic Development Grant Funds

131.14 Cash--General--Economic Development Non-Federal Revolving

Funds

* * * * *

131.13 Cash--General--Economic Development Grant Funds

This account shall include cash received from the Rural Utilities

Service for Rural Economic Development Grants. Economic development

grant funds shall be charged to this account and credited to Account

224.18, Other Long-Term Debt--Grant Funds; Account 208, Donated

Capital; or Account 421, Miscellaneous Nonoperating Income, as

appropriate. This account shall be credited and either Account 123.3,

Investment in Associated Organizations--Federal Economic Development

Loans, or Account 124.1, Other Investments--Federal Economic

Development Loans, shall be debited, as appropriate, with the amount of

an economic development revolving fund loan.

131.14 Cash--General--Economic Development Non-Federal Revolving Funds

This account shall include all non-Federal funds comprising the

economic development revolving fund. It shall include all funds

supplied by the borrower as well as all cash received from the

repayment of loans made from the economic development revolving fund.

This account shall be credited and either Account 123.4, Investment in

Associated Organizations--Non-Federal Economic Development Loans, or

Account 124.2, Other Investments--Non-Federal Economic Development

Loans, shall be debited, as appropriate, with the amount of an economic

development revolving fund loan.

* * * * *

9. In Sec. 1767.19, in the table of contents listing under

``Margins and Equities'', an entry for Account 215.1 is added in

numerical order and Account 215.1 is added to read as follows:

Sec. 1767.19 Liabilities and other credits.

* * * * *

Liabilities and Other Credits

Margins and Equities

* * * * *

215.1 Unrealized Gains and Losses--Debt and Equity Securities

* * * * *

215.1 Unrealized Gains and Losses--Debt and Equity Securities

This account shall include the unrealized holding gains and losses

for available-for-sale securities.

* * * * *

10--15. In Sec. 1767.41, make the following changes:

a. In the Numerical Index, the entries Interpretation No. 136,

Storm Damage; Interpretation No. 628, Postemployment Benefits; and

Interpretation No. 629, Investments in Debt and Equity Securities, are

added in numerical order.

b. In the Subject Matter Index listing under ``D'', an entry for

``Debt Securities--Investments in,'' is added in alphabetical order.

c. In the Subject Matter Index listing under ``E'', an entry for

``Equity Securities--Investments in,'' is added in alphabetical order.

d. In the Subject Matter Index listing under ``I'', an entry for

``Investments in Debt and Equity Securities,'' is added in alphabetical

order.

e. In the Subject Matter Index listing under ``P'', an entry for

``Postemployment Benefits,'' is added in alphabetical order.

f. In the Subject Matter Index listing under ``S'', an entry for

``Securities--Investments in Debt and Equity,'' and an entry for

``Storm Damage,'' are added in alphabetical order.

g. The entry Interpretation No. 136 is added. The additions read as

follows:

Sec. 1767.41 Accounting methods and procedures required of all RUS

borrowers.

* * * * *

Numerical Index

------------------------------------------------------------------------

Number Title

------------------------------------------------------------------------

* * * * *

136........................... Storm Damage.

* * * * *

628........................... Postemployment Benefits.

629........................... Investments in Debt and Equity

Securities.

------------------------------------------------------------------------

[[Page 55431]]

Subject Matter Index

------------------------------------------------------------------------

Number

------------------------------------------------------------------------

* * * * *

D

* * * * *

Debt Securities--Investments in........... 629

* * * * *

E

* * * * *

Equity Securities--Investments in......... 629

* * * * *

I

* * * * *

Investments in Debt and Equity Securities. 629

* * * * *

P

* * * * *

Postemployment Benefits................... 628

* * * * *

S

* * * * *

Securities--Investments in Debt and Equity 136

* * * * *

Storm Damage.............................. 136

* * * * *

------------------------------------------------------------------------

136 Storm Damage

As a result of recent hurricane, flood, and ice storm damage, the

Rural Utilities Service (RUS) has received several inquiries concerning

the proper accounting for storm damage costs and the associated funds

received from the Federal Emergency Management Administration (FEMA).

Storm damage costs should be accounted for under the work order

procedure. Units of property destroyed or otherwise removed from

service must be reflected on retirement work orders and units of

property installed must be shown on construction work orders. To ensure

that the accounting for construction and retirement costs is as

accurate as possible, an effort should be made to accurately accumulate

material, labor, and overhead costs. Even when extreme care has been

exercised, however, it may still be necessary to use estimates to

develop the appropriate cost figures.

When a storm occurs, a utility typically incurs a large retirement

loss, all or a part of which should be charged to the accumulated

provision for depreciation. Storm damage costs over and above

construction and retirement costs represent maintenance expense.

Maintenance costs include the costs of resagging lines, straightening

poles, and replacing minor items of property. When extensive damage has

occurred, the need to restore the property to an operating condition

without delay usually results in excessive costs being incurred.

Standard property unit costs may be used as a guide in determining the

amount to be capitalized. It should be noted, however, that when

standard property unit costs are used, all excess costs are charged to

maintenance expense.

Because of the storm's destruction, property is retired prematurely

and as a result, extraordinary retirement losses occur. When such

extraordinary losses occur, they should be recorded in the year in

which the losses are incurred. If the recording of such losses will

materially distort the income statement, such losses may be charged to

Account 435, Extraordinary Deductions. These costs may be deferred and

amortized to future periods only if the provisions of Statement of

Financial Accounting Standards No. 71, Accounting for the Effects of

Certain Types of Regulation (Statement No. 71), are applied. Under the

provisions of Statement No. 71, a utility may defer certain costs,

provided such costs are included in the utility's rate base and

recovered through future rates. If an RUS borrower elects to apply the

provisions of Statement No. 71, RUS approval is required. To obtain RUS

approval, a borrower must submit:

a. A detailed description of the plan including the nature of the

expense item, the amount of the deferral, the specific time period for

rate recovery, and justifying support for the time period selected;

b. The accounting journal entries being used by the cooperative to

record the expense deferral and amortization of the deferred costs;

c. A copy of the state Commission order authorizing recovery of the

deferred costs through future rates, or in the absence of commission

jurisdiction, a resolution from the cooperative's board of directors

authorizing such recovery; and

d. A statement from the borrower's certified public accountant

(CPA) or CPA firm indicating that the deferral and amortization of

these costs is in accordance with generally accepted accounting

principles.

To assist in the restoration of the damaged facilities, the Federal

government often provides assistance through FEMA. Under current FEMA

procedures, FEMA provides funds for the restoration of facilities based

upon the cost estimates submitted by the entity requesting assistance.

If the FEMA grant is for less than 100 percent of the cost estimates,

FEMA does not specify which costs are to be reimbursed. When the funds

are received, therefore, they should be accounted for by crediting

construction, retirement, maintenance expense, and administrative

expense in direct proportion to the total costs incurred. For example,

if total storm damage costs are $1,000,000 with $450,000 incurred for

maintenance, $300,000 for retirement, $200,000 for construction, and

$50,000 for administrative costs, the FEMA reimbursement should be

accounted for by applying 45 percent of the funds received as a credit

to maintenance expense, 30 percent as a credit to retirement costs, 20

percent as a credit to construction, and 5 percent as a credit to

administrative and general costs.

Accounting Journal Entries

Dr. 108.8X, Retirement Work in Progress--

Storm Damage........................... $1,015.17

Cr. 107.4, Construction Work in

Progress--Storm Damage............. .............. $1,015.17

To transfer the removal costs recorded in Column 11 of Retirement

Work Order #4401X to Account 108.8X.

Dr. 107.4, Construction Work in

Progress--Storm Damage................. $4,141.55

Cr. 108.8X, Retirement Work in

Progress--Storm Damage............. .............. $4,141.55

To remove material salvaged in the ____________________ rebuild

from Account 107.4. The original entry debited Account 154, Plant

Materials and Operating Supplies, and credited Account 107.4. (See

Column 12 of Retirement Work Order #4401X.)

Dr. 108.8X, Retirement Work in Progress--

Storm Damage........................... $312,230.41

[[Page 55432]]

Cr. 364, Poles Towers and Fixtures.. .............. $133,377.55

Cr. 365, Overhead Conductors and

Devices............................ .............. 59,683.08

Cr. 368, Lines Transformers......... .............. 19,704.60

Cr. 369, Services................... .............. 97,651.23

Cr. 373, Street Lighting and Signal

Systems............................ .............. 1,813.95

To remove the original cost of property destroyed and retired from

the classified plant accounts. This retirement is recorded, in detail,

on Retirement Work Order #4401X. It is understood that this retirement

covers all distribution property retired or destroyed in the

____________________ area exclusive of substations and special

equipment items (meters, meter sockets, current and potential

transformers, transformers, voltage regulators, oil circuit reclosers

(OCR), and sectionalizers).

Dr. 108.6, Accumulated Provision for

Depreciation of Distribution Plant..... $309,104.03

Cr. 108.8X, Retirement Work in

Progress--Storm Damage............. .............. $309,104.03

To record the net loss due to the retirement of distribution lines

in the ____________________ area. (See Retirement Work Order #4401X.)

Dr. 364, Poles, Towers and Fixtures..... $99,075.40

Dr. 365, Overhead Conductors and Devices 104,142.22

Dr. 368, Line Transformers.............. 25,036.07

Dr. 369, Services....................... 28,865.08

Dr. 373, Street Lighting and Signal

Systems................................ 2,101.60

Cr. 107.4, Construction Work in

Progress--Storm Damage............. .............. $259,220.37

To record, in the proper classified plant accounts, Construction

Work Order #4401 covering the ____________________ rebuild.

This entry includes:

Material Issued..................... $150,336.49

Less: Materials Returned............ 15,631.39

-------------------------------

Net Material Used................... 134,705.10

Labor and overhead estimated by

using standard record unit costs... 124,515.27

-------------------------------

Total............................. 259,220.37

===============================

Dr. 108.8X, Retirement Work in Progress--

Storm Damage........................... 2,384.00

Cr. 107.4, Construction Work in

Progress--Storm Damage............. .............. $2,384.00

To transfer the removal costs associated with the retirement of old

transmission lines ($1,966) and substations ($418) to Account 107.4.

This cost is shown in Column 11 of Retirement Work Order #4400X).

Dr. 107.4, Construction Work in

Progress--Storm Damage................. $1,939.74

Cr. 108.8X, Retirement Work in

Progress--Storm Damage............. .............. $1,939.74

To remove material salvaged from transmission lines ($1,545.74) and

substations ($394.00) from Account 107.4. The original entry debited

Account 154 and credited Account 107.4. (See Column 12 of Retirement

Work Order #4400X.)

Dr. 108.8X, Retirement Work in Progress--

Storm Damage........................... $162,172.06

Cr. 355, Poles and Fixtures......... .............. $47,738.45

Cr. 356, Overhead Conductors &

Devices............................ .............. 80,304.11

Cr. 362, Station Equipment.......... .............. 34,129.50

To remove the original cost of transmission lines and substations

destroyed and retired from the classified plant accounts. (See

Retirement Work Order #4400X.) (New substations were built and

separately accounted for on Work Order #4406.)

Dr. 108.5, Accumulated Provision for

Depreciation of Transmission Plant..... $128,462.82

Dr. 108.6, Accumulated Provision for

Depreciation of Distribution Plant..... 34,153.50

Cr. 108.8X, Retirement Work in

Progress--Storm Damage............. .............. $162,616.32

To record the net loss due to the retirement of transmission lines

($128,462.82) and substations ($34,153.50). (See Retirement Work Order

#4400X):

------------------------------------------------------------------------

Transmission

Substations plant

------------------------------------------------------------------------

Original Cost........................... $34,129.50 $128,042.56

Add: Cost of Removal.................... 418.00 1,966.00

-------------------------------

34,547.50 130,008.56

Less: Material Salvaged................. 394.00 1,545.74

-------------------------------

Total............................. 34,153.50 128,462.82

===============================

------------------------------------------------------------------------

Dr. 355, Poles and Fixtures............. $161,784.05

Dr. 356, Overhead Conductors and Devices 124,704.77

Cr. 107.4, Construction Work in

Progress--Storm Damage............. .............. $286,488.82

To record, in the proper classified plant accounts, the costs of a

69 kV transmission line (____________________) as detailed in Work

Order #4400. This work order includes construction costs as follows:

[[Page 55433]]

Material Used (Net)..................... $171,665.62

Labor and overhead estimated by

using standard record unit costs... 114,823.20

-------------------------------

Total............................. 286,488.82

===============================

Dr. 107.4, Construction Work in

Progress--Storm Damage................. $329.40

Cr. 108.8X, Retirement Work in

Progress--Storm Damage............. .............. $329.40

To correct the journal entry for cash received from the sale of

scrapped meters and transformers. The original entry credited Account

107.4 at the time of receipt.

Transformers........................ $318.00

Meters.............................. 11.40

-------------------------------

Net Materials Used.................. 329.40

===============================

Dr. 108.8X, Retirement Work in Progress--

Storm Damage........................... .............. $137,671.22

Cr. 365, Overhead Conductors and

Devices............................ .............. $4,557.00

Cr. 368, Line Transformers.......... .............. 112,815.22

Cr. 370, Meters..................... .............. 20,299.00

To remove the cost of meters, transformers, and OCRs lost or

destroyed from the primary plant accounts. (See Retirement Work Order

#4402X.)

737 Transformers.................... $112,815.22

31 OCRs............................. 4,557.00

1,532 Meters........................ 20,299.00

-------------------------------

Total............................. 137,671.22

===============================

Dr. 108.6, Accumulated Provision for

Depreciation of Distribution Plant..... $137,341.82

Cr. 108.8X, Retirement Work in

Progress........................... .............. $137,341.82

To record the net loss due to the retirement of meters,

transformers, and OCRs. (See Retirement Work Order #4402X.)

Original Cost....................... $137,671.22

Salvaged Realized................... 329.40

-------------------------------

Total............................. 137,341.82

===============================

Dr. 186, Miscellaneous Deferred Debits.. $1,319.85

Cr. 107.4, Construction Work in

Progress--Storm Damage............. .............. $1,319.85

To record the engineering costs associated with future construction

work in the ____________________ area.

Dr. 593, Maintenance of Overhead Lines.. $607.24

Dr. 595, Maintenance of Line

Transformers........................... 19,365.86

Dr. 597, Maintenance of Meters.......... 6,595.56

Cr. 107.4, Construction Work in

Progress--Storm Damage............. .............. $26,568.66

To charge the costs of repairing damaged meters, transformers,

voltage regulators, and OCRs to the appropriate expense accounts.

Repair costs were originally charged to Account 107.4.

----------------------------------------------------------------------------------------------------------------

593 595 597

----------------------------------------------------------------------------------------------------------------

Meters.......................................................... .............. .............. $6,595.56

Transformers.................................................... .............. $18,869.95 ..............

Voltage Regulators.............................................. .............. 495.91 ..............

Oil Circuit Reclosers........................................... $607.24 .............. ..............

-----------------------------------------------

Total..................................................... 607.24 19,365.86 6,595.56

===============================================

----------------------------------------------------------------------------------------------------------------

Dr. 920, Administrative and General

Salaries............................... $32,000.00

Dr. 921, Office Supplies and Expenses... 4,421.69

Cr. 107.4, Construction Work in

Progress--Storm Damage............. .............. $36,421.69

To charge the administrative costs incurred to obtain the FEMA

grant to the appropriate expense accounts. Administrative costs were

originally charged to Account 107.4.

Salaries............................ $32,000.00

Office Supplies..................... 4,421.69

-------------------------------

Total............................. $36,421.69

===============================

Dr. 571, Maintenance of Overhead Lines.. $3,675.60

Dr. 593, Maintenance of Overhead Lines.. 33,080.40

Cr. 107.4, Construction Work in

Progress Storm Damage.............. .............. $36,756.00

To allocate expenses remaining in Account 107.4 to distribution and

transmission maintenance expense. It was estimated that only 10 percent

is applicable to transmission.

Dr. 426.5, Other Deductions............. $275,000.00

[[Page 55434]]

Dr. 435, Extraordinary Deductions

Dr. 182.1, Extraordinary Property Losses

Cr. 108.5, Accumulated Provision for

Depreciation of Transmission Plant. .............. $35,000.00

Cr. 108.6, Accumulated Provision for

Depreciation of Distribution Plant. .............. 240,000.00

To restore the accumulated provisions for depreciation to their

appropriate levels based upon a study of plant currently in service.

Note: Account 426.5, Other Deductions, should be used to record

the retirement loss as a current period expense. Account 435,

Extraordinary Deductions, may be used when the loss will materially

distort the income statement. Account 182.1, Extraordinary Property

Losses, should be used when such costs are being deferred under the

provisions of Statement No. 71. Costs recorded in this account

should be amortized to Account 407, Amortization of Property Losses,

as the costs are recovered through rates.

Dr. 131.1, Cash--General.................................................... $1,000,000.00

Cr. 253, Other Deferred Credits......................................... ................ $1,000,000.00

To record the receipt of funds from the Federal Emergency

Management Administration (FEMA).

Dr. 253, Other Deferred Credits............................................... $1,000,000.00

Cr. 108.5, Accumulated Provision for Depreciation of Transmission Plant... ................ $74,205.00

Cr. 108.6, Accumulated Provision for Depreciation of Distribution Plant... ................ 191,575.00

Cr. 186, Miscellaneous Deferred Debits.................................... ................ 872.00

Cr. 355, Poles and Fixtures............................................... ................ 129,056.00

Cr. 356, Overhead Conductors and Devices.................................. ................ 99,408.00

Cr. 364, Poles, Towers and Fixtures....................................... ................ 78,916.00

Cr. 365, Overhead Conductors and Devices.................................. ................ 82,840.00

Cr. 368, Line Transformers................................................ ................ 20,056.00

Cr. 369, Services......................................................... ................ 23,108.00

Cr. 373, Street Lighting and Signal Systems............................... ................ 1,744.00

Cr. 426.5, Other Deductions............................................... ................ 219,220.00

Cr. 571, Maintenance of Overhead Lines.................................... ................ 2,900.00

Cr. 593, Maintenance of Overhead Lines.................................... ................ 26,600.00

Cr. 595, Maintenance of Line Transformers................................. ................ 15,300.00

Cr. 597, Maintenance of Meters............................................ ................ 5,200.00

Cr. 920, Administrative and General Salaries.............................. ................ 25,491.00

Cr. 921, Office Supplies and Expenses..................................... ................ 3,509.00

To allocate FEMA funds to the proper accounts.

Summary of Costs

Maintenance:

Account 571, Maintenance of Overhead Lines.......... $3,675.60

Account 593, Maintenance of Overhead Lines.......... 33,687.24

Account 595, Maintenance of Line Transformers....... 19,365.86

Account 597, Maintenance of Meters.................. 6,595.56

---------------

Total Maintenance Costs........................... 63,324.26

===============

Retirement Loss:

Account 108.5, Accumulated Provision for

Depreciation of Transmission Plant................. 93,462.82

Account 108.6, Accumulated Provision for

Depreciation of Distribution Plant................. 240,599.35

Account 426.5, Other Deductions..................... 275,000.00

---------------

Total Retirement Loss............................. 609,062.17

===============

Construction:

Account 186, Miscellaneous Deferred Debits.......... 1,319.85

Account 355, Poles and Fixtures..................... 161,784.05

Account 356, Overhead Conductors and Devices........ 124,704.77

Account 364, Poles, Towers and Fixtures............. 99,075.40

Account 365, Overhead Conductor and Devices......... 104,142.22

Account 368, Line Transformers...................... 25,036.07

Account 369, Services............................... 28,865.08

Account 373, Street Lighting and Signal Systems..... 2,101.60

---------------

Total Construction Cost........................... 547,029.04

===============

Administrative:

Account 920, Administrative and General Salaries.... $32,000.00

Account 921, Office Supplies and Expenses........... 4,421.69

---------------

Total Administrative Cost......................... 36,421.69

===============

Maintenance......................................... 63,324.26

Retirement Loss..................................... 609,062.17

Construction........................................ 547,029.04

Administrative...................................... 36,421.69

---------------

Total Costs....................................... 1,255,837.16

===============

[[Page 55435]]

Distribution of FEMA Funds

Maintenance: 63,324.261,255,837.16=.0504=5.0%

Retirement: 609,062.171,255,837.16=.4850=48.5%

Construction: 547,029.041,255,837.16=.4356=43.6%

Administrative: 36,421.691,255,837.16=.0290=2.9%

Maintenance: $1,000,000.00 x 5.0%=.................... $50,000.00

Retirement: $1,000,000.00 x 48.5%=.................... 485,000.00

Construction: $1,000,000.00 x 43.6%=.................. 436,000.00

Administrative: $1,000,000.00 x 2.9%=................. 29,000.00

-----------------

Total........................................... 1,000,000.00

=================

Distribution of FEMA Funds--Maintenance

Account 571: 3,675.6063,324.26=.0580=5.8%

Account 593: 33,687.2463,324.26=.5320=53.2%

Account 595: 19,365.8663,324.26=.3058=30.6%

Account 597: 6,595.5663,324.26=.1041=10.4%

Account 571: $50,000.00 x 5.8%=....................... $2,900.00

Account 593: $50,000.00 x 53.2%=...................... 26,600.00

Account 595: $50,000.00 x 30.6%=...................... 15,300.00

Account 597: $50,000.00 x 10.4%=...................... 5,200.00

-----------------

Total........................................... 50,000.00

=================

Distribution of FEMA Funds--Retirement Loss

Account 108.5: 93,462.82609,062.17=.1535=15.3%

Account 108.6: 240,599.35609,062.17=.3950=39.5%

Account 426.5: 275,000.00609,062.17=.4515=45.2%

Account 108.5: $485,000.00 x 15.3%=................... $74,205.00

Account 108.6: $485,000.00 x 39.5%=................... 191,575.00

Account 426.5: $485,000.00 x 45.2%=................... 219,220.00

-----------------

Total........................................... 485,000.00

=================

Distribution of FEMA Funds--Construction

Account 186: 1,319.85547,029.04=.0024=.2%

Account 355: 161,784.05547,029.04=.2958=29.6%

Account 356: 124,704.77547,029.04=.2280=22.8%

Account 364: 99,075.40547,029.04=.1811=18.1%

Account 365: 104,142.22547,029.04=.1904=19.0%

Account 368: 25,036.07547,029.04=.0457=4.6%

Account 369: 28,865.08547,029.04=.0528=5.3%

Account 373: 2,101.67547,029.04=.0038=.4%

Account 186: $436,000.00 x .2%=....................... $872.00

Account 355: $436,000.00 x 29.6%=..................... 129,056.00

Account 356: $436,000.00 x 22.8%=..................... 99,408.00

Account 364: $436,000.00 x 18.1%=..................... 78,916.00

Account 365: $436,000.00 x 19.0%=..................... 82,840.00

Account 368: $436,000.00 x 4.6%=...................... 20,056.00

Account 369: $436,000.00 x 5.3%=...................... 23,108.00

Account 373: $436,000.00 x .4%=....................... 1,744.00

-----------------

Total........................................... 436,000.00

=================

Distribution of FEMA Funds--Administrative

Account 920: 32,000.0036,421.69=.8786=87.9%

Account 921: 4,421.6936,421.69=.1213=12.1%

Account 920: $29,000.00 x 87.9%=...................... $25,491.00

Account 921: $29,000.00 x 12.1%=...................... 3,509.00

-----------------

Total........................................... 29,000.00

=================

* * * * *

16. In Sec. 1767.41, Interpretation No. 401 is revised to read as

follows:

* * * * *

401 Computer Software Costs

Computer software consists of programs and routines (sets of

computer instructions) which direct the operation of the computer.

Software may refer to generalized routines useful in computer

operations or to programs for specific applications such as payroll.

The distinction between generalized software and application

software is important. Generalized software provides operating support

for individual applications. This would include programs for such tasks

as

[[Page 55436]]

making printouts of machine-readable records, sorting records,

organizing and maintaining files, translating programs written in a

symbolic language into machine-language instructions, and scheduling

jobs through the computer. These programs are generally furnished by

the manufacturer.

Application software consists of a set of instructions for

performing a particular data processing task. Application programs are

generally written by the user installation, but are frequently obtained

as prewritten packages from software vendors. Application software

includes programs such as payroll, billing, general ledger, as well as

engineering or managerial applications.

Costs incurred with the purchase or development of computer

software shall be accounted for as follows:

1. Capitalize in a subaccount of Account 391, Office Furniture and

Equipment, all costs for generalized software. Depreciate the cost over

the service life (or remaining life) of the main hardware (i.e.,

containing central processor). If the purchase invoice does not break

out or assign a cost to the ``generalized software,'' it is appropriate

to include the full amount in hardware costs. Capitalize in a separate

subaccount of Account 391, all costs for applications software

determined to have a service life of over one year. Depreciate the cost

over the estimated useful service life of the program. This

depreciation period shall not exceed five (5) years. RUS realizes,

however, that there may be circumstances that justify a useful life

longer than 5 years. When this is the case and it is management's

intent to utilize these programs over an extended period, written

justification shall be submitted to RUS for approval.

2. Expense in Account 921, Office Supplies and Expenses, in the

period incurred, all costs associated with the maintenance, updating,

and conversion of files or revision of all software, and all costs for

software with a useful life of less than 1 year. Also expense in

Account 921, the unamortized cost of all software determined, during

the year, to be no longer used by or useful to the cooperative. Such

costs that are clearly applicable to any category of operating expenses

other than the administrative and general category, however, shall be

included in the appropriate account in such category. In accordance

with the USoA, no portion of such costs shall be capitalized to

construction or retirement activities.

In determining the total cost of purchased or internally developed

software, the following items shall be included:

a. Costs incurred for feasibility studies if they result in the

purchase or development of software;

b. All costs related to the actual purchase or development of the

software. These costs must be specifically identifiable with the

software and properly supported by time cards, invoices, or other

documents; and

c. All costs incurred in ``testing and debugging'' the software.

Computer software costs are properly chargeable to Account 107,

Construction Work in Progress, provided that the following criteria are

met:

1. The computer program is specifically dedicated to performing a

construction related activity, and

2. The cost of the software is itemized separate and apart from

other hardware and software costs.

The cost of software programs meeting the above requirements and

having an estimated useful service life in excess of 1 year shall be

recorded in Account 186, Miscellaneous Deferred Debits, and amortized

to Account 107, Construction Work in Progress, over the estimated

service life of the program not to exceed 5 years.

All costs related to training personnel in the use of software

shall be expensed as incurred.

The accounting in this section is not intended to apply to

immaterial amounts. When it is deemed that the costs of the

recordkeeping necessary to amortize these costs outweigh the benefits

to the members, software costs shall be expensed in the year incurred.

For computer costs relating to load control equipment, refer to

Item 118 of this section.

* * * * *

17. In Sec. 1767.41, Interpretation No. 604 is revised to read as

follows:

* * * * *

604 Deferred Compensation

Many utilities participate in the NRECA Deferred Compensation

Program. Based upon the provisions of the program, the following

accounting entries shall be made:

Dr. 186.XX, Miscellaneous Deferred Debits--Deferred Compensation

Cr. 228.3, Accumulated Provision for Pensions and Benefits

To increase the deferred compensation provision by the amount of

the annual deposit to NRECA's Deferred Compensation Fund.

Dr. 128, Other Special Funds--Deferred Compensation

Cr. 131.1, Cash--General

To record the annual deposit to NRECA's Deferred Compensation Fund.

Dr. Construction Work in Progress, Retirement Work in Progress, or

Account 926, Employee Pensions and Benefits, as appropriate.

Cr. 186.XX, Miscellaneous Deferred Debits--Deferred Compensation

To record monthly accrual of deferred compensation.

Note: If an employee joins the deferred compensation program

during the year, use entry #1 to record the additional deposit to

the NRECA Deferred Compensation Fund and increase the monthly

accrual in entry #2 to reflect this deposit.

NRECA provides borrowers that participate in the deferred

compensation program with an annual account statement disclosing the

activity for each Homestead Fund investment including the number of

shares owned, interest income, dividend income, capital gains/losses,

and the value of the shares owned at statement date. Funds may be

invested in the Short-term Bond Fund, the Value Fund, the Short-term

Government Securities Fund, and the Daily Income Fund. Depending upon

the Homestead Fund selected, invested funds may earn interest and

dividend income and may experience unrealized holding gains or losses.

Based upon the information provided on the annual statement, the

following journal entries shall be recorded to recognize the increase

or decrease in the fund assets:

Dr. 128, Other Special Funds--Deferred Compensation

Cr. 419, Interest and Dividend Income

Cr. 421, Miscellaneous Nonoperating Income

To record an increase in the fund value as of December 31, 19xx,

resulting from interest and dividend income and from unrecognized

holding gains on trading securities.

Dr. 926, Employee Pensions and Benefits

Cr. 228.3, Accumulated Provision for Pensions and Benefits

To record an increase in the liability to the employee resulting

from an increase in the investment account.

Dr. 426.5, Other Deductions

Cr. 128, Other Special Funds--Deferred Compensation To record a

decrease in fund value as of December 31, 19xx, resulting from

unrecognized holding losses on trading securities.

Dr. 228.3, Accumulated Provision for Pensions and Benefits

Cr. 926, Employee Pensions and Benefits

[[Page 55437]]

To record a decrease in the liability to the employee resulting

from a decrease in the investment account.

Payments made to participating employees because of retirement or

separation for other reasons shall be recorded using the following

entries:

Dr. 131.1, Cash--General

Cr. 128, Other Special Funds--Deferred Compensation

To record the receipt of funds from NRECA.

and

Dr. 228.3, Accumulated Provision for Pensions and Benefits

Cr. 131.1, Cash--General

To record payment to employee for deferred compensation.

If the borrower has elected to bear the market risk of the funds

which guarantee that the amount of money an employee receives will not

be less than the amount of salary deferred, the following entry shall

be recorded if total payment(s) from NRECA are less than the amount of

salary deferred:

Dr. 926, Employee Pensions and Benefits

Cr. 131.1, Cash--General

To record payment to employee for deferred compensation. Payment

was made because amount returned did not equal salary deferred.

Appropriate disclosure of the terms of the program shall be made in

the notes to the financial statements.

* * * * *

18. In Sec. 1767.41, Interpretation No. 626 is revised to read as

follows:

* * * * *

626 Rural Economic Development Loan and Grant Program

On December 21, 1987, Section 313, Cushion of Credits Payments

Program, was added to the Rural Electrification Act. Section 313

establishes a Rural Economic Development Subaccount and authorizes the

Administrator of the Rural Utilities Service to provide zero interest

loans or grants to RE Act borrowers for the purpose of promoting rural

economic development and job creation projects.

Subpart B, Rural Economic Development Loan and Grant Program, 7 CFR

Part 1703, sets forth the policies and procedures relating to the zero

interest loan program and for approving and administering grants.

The accounting journal entries required to record the transactions

associated with a rural economic development loan are as follows:

Dr. 224.17, RUS Notes Executed--Economic Development--Debit

Cr. 224.16, Long-Term Debt--RUS Economic Development Notes Executed

To record the contractual obligation to RUS for the Economic

Development Notes.

Dr. 131.12, Cash--General--Economic Development Funds

Cr. 224.17, RUS Notes Executed--Economic Development--Debit

To record the receipt of the economic development loan funds.

Dr. 123, Investment in Associated Organizations or

Dr. 124, Other Investments

Cr. 131.12, Cash--General--Economic Development Funds

To record the disbursement of Economic development loan funds to

the project.

Dr. 131.1, Cash--General Funds

Cr. 421, Miscellaneous Nonoperating Income

To record payment received from the project for loan servicing

charges.

Dr. 171, Interest and Dividends Receivable

Cr. 419, Interest and Dividend Income

To record the interest earned on the investment of rural economic

development loan funds.

Dr. 426.1, Donations or

Dr. 426.5, Other Deductions

Cr. 131.1, Cash--General Funds

To record the payment of interest earned in excess of $500.00 on

the investment of rural economic development loan funds.

Note: Interest earned in excess of $500.00 must be used for the

rural economic development project for which the loan funds were

received or returned to RUS.

Dr. 131.12, Cash--General--Economic Development Funds

Cr. 123, Investment in Associated Organizations or

Cr. 124, Other Investments

To record receipt of the repayment, by the project, of economic

development loan funds.

Dr. 224.16, Long-Term Debt--RUS Economic Development Notes Executed

Cr. 131.12, Cash--General--Economic Development Funds

To record the repayment, to RUS, of the economic development loan

funds.

The accounting journal entries required to record the transactions

associated with a rural economic development grant are as follows:

Dr. 131.13, Cash--General--Economic Development Grant Funds

Cr. 224.18, Other Long-Term Debt--Grant Funds;

Cr. 208, Donated Capital; or

Cr. 421, Miscellaneous Nonoperating Income

To record grant funds disbursed by RUS. If the grant agreement

requires repayment of the funds upon termination of the revolving loan

program, Account 224.18 should be credited. If the grant agreement

states that there is absolutely no obligation for repayment upon

termination of the revolving loan program, the funds should be

accounted for as a permanent infusion of capital by crediting Account

208. If, however, the grant agreement is silent as to the final

disposition of the grant funds, Account 421 should be credited.

Dr. 123.3, Investment in Associated Organizations--Federal Economic

Development Loans

Cr. 131.13, Cash--General--Economic Development Grant Funds

To record advances of Federal funds to associated organizations for

authorized rural economic development projects.

Dr. 124.1, Other Investments--Federal Economic Development Loans

Cr. 131.13, Cash--General--Economic Development Grant Funds

To record advances of Federal funds to nonassociated organizations

for authorized rural economic development projects.

Dr. 171, Interest and Dividends Receivable

Cr. 419, Interest and Dividend Income

To record the accrual of interest on loans made to associated and

nonassociated organizations with Federal funds for authorized rural

economic development projects.

Dr. 131.14, Cash--General--Economic Development Non-Federal Revolving

Funds

Cr. 123.3, Investment in Associated Organizations--Federal Economic

Development Loans or

Cr. 124.1, Other Investments--Federal Economic Development Loans

To record repayment of loans made with Federal funds.

Dr. 123.4, Investment in Associated Organizations--Non-Federal Economic

Development Loans

Cr. 131.14, Cash--General--Economic Development Non-Federal

Revolving Funds

To record advances of non-Federal funds to associated organizations

for authorized rural economic development projects.

Dr. 124.2, Other Investments--Non-Federal Economic Development Loans

Cr. 131.14, Cash--General--Economic

[[Page 55438]]

Development Non-Federal Revolving Funds

To record advances of non-Federal funds to nonassociated

organizations for authorized rural economic development projects.

Dr. 171, Interest and Dividends Receivable

Cr. 419, Interest and Dividend Income

To record the accrual of interest on loans made to associated and

nonassociated organizations with non-Federal funds for authorized rural

economic development projects.

Dr. 131.14, Cash--General--Economic Development Non-Federal Revolving

Funds

Cr. 123.4, Investment in Associated Organizations--Non-Federal

Economic Development Loans or

Cr. 124.2, Other Investments--Non-Federal Economic Development

Loans

To record repayment of loans made with non-Federal funds.

* * * * *

19. In Sec. 1767.41, Interpretation No. 627 is revised, and

Interpretation No. 628, Postemployment Benefits, and Interpretation No.

629, Investments in Debt and Equity Securities, are added to read as

follows:

* * * * *

627 Postretirement Benefits

Statement of Financial Accounting Standards No. 106, Employers'

Accounting for Postretirement Benefits Other than Pensions (Statement

No. 106), requires reporting entities to accrue the expected cost of

postretirement benefits during the years the employee provides service

to the entity. For purposes of applying the provisions of Statement No.

106, members of the board of directors are considered to be employees

of the cooperative. Prior to the issuance of Statement No. 106, most

reporting entities accounted for postretirement benefit costs on a

``pay-as-you-go'' basis; that is, costs were recognized when paid, not

when the employee provided service to the entity in exchange for the

benefits.

As defined in Statement No. 106, a postretirement benefit plan is a

deferred compensation arrangement in which an employer promises to

exchange future benefits for an employee's current services.

Postretirement benefit plans may be funded or unfunded. Postretirement

benefits include, but are not limited to, health care, life insurance,

tuition assistance, day care, legal services, and housing subsidies

provided outside of a pension plan.

This statement applies to both written plans and to plans whose

existence is implied from a practice of paying postretirement benefits.

An employer's practice of providing postretirement benefits to selected

employees under individual contracts with specified terms determined on

an employee-by-employee basis does not, however, constitute a

postretirement benefit plan under the provisions of this statement.

Postretirement benefit plans generally fall into three categories:

single-employer defined benefit plans, multi-employer plans, and

multiple-employer plans.

The accounting requirements set forth in this interpretation focus

on single- and multiple-employer plans. The accounting requirements set

forth in Statement No. 106 for multiemployer plans or defined

contribution plans shall be adopted for borrowers electing those types

of plans.

Under the provisions of Statement No. 106, there are two components

of the postretirement benefit cost: the current period cost and the

transition obligation. The transition obligation is a one-time accrual

of the costs resulting from services already provided. Statement No.

106 allows the transition obligation to be deferred and amortized on a

straight-line basis over the average remaining service period of the

active employees. If the average remaining service life of the

employees is less than 20 years, a 20-year amortization period may be

used.

Accounting Requirements

All RUS borrowers must adopt the accrual accounting provisions and

reporting requirements set forth in Statement No. 106. The transition

obligation and accrual of the current period cost must be based upon an

actuarial study. This study must be updated to allow the borrower to

comply with the measurement date requirements of Statement No. 106;

however, the study must, at a minimum, be updated every five years. RUS

will not allow electric borrowers to account for postretirement

benefits on a ``pay-as-you-go'' basis.

The deferral and amortization of the transition obligation does not

require RUS approval provided that it complies with the provisions of

Statement No. 106. If, however, a borrower elects to expense the

transition obligation in the current period and subsequently defer this

expense in accordance with Statement of Financial Accounting Standards

No. 71, Accounting for the Effects of Certain Types of Regulation, the

deferral must be approved by RUS. In those states in which the

commission will not allow the recovery of the transition obligation

through future rates, the transition obligation must be expensed, in

its entirety, in the year in which Statement No. 106 is adopted. A

portion of the transition obligation may be charged to construction and

retirement activities provided such charges are properly supported.

Effective Date and Implementation

For plans outside the United States and for defined benefit plans

of employers that (a) are nonpublic enterprises and (b) sponsor defined

benefit postretirement plans with no more than 500 plan participants in

the aggregate, Statement No. 106 is effective for fiscal years

beginning after December 15, 1994. For all other plans, Statement No.

106 is effective for fiscal years beginning after December 15, 1992.

RUS borrowers must comply with the implementation dates set forth

in Statement No. 106. At the time of the adoption of Statement No. 106,

rates must be in place sufficient to recover the current period expense

and any amortization of the transition obligation. A copy of a board

resolution or commission order, as appropriate, indicating that the

transition obligation and current period expense have been included in

the borrower's rates must be submitted to RUS.

Accounting Journal Entries--Transition Obligation

The journal entries required to record the transition obligation

are as follows:

1. If the borrower elects to expense the transition obligation in

the current period and there is no deferral of costs, the following

entry shall be recorded:

Dr. 435.1, Cumulative Effect on Prior Years of a Change in Accounting

Principle or

Dr. 926, Employee Pensions and Benefits

Dr. 107, Construction Work in Progress

Dr. 108.8, Retirement Work in Progress

Cr. 228.3, Accumulated Provision for Pensions and Benefits

To record the current period recognition of the transition

obligation for postretirement benefits.

Note: A portion of the transition obligation may be charged to

construction and retirement activities provided such charges are

properly supported.

2. If the borrower elects to defer and amortize the transition

obligation in accordance with the provisions of Statement No. 71, the

following entry shall be recorded:

Dr. 182.3, Other Regulatory Assets

Cr. 228.3, Accumulated Provision for Pensions and Benefits

[[Page 55439]]

To record the deferral of the transition obligation under the

provisions of Statement No. 71.

Dr. 926, Employee Pensions and Benefits

Dr. 107, Construction Work in Progress

Dr. 108.8, Retirement Work in Progress

Cr. 182.3, Other Regulatory Assets

To record the amortization of postretirement benefits expenses as

they are recovered through rates in accordance with Statement No. 71.

3. The deferral and amortization of the transition obligation under

the provisions of Statement No. 106 is considered to be an off balance

sheet item. If, therefore, the borrower elects to defer and amortize

the transition obligation on a straight-line basis over the average

remaining service period of the active employees or 20 years in

accordance with Statement No. 106, no entry is required. Instead, the

transition obligation is recognized as a component of postretirement

benefit cost as it is amortized. It should be noted, however, that the

amount of the unamortized transition obligation must be disclosed in

the notes to the financial statements.

Accounting Journal Entries--Current Period Expense

The current period postretirement expense should be recorded by the

following entry:

Dr. 926, Employee Pensions and Benefits

Dr. 107, Construction Work in Progress

Dr. 108.8, Retirement Work in Progress

Cr. 228.3, Accumulated Provision for Pensions and Benefits

To record current period postretirement benefit expense.

Dr. 228.3X, Accumulated Provision for Pensions and Benefits--Funded

Cr. 131.1, Cash--General

To record cash payments on a ``pay-as-you-go'' basis for

postretirement benefits.

Accounting Journal Entry--Funding

If a borrower elects to voluntarily fund its postretirement

benefits obligation in an external, irrevocable trust, the following

entry shall be recorded:

Dr. 228.3X, Accumulated Provision for Pensions and Benefits--Funded

Cr. 131.1, Cash--General

To record the funding of postretirement benefits expense into an

external, irrevocable trust.

If a borrower elects to voluntarily fund its postretirement

benefits obligation in an investment vehicle other than an external,

irrevocable trust, the following entry shall be recorded:

Dr. 128, Other Special Funds

Cr. 131.1, Cash--General

To record the funding of postretirement benefits expense into an

investment vehicle other than an external, irrevocable trust.

628 Postemployment Benefits

Statement of Financial Accounting Standards No. 112, Employers'

Accounting for Postemployment Benefits (Statement No. 112) establishes

the standards of financial accounting and reporting for employers who

provide benefits to former or inactive employees after employment but

before retirement. Inactive employees are those who are not currently

rendering service to the employer but who have not been terminated,

including employees who are on disability leave, regardless of whether

they are expected to return to active service. For purposes of applying

the provisions of Statement No. 112, former members of the board of

directors are considered to be employees of the cooperative.

Postemployment benefits include benefits provided to former or

inactive employees, their beneficiaries, and covered dependents. They

include, but are not limited to, salary continuation, supplemental

benefits (including workmen's compensation), health care, job training

and counseling, and life insurance coverage. Benefits may be provided

in cash or in kind and may be paid upon cessation of active employment

or over a specified period of time.

The cost of providing postemployment benefits is considered to be a

part of the compensation provided to an employee in exchange for

current service and should, therefore, be accrued as the employee earns

the right to be paid for future postemployment benefits. Applying the

criteria set forth in Statement of Financial Accounting Standards No.

43, Accounting for Compensated Absences, a postemployment benefit

obligation is accrued when all of the following conditions are met:

1. The employer's obligation for payment for future absences is

attributable to employees' services already performed;

2. The obligation relates to employee rights that vest or

accumulate. Vested rights are considered those rights for which the

employer is obligated to make payment even if the employee terminates.

Rights that accumulate are those earned, but unused rights to

compensated absences that may be carried forward to one or more periods

subsequent to the period in which they are earned;

3. Payment of the compensation is probable; and

4. The amount can be reasonably estimated.

If all of these conditions are not met, the employer must account

for its postemployment benefit obligation in accordance with Statement

of Financial Accounting Standards No. 5, Accounting for Contingencies

(Statement No. 5) when it becomes probable that a liability has been

incurred and the amount of that liability can be reasonably estimated.

If an obligation for postemployment benefits is not accrued in

accordance with the provisions of Statement No. 5 or Statement No. 43

only because the amount cannot be reasonably estimated, the financial

statements should disclose that fact.

Accounting Requirements

All RUS borrowers must adopt the accrual accounting provisions and

reporting requirements set forth in Statement No. 112 as of the

statement's implementation date. A portion of the cumulative effect may

be charged to construction and retirement activities provided such

charges are properly supported. If a borrower elects to defer the

cumulative effect of implementing Statement No. 112 in accordance with

the provisions of Statement of Financial Accounting Standards No. 71,

Accounting for the Effects of Certain Types of Regulation, the deferral

must be approved by RUS.

Effective Date and Implementation

Statement No. 112 is effective for fiscal years beginning after

December 15, 1993. Previously issued financial statements should not be

restated.

RUS borrowers must comply with the implementation date set forth in

Statement No. 112. At the time of the adoption of Statement No. 112,

rates must be in place sufficient to recover the current period

expense.

Accounting Journal Entries

The journal entries required to account for postemployment benefits

are as follows:

Dr. 435.1, Cumulative Effect on Prior Years of a Change in Accounting

Principle

Dr. 107, Construction Work in Progress

Dr. 108.8, Retirement Work in Progress

Cr. 228.3, Accumulated Provision for Pensions and Benefits

To record the cumulative effect of implementing Statement No. 112.

Note: A portion of the cumulative effect may be charged to

construction and retirement activities provided such charges

[[Page 55440]]

are properly supported. Account 435.1 is closed to Account 219.2,

Nonoperating Margins.

If the borrower elects to defer and amortize the cumulative effect

in accordance with the provisions of Statement No. 71, the following

entry shall be recorded:

Dr. 182.3, Other Regulatory Assets

Cr. 228.3, Accumulated Provision for Pensions and Benefits

To record the deferral of the cumulative effect of implementing

Statement No. 112 in accordance with the provisions of Statement No.

71.

Dr. 926, Employee Pensions and Benefits

Dr. 107, Construction Work in Progress

Dr. 108.8, Retirement Work in Progress

Cr. 182.3, Other Regulatory Assets

To record the amortization of the cumulative effect of implementing

Statement No. 112 as it is recovered through rates in accordance with

Statement No. 71.

Dr. 926, Employee Pensions and Benefits

Dr. 107, Construction Work in Progress

Dr. 108.8, Retirement Work in Progress

Cr. 228.3, Accumulated Provision for Pensions and Benefits

To record current period postemployment benefit expense.

Note: If postemployment benefits are accrued under the criteria

set forth in Statement No. 43, this journal entry is made on a

monthly basis. If, however, the accrual is based upon the provisions

of Statement No. 5, this is a one-time entry unless the liability is

reevaluated and subsequently adjusted.

629 Investments in Debt and Equity Securities

Statement of Financial Accounting Standards No. 115, Accounting for

Certain Investments in Debt and Equity Securities (Statement No. 115),

establishes the standards of financial accounting and reporting for

investments in debt securities and for investments in equity securities

that have readily determinable fair values. Statement No. 115 does not

apply to investments in equity securities accounted for under the

equity method nor to investments in consolidated subsidiaries.

At the time of acquisition, an entity must classify debt and equity

securities into one of three categories: held-to-maturity, available-

for-sale, or trading. At the balance sheet date, the appropriateness of

the classifications must be reassessed.

Investments in debt securities are classified as held-to-maturity

and are measured at amortized cost in the balance sheet only if the

reporting entity has the positive intent and ability to hold these

securities to maturity. Debt securities are not classified as held-to-

maturity if the entity has the intent to hold the security only for an

indefinite period; for example, if the security would become available

for sale in response to changes in market interest rates and related

changes in the security's prepayment risk, needs for liquidity, changes

in the availability of and the yield on alternative investments,

changes in funding sources and terms, and changes in foreign currency

risk.

Investments in debt securities that are not classified as held-to-

maturity and equity securities that have readily determinable fair

values are classified as either trading securities or available-for-

sale securities and are measured at fair value in the balance sheet.

Trading securities are those securities that are bought and held

principally for the purpose of selling them in the near future. Trading

generally reflects active and frequent buying and selling and trading

securities are generally used with the objective of generating profits

on short-term differences in prices. Available-for-sale securities are

those investments not classified as either trading securities or held-

to-maturity securities.

Statement No. 115 requires unrealized holding gains and losses for

trading securities to be included in earnings in the current period.

Unrealized holding gains and losses for available-for-sale securities

are excluded from earnings; however, they are reported as a net amount

in a separate component of shareholders' equity until realized.

For individual securities classified as either available-for sale

or held-to-maturity, an entity must determine whether a decline in the

security's fair value below the amortized cost is other than temporary.

If the decline in fair value is determined to be permanent, that is, it

is probable that the entity will not be able to collect all amounts due

under the contractual terms of the security, the realized loss is

accounted for in earnings of the current period. The new cost basis is

not adjusted upward for subsequent recoveries in the fair value.

Subsequent increases in the fair value of available-for-sale securities

are included in the separate component of equity. Subsequent decreases

are also included in the separate component of equity.

All trading securities are reported as current assets in the

balance sheet and individual held-to-maturity and available-for-sale

securities are classified as either current or noncurrent, as

appropriate. Cash flows from the purchase, sale, or maturity of

available-for-sale securities and held-to-maturity securities are

classified in the statement of cash flows as cash flows from investing

activities and reported gross for each security classification.

Accounting Requirements

All RUS borrowers must adopt the accounting, reporting, and

disclosure requirements set forth in Statement No. 115 as of the

statement's implementation date. Unrealized holding gains or losses for

trading securities shall be recorded in either Account 421,

Miscellaneous Nonoperating Income, or Account 426.5, Other Deductions,

as appropriate. Unrealized holding gains or losses for available-for-

sale securities held by the corporate entity are recognized as a

component of stockholder's equity in Account 215.1, Unrealized Gains

and Losses--Debt and Equity Securities. A contra account of the

investment account shall be debited or credited accordingly. Unrealized

gains and losses for available-for-sale securities held in a

decommissioning fund shall increase or decrease, as appropriate, the

reported value of the fund.

Effective Date and Implementation

Statement No. 115 is effective for fiscal years beginning after

December 15, 1993. At the beginning of the entity's fiscal year, the

entity must classify its debt and equity securities on the basis of the

entity's current intent. This statement may not be applied

retroactively to prior years' financial statements. For fiscal years

beginning prior to December 16, 1993, reporting entities are permitted

to apply Statement No. 115 as of the end of a fiscal year for which

annual financial statements have not previously been issued.

Dated: October 2, 1995.

Jill Long Thompson,

Under Secretary, Rural Economic and Community Development.

[FR Doc. 95-27006 Filed 10-31-95; 8:45 am]

BILLING CODE 3410-15-P