HomeMy WebLinkAbout20230330PR 7 Attachment B.pdfAVISTA – Capitalization Policy
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Overview
Overheads, also referred to as burdens or loadings, are labor and material costs the Company incurs
that cannot be directly assigned to a project. In order to accumulate, analyze and allocate these
overhead costs in a systematic manner, overhead pool accounts have been established with designated
projects and tasks.
Overhead pool balances, along with costs being charged to and allocated from the pools, are reviewed
and analyzed on a monthly basis by Projects and Fixed Asset Accounting (PFA) in order to set
appropriate overhead rates. The purpose of the monthly analysis is to detect trends as early as possible
and adjust overhead rates to better reflect costs, with the intent of spreading the costs that have
accumulated to active projects. Any carryover overhead pool balance is included in the calculation of
the subsequent period’s rate. Current and historical loading rates can be found at the following
SharePoint site: Overhead Rates
Costs charged to the overhead pool accounts should be directly attributable to the activity and function
of the overhead pool being charged when it is not feasible to directly charge a specific project. For
example, a Spokane CPC designing work for several Spokane gas jobs that require short, intermittent
time commitments, should charge the Gas North Construction Overhead Pool; the CPC should directly
charge projects when possible. Additionally, only those individuals with direct oversight of a function
should charge the overhead pool accounts.
The allocation of indirect or non-assignable costs from the overhead pools to projects are made for two
reasons:
1. To meet FERC and GAAP requirements relating to capitalization of costs and proper
assignment of certain expenses.
2. To provide full cost information to project managers and sponsors that can be used in
decision making.
Overheads are charged to projects in order to represent the full cost of resources utilized on those
projects. For example, the storeroom function is responsible for unloading materials and putting them
into storage, getting materials from stock and preparing them for charge out, inventorying stock,
maintaining stock records, handling scrap materials, etc. To allocate the cost of this resource, each store
issue should bear a portion of storeroom function costs associated with having materials on hand and
readily available which properly spreads the costs to capital and operations and maintenance (O&M)
activities.
In situations where it is determined appropriate to cancel a capital construction project and write-off all
the transactions to O&M via a journal entry, the capital overheads (construction and safety clothing) will
be reversed off the project back into the overhead pool. This is done as construction overheads would
not have been calculated on the transactions had they originally been charged to O&M. Similarly, when
transactions are transferred by PFA between projects within the Oracle EBS Projects Module or
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distribution corrections are made by Accounts Payable within the Oracle EBS AP Module and interfaced
into the Oracle EBS Projects Module, the overheads are recalculated on the transferred transactions
systematically to align with the appropriate calculation given the new project type and/or expenditure
type.
Types of Overheads
Construction
The purpose of the construction overhead pool accounts is to accumulate costs with a direct
relationship to construction that cannot be charged directly to a specific construction project.
Charging
Construction overhead costs are charged to the following six accounts:
Project Number Project Name Task Number Task Name
The construction overhead accounts should only be charged with labor, transportation usage (e.g.
mileage), and overheads. Pacesetters, bonuses, and other non-worked pay should not be charged to
the overhead accounts. Employees who charge the construction overhead accounts must meet the
following requirements:
1. Have a direct relationship with construction work related to the functional overhead they are
charging time to.
2. Be working on so many capital projects it is not feasible to charge their time directly to those
projects.
3. Be performing a capital activity.
There are no construction overhead pools for ET, Facilities and other general plant; these functional
areas require direct charging to projects. Per ASC 350-40, overheads are not permitted to be charged on
ET software projects. For Facilities and other general plant, due to the wide range of asset types and
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complexity involved in identifying a reasonable basis for costs and subsequent allocation, it was
determined that direct project assignment was the preferred method.
The Construction Overheads-Charging Activity Guidance (see Appendix A) presents a listing of activities
that have been approved to be charged to the capital overhead pools by functional area if they meet the
capital overhead account criteria and determinations on activities that should be charged to O&M.
Please contact Project Accounting at ProjectAccounting@avistacorp.com with questions regarding
whether a job duty/activity should be charged to the construction overhead pools.
All time and expenses charged to the construction overhead accounts should have oversight from a
manager or other responsible individual as part of normal operating procedures (e.g., timesheets and
invoices). Charges to construction overheads are subject to review by PFA and Internal Audit on a
periodic basis.
Allocations
Costs in the construction overhead accounts are allocated monthly to capital construction projects
based on a percentage rate applied to direct costs. Capital Overhead - Accounting is applied to all
construction projects regardless of project type, while all the other overheads are only applied to
projects that are of the same functional type (e.g., Capital Overhead - Distribution is only applied to
electric distribution project types, etc.).
Safety Clothing
The purpose of the safety clothing overhead pool accounts is to accumulate costs associated with
providing safety clothing (e.g., fire resistant, goggles, gloves) to construction and operations personnel
working in potentially dangerous environments.
Charging
Safety clothing overhead costs are charged to the following three accounts:
Project Number Project Name Task Number Task Name
The safety clothing overhead accounts should only include invoices for purchasing safety clothing for
distribution, transmission, and generation construction and operations activities; applying a supportable
ratio to safety clothing invoices is an acceptable practice. Safety clothing purchases should never be
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directly charged to projects or the project will be charged twice for safety clothing (once for the direct
charge and once for the overhead).
Allocations
Costs in the safety clothing overhead accounts are allocated monthly to capital construction projects
based on a percent rate applied to bargaining unit labor charges. The allocations are only applied to
projects that are of the same type (e.g., Safety Clothing - Production is only applied to production
project types, etc.).
Stores and Purchasing
The purpose of the stores and purchasing overhead pool accounts is to accumulate costs with a direct
relationship to the purchasing and storing of materials and supplies.
Charging
Stores and purchasing overhead costs are charged to the following project accounts, but can also be
coded directly to GL account 163000:
Project
Number Number
77700230 Supply Chain - Clearing 163000 Purchase and Material Clearing Expense
77700230 Supply Chain - Clearing 163020 Meter and Transformer Handling
77700232 Supply Chain - Material Mgmt 163000 Purchase and Material Clearing Expense
77700233 Supply Chain - Warehouse Ops 163000/
B9XX770002 (B-WOs are warehouse specific)
Warehouse
The stores and purchasing overhead accounts should only include labor, transportation, invoices for
purchasing stores and materials supplies, inventory adjustments, freight, and tax.
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Allocations
Costs in the stores and purchasing overhead accounts are allocated monthly to warehouse material
issues and material purchase order* transactions. Warehouse and material purchase transactions are
loaded at the same base rate. A separate rate for freight and sales tax is applied only to items issued
from warehouse inventory as these costs are not included in the system average price by the Supply
Chain system.
*Single purchased items with costs greater than $100,000 or combined purchase orders greater than
$500,000 are excluded from the base rate allocation as to not unfairly burden large purchases.
Small Tools
Small tools are hand and portable tools with a value of $1,000 or less that are used directly in the repair,
maintenance or installation of equipment or facilities. The purpose of the small tools overhead accounts
is to accumulate costs for the purchase of small tools and maintenance of small tool cribs and allocate
them to construction, maintenance, and some operating accounts.
Charging
Small tools costs are recorded in the below accounts:
Project Number Project Name Task Number Task Name
184399
The only charges to the small tools overhead accounts should be the tool keeper’s labor and invoices for
small tool purchases and repairs. Small tools should never be purchased directly to a project or the
project will be charged twice for the equipment (once for the direct charge and once for the overhead).
Immaterial items with a short life that are consumable in nature such as replacement batteries, paper
products, paint and solvents, auto parts, medical supplies, computer/telecommunications accessories,
etc. are not considered small tools and should be expensed.
When charging the small tools overhead accounts, invoice or credit card transactions should include a
complete description of the type of tool being charged (e.g., hot stick, flashlight, etc.). “Supplies” or “small
tools” should not be used as the description for the item being charged.
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Examples of items that should be charged to the small tools overhead accounts are:
hot sticks) and repair of tools which will extend the life of the tool.
Examples of items that should not be included in the small tools overhead account include (but are not
limited to):
radios, antennas, modems, fax machines, carrying cases, or other
washing, linen service, etc.
Allocation
Costs in the small tools overhead accounts are allocated monthly to projects based on a percent rate
applied to direct bargaining unit labor charges.
Transportation
The purpose of the transportation overhead pool accounts is to accumulate O&Mcosts related to
transportation and other equipment in pools for each vehicle class.
Charging
In general, Fleet Management and Travel and Flight Operation are the only departments authorized to
charge the transportation overhead pools as they solely perform maintenance on fleet vehicles and
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operate the Company aircraft, respectively. Appropriate charges to the transportation overhead pools
include fuel, oil changes, labor, and other O&M activities related to the vehicles. The last two digits of
the task typically correlate with the vehicle class number (bolded below). Costs charged to 184101,
184102, and 184103 are allocated monthly among all the vehicle classes based on percentages that are
updated annually.
Project
Number Number
77700115 Aircraft Operations - Clearing 184110 Aircraft Clearing (class )
77700200 Fleet Management - Clearing 184101 Preventative Maintenance
Supply and Fuel
32
46/46
47 47
48 48
56 56
57 57
58 58
65
66 66
67 67
68 68
76 76
77
78
79
85
86
87
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Allocation
Costs in the transportation overhead accounts are allocated monthly to projects by applying the
appropriate class rate to actual miles driven, hours of usage, or a fixed rate for each vehicle and fleet
equipment asset used during the month, as submitted through Maximo or directly to PFA.
Payroll
The purpose of the payroll overhead pool accounts is to accumulate costs with a direct relationship to
employee benefits and company payroll tax liabilities.
Charging
Payroll overhead costs are accumulated in six categories of similar costs:
1. Payroll Benefits (account 184260) – represents employee benefits provided by the Company
including: pension, health insurance, 401(K) match, post-retirement benefits, group life
insurance, workers compensation insurance, and other employee benefits (e.g. tuition aid,
Employee Assistance Program (EAP), etc.).
2. Payroll Benefits – Non-Service (account 184265) – represents non-service costs related to the
employee benefits provided by the Company in account 184260.
3. Paid Time Off (account 242700) – represents paid time off provided by the Company for one
leave, holidays, short term disability, jury duty, military duty, and industrial sick leave.
4. Payroll Taxes (account 184270) – represents the Company’s liability for Social Security,
Medicare, OASDI, and federal/state unemployment taxes.
5. Incentives – NU (account 232380) – represents the Company’s accrual of the non-union short-term non-officer incentive plan.
6. Incentives – Union (account 232380) – represents the Company’s accrual of the union short-
term incentive plan.
Allocation
Costs in the payroll overhead pool accounts are allocated monthly to projects based on a percentage
rate applied to regular payroll transactions. Only the Payroll Taxes overhead is applied to non-regular
payroll transactions (e.g., overtime, dual time, etc.).
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Guidance
FERC Guidance
Pt. 101 18 CFR Ch. I (4–1–18 Edition): Page 414 & 657-658
4. Overhead Construction Costs.
A. All overhead construction costs, such as engineering, supervision, general office salaries and
expenses, construction engineering and supervision by others than the accounting utility, law
expenses, insurance, injuries and damages, relief and pensions, taxes and interest, shall be
charged to particular jobs or units on the basis of the amounts of such overheads reasonably
applicable thereto, to the end that each job or unit shall bear its equitable proportion of such
costs and that the entire cost of the unit, both direct and overhead, shall be deducted from the
plant accounts at the time the property is retired.
B. As far as practicable, the determination of payroll charges includible in construction overheads
shall be based on time card distributions thereof. Where this procedure is impractical, special
studies* shall be made periodically of the time of supervisory employees devoted to
construction activities to the end that only such overhead costs as have a definite relation to
construction shall be capitalized. The addition to direct construction costs of arbitrary
percentages or amounts to cover assumed overhead costs is not permitted.
C. For Major utilities, the records supporting the entries for overhead construction costs shall be so
kept as to show the total amount of each overhead for each year, the nature and amount of
each overhead expenditure charged to each construction work order and to each electric plant
account, and the bases of distribution of such costs.
*If special studies are conducted, PFA should be consulted.
Pt. 101 18 CFR Ch. I (4–1–18 Edition): Page 655 & 1035 The cost of individual items of equipment of small value (for example, $500 or less) or of short life,
including small portable tools and implements, must not be charged to service company property
accounts unless the correctness of the accounting is verified by current inventories. The cost must be
charged to the appropriate operating expense or clearing accounts, according to the use of the items,
or, if the items are consumed directly in construction work, the cost must be included as part of the cost
of the construction.
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NARUC “Interpretations of the Uniform System of Accounts for Electric and Gas Utilities”; revised September 1988; No. 59.
Question:
A. Account 922 of the Uniform System of Accounts provides there shall be shown therein amounts
of administrative and general expenses which are properly includible as cost of construction.
Questions have arisen as to the method of determining the amount of such expenses which may
be capitalized.
B. Is the supervised expenditures or supervised payroll method (method whereby certain accounts
or amounts are prorates between operating expenses and construction in proportion to direct
charges) a permissible method of determining amounts transferable from administrative and
general expenses to construction overheads?
Answer:
A. The amounts of administrative and general expenses which are capitalized are only those which
have a provable relationship to construction. The use of percentage distributions, based upon
assumed relationships between operating expenses and cost of construction, either in total or
restricted to labor only, is a violation of Paragraph B of the Utility Plant Instruction 4, Overhead
Construction Costs, which reads as follows:
“B”. As far as practicable, the determination of payroll charges includible in construction
overheads shall be based on time card distributions thereof. Where this procedure is
impractical, special studies* shall be made periodically of the time of supervisory
employees devoted to construction activities to the end that only such overhead costs as
have a definite relation to construction shall be capitalized. The addition to direct
construction costs of arbitrary percentages or amounts to cover assumed overhead costs
is not permitted.
In general, it is believed that the incremental costs basis is the preferred method of determining
amounts of administrative and general expenses which should be capitalized. Under this
method only the costs specifically incurred for construction – costs which would not be incurred
if construction were not undertaken – are chargeable to construction. The use of this plan will
avoid the effect of showing greater net income merely because of increased construction work.
Where the incremental cost basis is not employed, general and administrative expenses can
properly be distributed to construction only if studies are made to determine the amounts
thereof which relate to construction activities. In the case of compensation for personal
services, such studies should be based upon time records or upon periodic surveys of the
activities of employees. Where daily time repots are not in effect, periodic studies should be
made at least once a year and more frequently if construction fluctuates considerably. Such
studies should show each employees’ activities and the proportion of his time which is includible
in construction account. Where the expenditures relate to other than compensation for
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personal services, it must be shown (1) that the expenditure has a relationship to construction
activities and (2) that a reasonable basis has been evolved for determining the amount of
proportion properly capitalizable. In no event is it permissible to assign construction a
proportion or percentage of a particular class of expenditures without first having established
the relationship of the expenditures in question to construction work.
The records supporting allocations of administrative and general expenses to construction
should; therefore, show (1) the relationship of the particular function to construction activities,
(2) the proportion of each employee’s time or each particular expenditures allocable to
construction, and (3) the method of determining (2), that is time studies, daily time reports, etc.
B. No. Such methods violate the provisions of Paragraph B of Utility Plant Account Instruction 4.
GAAP Guidance
PWC Guide: Property, plant, equipment and other assets, Section 1.2
ASC 970, Real Estate, includes incremental guidance on capitalizing the costs of real estate developed
for sale or rental. That guidance explicitly excludes capital projects constructed for a reporting entity’s
own use. However, in the absence of other authoritative guidance, reporting entities often apply the
guidance in ASC 970 by analogy in developing their overall capitalization policies.
ASC 970-360-20
Indirect Project Costs: Costs incurred after the acquisition of the property, such as construction
administration (for example, the costs associated with a field office at a project site and the
administrative personnel that staff the office), legal fees, and various office costs, that clearly relate to
projects under development or construction.
Examples of office costs that may be considered indirect project costs are cost accounting, design, and
other departments providing services that are clearly related to real estate projects.
ASC 970-360-25-3
Indirect project costs that relate to several projects shall be capitalized and allocated to the projects to
which the costs relate.
ASC 970-720-25-3
Indirect costs that do not clearly relate to projects under development or construction, including general
and administrative expenses, shall be charged to expense as incurred.