20181105PAC to Monsanto Attach 9.docx

PacifiCorp
Capitalization Policy for Electric Utility Operations
Table of Contents
1.SCOPE3
2.PURPOSE3
3.ASSET RECOGNITION CRITERIA3
4.ASSET VALUATION5
5.PLANT ADDITION GUIDELINES8
6.PLANT REMOVAL GUIDELINES12
7.COMPUTER SOFTWARE SYSTEMS (Excludes Desktop Software)13
8.WEB SITE DEVELOPMENT16
9.CAPITALIZING PROPERTY TAX19
10.CAPITAL SURCHARGE20
11.PRELIMINARY SURVEY & INVESTIGATION24
PacifiCorp Capitalization Policy for Electric Utility Operations
SCOPE
The following capitalization policy applies to the operations of PacifiCorp’s regulated domestic electric utility. This document is based on the accounting guidelines detailed in the Federal Energy Regulatory Commission (FERC) Uniform System of Accounts as outlined in the Code of Federal Regulations vol. 18 Parts 1 through 399 and US Generally Accepted Accounting Principles (GAAP). It sets forth the company’s policy for proper financial accountability related to Property, Plant & Equipment including computer software systems.
Policy as stated in the PacifiCorp Capitalization Policy for Electric Utility Operations is not static and may change as circumstances warrant. These policies are dictated, in a large part, by factors such as regulatory requirements, Generally Accepted Accounting Principles,technological advancements and management philosophy. As these factors change over time, existing policies must be revised accordingly.
PURPOSE
Due to the capital-intensive nature of the utility industry, clear guidelines are necessary for consistent accounting of expenditures throughout utility operations. This capitalization policy is intended to accomplish the following:
To provide accounting guidance for the proper identification of utility Property, Plant & Equipment expenditures.
To ensure the consistent application of PacifiCorp’s capitalization policy for determining capital vs. expense.
To capture and track by vintage year costs of capital assets providing future benefits to ratepayers (“used and useful”) and, thereby, are allocated through depreciation expense to the generation of ratepayers expected to benefit from the asset.
ASSET RECOGNITION CRITERIA
In accordance with FERC Electric Plant Instruction No. 2A, capital asset expenditures are recorded at their historical installed cost or at the cost incurred by the company first devoting it to utility service, unless otherwise noted.
To qualify as a capital expenditure, the following asset recognition criteria must be met:
Asset must be used in PacifiCorp operations.
Asset must have an expected useful life of one year or greater.
Asset must be identifiable as a PacifiCorp Property Retirement Unit (PRU) including indirect capital costs necessary to make the asset suitable for its intended use (e.g. engineering, overheads, insurance, taxes, etc.). (See PRU catalogs located in Asset Accounting.)
OR
Additions of items not specifically identified as Property Retirement Units but with characteristics of an asset (e.g. used and useful in utility service, relatively long useful life) and a direct cost of $500 or greater, unless otherwise noted. (Contact Asset Accounting for expenditures that meet this criterion.)
Costs include only normal expenditure of readying an asset for use (see Section 4 Asset Valuation for specific guidelines).
Costs incurred for asset improvements must result in a substantial increase in usefulness, service life, productivity, capacity or functionality of a facility or property. (For expenditures that meet this criteria, see policy related to betterment accounting.)
Types of costs accounted for as expense and should not be included in capital are as follows:
Preventing failure.
Restoring serviceability.
Maintaining the life of plant.
The net cost of installing, maintaining and removing temporary facilities (temporary is defined as facilities in use for less than one year) to prevent interruptions in serviceon replacement construction or maintenance projects. Temporary facilities necessary to prevent interruptions in service as a part of new construction/system upgrades may be charged to capital construction (see Capitalization Policy: Asset Valuation for details).
Rearranging and changing the location of plant not retired.
Inspecting, testing and reporting on the condition of plant to determine the need for repairs and replacements.
Repairing for reuse materials recovered from plant.
Efficiency and other tests performed on equipment after the in-service date.
Training costs except when related to facilities, which are not conventional in nature or are new to company operations (see Self-Constructed Assets).
Replacing minor items of plant.
Departmental plans (“Blueprints” or “roadmaps” for operations).
Accumulated costs for canceled projects not benefiting an on-going capital project.
Data conversion or costs to input web site content.
Abnormal costs including excessive spoilage and excessive freight costs.
ASSET VALUATION
The following guidelines should be used in determining the appropriate value for recording assets.
Self-Constructed Assets – The valueof self-constructed assets should be recorded on the basis of the actual costs incurred, including all appropriate related costs of construction. Self-constructed assets should include, where applicable, the direct and overhead costs such as those detailed below in the representative list of the components of construction. (Electric Plant Instructions 3-A).
Components of Construction Cost
Direct Costs
Overhead Costs (Incremental)
Contract Work
Indirect Engineering and Supervision
Labor and Labor Overheads
General Office Salaries and Expenses (A&G)
Material and Supplies
Insurance
Transportation
Relief and Pensions
Special Machine Service
Taxeson physical property during the period of construction and other taxes properly includible in the cost of construction
Shop Service
Allowance for Funds Used During Construction (AFUDC)
Protection of Property
Injuries and Damages
Earnings and Expenses During Construction
Rents
Engineering Services
Direct Mandated Studies related to Assets Under Construction
Privileges and Permits
Training cost for non-conventional plant or new to company operations. (see below)
Law Expenses
All construction overhead costs will be allocated to work orders to which they reasonably apply so that each job or project will bear its equitable share of the costs. The proper allocation of overheads will ensure that the entire cost of the unit, both direct and overhead, is accurately reflected on the asset ledgers. (18 CFR, Electric Plant Instructions 4-A).
Costs necessary to train employees to operate or maintain facilities or equipment that “are not conventional in nature or are new to the company’s operations”, may be capitalized only up to the date the facilities are placed in service. Training costs that are incurred after the in-service date should be accounted for as a current period expense along with the cost of training employees to maintain or operate existing technologies or equipment.
Temporary facilities installed for periods longer than one year to furnish serviceuntil permanent new facilities are constructed, are capitalized if they meet all requirements set forth under “Asset Recognition Criteria” of this policy. When temporary facilities are installed in order to maintain service without interruption while replacement constructionor maintenance work is being performed on existing facilities, the net cost of the temporary facilities are charged to expense in accordance with Operating Instruction 2, Item 7 of 18 CFR, Electric Plant Instructions.FERC does advise in the FERC Accounting Liaison Meeting with the EEI/AGA on August 9, 2017, that as long as mobile assets such as mobile substations are required to prevent service interruption as part of new construction (e.g. an upgrade of a transmission line to a higher voltage or other increases to system capacity), it would be appropriate to charge the incurred costs of the mobile asset to capital construction.
Plant installed at a customer’s request for temporary use in utility service for periods of less than one year should be charged to FERC Account 185 and credited with payments received from customers and net salvage realized on removal of the temporary facilities. When the temporary facility is removed, the net remaining costs should be cleared to FERC Account 451, Miscellaneous Service Revenues.
Purchased Assets – Purchased assets should be valued on the basis of the actual costs incurred, including all nonrefundable purchase taxes and all appropriate related costs less any trade discounts or rebates.
NOTE: Any amounts received as trade-in value should be accounted for as salvage and not as a reduction of the asset value.
Donated Assets - For assets acquired in a voluntary non-reciprocal transfer by another entity either by gift, donation or payment of a nominal sum which is not reflective of the true market value, the cost assigned is to be the fair market value at time of acquisition plus all related costs. If the fair market value cannot be determined due to lack of sufficient records, an estimate of the market value is to be used. The difference between any amounts paid in acquiring the asset and its fair market value should be reflected as Contributions in Aid of Construction (CIAC).
Purchase of Multiple Assets - If several dissimilar assets are acquired in one purchase at a lump price, the actual costs incurred should be apportioned and capitalized to the various assets, taking into consideration their relative purchase values if they meet all requirements set forth under “Asset Recognition Criteria” of this policy.
Purchase of Operating Systems – The acquisition of electric plant representing an operating unit or system (e.g. generating facility, transmission line) should be recorded at the original book cost of the company first devoting it to utility service. If the historical cost is not determinable due to lack of sufficient records, an estimated historical cost should be used. The difference between the purchase price and the historical cost less the amount or amounts credited by the original utility at the time of acquisition to accumulated provisions for depreciation and amortization and contributions in aid of construction with respect to such property should be recorded to Account 114, Electric Plant Acquisition Adjustments.
FERC approval may be required for accounting for the cost of certain (material) operating units or systems. To ensure that regulatory requirements are met, Asset Accounting should be contacted for all acquisitions of electric plant.
Intangible Assets – The term intangible assets refers to certain long-lived legal rights or property valuable in the conduct of utility operations that lack the physical qualities of plant and equipment. Examples of intangible assets include patents, FERC hydro licenses, rights, franchise agreements, and software systems. Assets constructed or paid for by PacifiCorp that provide future financial ratepayer benefits but, for which, ownership is not retained, may be eligible for capitalization as an intangible asset. Intangible assets should be recorded on the basis of the actual costs incurred.
Leasehold Improvements - Leasehold Improvements occur when the lessee may invest in improvements on leased assets to enhance their usefulness. Leasehold improvements frequently are made to property for which the lease extends over a relatively long period. Leasehold improvements are recorded at the actual incurred cost and amortized over the life of the lease. To be eligible for capitalization, the leasehold improvement must meet all requirements set forth under “Asset Recognition Criteria” of this policy.
Capital Leases–A lease as defined bySFAS No. 13 and EITF 01-08 along with other US GAAP standards and the FERC Uniform System of Accounts Part 101 General Instructions paragraph 19,is a capital lease if it includes one or more of the following criteria at the time of its inception:
The lease transfers ownership of the property to the lessee by the end of the lease term.
The lease contains a bargain purchase option.
The lease term at inception is equal to at least 75 percent of the estimated economic life of the leased property. (This criterion does not apply when the lease term begins within the last 25 percent of the original estimated economic life of the property.)
At the beginning of the lease term the present value of the minimum lease payments, excluding the portion of payments representing insurance, maintenance, taxes, etc., exceeds 90 percent or more of the fair value of the leased property to the lessor over any related investment tax credit retained by the lessor and expected to be realized by the lessor. (Criterion No. 4 is subject to the same exception as criterion No. 3)
Any changes in the provisions of a lease require the new agreement to be evaluated in terms of the above criteria. Changes in estimates, e.g., economic life, will not change the classification of a lease.
An operating lease is any lease which does not qualify as a capital lease.
If a new capital lease is identified, Corporate Accounting must be notified.
PLANT ADDITION GUIDELINES
In accordance with FERC accounting guidelines, additions of electric plant are recorded through the use of authorized capital projects/work orders, the approval levels of which are established in the Corporate Governance Policy.
An Expenditure Requisition (ER) is a document requesting authorization to spend money for a project. A project captures and tracks the expenditure of funds for a specific purpose. A capital project has a beginning and an end and results in an asset. For capital projects, Asset Accounting uses an ER to identify units of property being added or removed. ER authorization is required for any capital project expenditure.
The following guidelines should be used to determine capital and expense decisions for the installation of electric plant and equipment:
Property Retirement Units - All eligible expenditures (see Components of Construction under Section 4, Asset Valuation) associated with the installation of Property Retirement Units will be capitalized and recorded as additions to Property, Plant and Equipment. Additions of facilities for which a legal obligation to remove the asset exists, require the recognition of a liability and the capitalization of the removal cost associated with the assets (see Cost of Removal under Section 6, Plant Removal Guidelines).
Minor Items - The addition of minor items of property which did not previously exist, (i.e. components of a retirement unit) when installed in conjunction with a Property Retirement Unit should be capitalized provided they meet all requirements set forth under “Asset Recognition Criteria” of this policy. The addition of minor items that are not installed in conjunction with a Property Retirement Unit should be charged to maintenance expense.Also the replacement of capitalized minor items of property should be expensed to the appropriate functional expense account
Reconstruction of an Asset - In a situation where the reconstruction of an asset is so substantial that it creates a new asset replacing an existing Property Retirement Unit, the cost of the reconstruction is considered capital. To qualify for capitalization, the future expected life of the reconstructed asset should be equal or greater than the expected life of the original retirement unit when it was initially installed. The original cost of the asset being rebuilt should be retired and the “core salvage” (reusable components) should be salvaged back to the new asset. The value of the new asset should be comprised of the value of the reusable components along with the new cost of construction, including overheads.
An asset would be considered used and useful ready for service when:
A generating plant is synchronized with the regional power grid.
Transmission and Distribution assemblies are energized.
Buildings or structures are occupied.
Software is transferred into production.
A hydro system federal license is accepted by PacifiCorp.
All other assets are placed into its intended used and useful state.
Listed below are the guidelines to be used for other groups of assets, which have unique capitalization criteria or accounting treatment:
Computer Software Systems - Software systems developed internally or software contracted or obtained from third party vendors with direct costs of $15,000 or greater will be considered capital, otherwise all costs should be expensed as incurred. (See Capitalization Policy: Computer Software Systems)
The initial cost incurred for maintenance/warranty contracts during the development stage of software are included in the asset value until the asset is placed in service. Once the asset is in service the balance of the maintenance/warranty contract should be expensed as deemed appropriate under the prepaid policy or the deferred charges policy. Payments for contracts not purchased at the same time as the fixed asset should be accounted for as expensein accordance with the prepaid policy or the deferred charges policy.
Software system upgrades and enhancements (modifications to existing internal-use software that result in additional functionality, such that the software is able to perform tasks that it was previously incapable of performing) may be capitalized if additional functionality will be achieved and the $500/one year capitalization threshold is met. If costs for upgrades and enhancements cannot be separated on a reasonably cost effective basis between maintenance and relatively minor upgrades and enhancements then all costs should be expensed as incurred.
The development of models or programs using “off-the-shelf” spreadsheet software such as Excel is considered to be utilization of existing software programs without providing additional functionality and, therefore, should be expensed as incurred. If spreadsheet modeling requires the use of professional third party services or tools and meets the $15,000 capitalization threshold, the costs may be capitalized.
The initial cost of developing reports related to a new computer software system may be capitalized as a part of the cost of the system. Costs related to the development of reports written after the initial software implementation do not result in additional system functionality and therefore should be expensed as incurred.
For more detailed information on accounting for computer software systems, such as project stages, capitalizable costs and asset identification, see Capitalization Policy: Computer Software Systems.
Web Site Development – Initial web site or graphics design that is developed internally or develop from third party vendors with direct costs of $15,000or greater will be considered capital, otherwise all costs should be expensed as incurred. (See Capitalization Policy: Web Site Development)
Web page upgrades and enhancements may be capitalized if additional functionality will be achieved and the $500/one year capitalization threshold is met (see Computer Software Systems). If costs for upgrades and enhancements cannot be separated on a reasonably cost effective basis between maintenance and relatively minor upgrades and enhancements then all costs should be expensed as incurred. Changes to the “look and feel” or the web page content do not provide additional functionality and therefore should be expensed.
For more detailed information on accounting for web site development, such as project stages, capitalizable costs, see Capitalization Policy: Web Site Development.
General Mass Property - General plant items such as computers, monitors, desktop software, furniture and equipment, tools and work equipment, laboratory equipment and other portable assets that have a direct cost of $500 or greater and an expected useful life of at least one year or greater are capitalized as general mass (“gen mass”) property. General mass property is not tracked or transferred after purchase and is automatically retired at the end of its fixed depreciable life.
A $500 capitalization threshold should be applied to the purchase of eachindividual “like kind” item, unless the purchase exceeds $10,000 in a single purchase, in which case the items should be capitalized in aggregate. For example, the purchase of four chairs that cost $400 each should be charged to expense, but the purchase of thirty of those same chairs would be capitalized. Furniture and equipment under the $500 threshold purchased for the initial furnishing of a new facility may be accumulated and capitalized in aggregate; subsequent replacements that do not meet a $500 capitalization threshold should be expensed. Tools under $500 are embedded in the Labor Activity rate and are either expensed or capitalized based on the labor charged to an associated work order.
FERC note: The cost of individual items of equipment of small value (for example, $500 or less) or of short life, including small portable tool and implements, shall not be charged to utility plant accounts unless the correctness of the accounting therefore is verified by current inventories. The cost shall be charged to the appropriate operating expense or clearing accounts, according to the use of such items, or, if such items are consumed directly in the construction work(individual project), the cost shall be included as part of the cost of construction.
All computer hardware and desktop software items acquired initially with a computer workstation should be capitalized. The addition (not replacement) of a non-property retirement unit hardware or desktop software item to an existing workstation should be capitalized if the cost exceeds the $500/one year capitalization threshold. The replacement of components of a computer workstation with the exception of the monitor and CPU should be expensed as incurred.
If computer hardware/desktop software is not general in nature and performs a specific operating function, the equipment will reside in the functional group for which it is to be dedicated. For example, if computer equipment is purchased and used exclusively for controlling the boiler plant, the WBS Element should settle to an asset in asset class 31200-Boiler Plant.
Coal Mine Assets - Coal Mine assets must meetall requirements set forth under “Asset Recognition Criteria” except direct costs must total $5,000 or greater to be eligible for capitalization. (See separate Capitalization Policy dated January 18, 1991 for mining assets).
Exceptions to the $5,000 capitalization policy are as follows:Land and Land Rights are always capitalized regardless of cost.Structures (Original Installation) shall be capitalized if the combined cost of all the retirement units involved is $5,000 or more. The individual retirement units (i.e. roof, walls, heating, plumbing, cooling system, etc.) for that structure are all capitalized even though individually a single retirement unit may be less than $5,000. The replacement of an existing retirement unit will not be capitalized unless the cost is $5,000 or more.Extension Components Used in Underground Mines shall be capitalized regardless of cost if they are defined as a Property Retirement Unit.Haul Road Extension Used in Open Pit Mines shall be capitalized regardless of cost. Office furniture, office equipment and computer equipment are capitalized for items with costs over $500.
Capitalized Spare Parts – Capitalized spare parts are those items that are essential for emergency operation needs, not items that are used in normal periodic maintenance (see NARUC Interpretation No. 50). To qualify as capital, the item must meet the following criteria: 1) have no forecasted usage in the next 5 years, 2) be functionally significant to a specific location and 3) have a direct cost of $10,000 or greater. Capitalized spare parts are considered “stand alone” property retirement units on standby status, fully ready for service and, when utilized, are exchanged for a similar unit in need of repair or replacement. Items that are subject to periodic replacement, are not site specific and have a shorter lead-time for ordering, which can be planned or forecasted, should be accounted for as inventory.
PLANT REMOVAL GUIDELINES
The following guidelines should be used to determine the proper accounting treatment for the removal or replacement of electric plant and equipment.
Property Retirement Units – The removal or replacement of Property Retirement Units should be accounted for as a retirement of the original cost of the replaced asset and the addition of the newly installed asset shall be capitalized at its actual incurred cost. The cost of rearranging or changing the location of plant not retired should be accounted for as expense.
Minor Items – When a minor item of property is retired without a replacement, a retirement should be processed for the minor item or the retirement may be deferred and accounted for with the removal of the Property Retirement Unit.
If a minor item is replaced independently of the Property Retirement Unit, the cost to remove and replace the item should be charged to maintenance unless a substantial betterment occurs. A substantial betterment occurs if the Property Retirement Unit affected is made “more useful, more efficient, of greater durability or of greater capacity” as a result of the minor item replacement. The transaction is eligible for capitalization if the betterment exceeds the cost of replacement in kind by a minimum of $5,000. In such situations, the estimated cost of replacement in kind is considered maintenance expense and the incremental additional cost of the replacement with betterment is capitalized.
BETTERMENT CALCULATION EXAMPLE: If the memory board in a large computer system is replaced with a $12,000 upgraded version instead of a $7,000 in kind version then the incremental additional cost of $5,000 is capital and $7,000 is maintenance expense.
Cost of Removal - Cost of Removal is defined as the cost of demolishing, dismantling, tearing down or otherwise removing electric plant, including the cost of transportation and related handling costs. Cost of removal for non-ARO assets will be booked to the depreciation reserve, whether or not the asset removed will be replaced.
For minor items (i.e. components of a retirement unit) that are being removed without replacement, the cost of removal should be recorded to the depreciation reserve. If a minor item is being replaced, the removal cost should be charged to maintenance expense.
With the implementation of FAS 143, Accounting for Asset Retirement Obligations, in April 2003, Asset Retirement Obligations (AROs) must be recognized as a liability and the cost associated with the obligation capitalized as part of the related asset’s book cost. The costs associated with removing the ARO related assets should be recorded to the liability.
Salvage - Salvage is defined as the amount received for returned or retired property, less any expenses incurred in connection with the sale or in preparing the property for sale. If the assets are retained, the depreciation reserve should be credited for the amount at which the returned material is charged to inventory. If the Company is given trade-in value on a retired asset during a new purchase, that value should be recorded as salvage and the cost of the new asset should be increased to reflect the actual cost.
COMPUTER SOFTWARE SYSTEMS (Excludes Desktop Software)
PacifiCorphas adopted the requirements of Statement of Position 98-1 (SOP 98-1), “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”.Where applicable PacifiCorp is following SFAS 71 as well. The following guidelines summarize the capitalization criteria to be followed:
Capitalization Threshold - Software systems developed internally or software contracted or obtained from third party vendors with direct costs of $15,000 or greater will be considered capital, otherwise all costs should be expensed as incurred.
Capitalizable Costs - Costs of capitalized computer software developed or obtained for internal use include only the following:External direct costs of materials and services consumed in developing or obtaining internal use software.Payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use computer software project to the extent of the time spent directly on the project.Interest costs incurred while developing internal-use computer software.General and Administrative costs and overhead costs. (NOTE: This is an exception to SOP 98-1 because it is allowable under FAS 71.)Costs associated with software licensing should be capitalized.
Maintenance and Warranty Costs
Costs incurred for maintenance and warranty agreements should be expensed as incurred. If the costs are associated with a maintenance or warranty agreement that will benefit future periods, the costs may be expensed over the future period in accordance with the company’s prepaid policy. If the period of future benefit includes benefit during the “Application Development Stage” (defined below), this allocated portion of the expense may be capitalized.
     Multiple-Element Software Arrangements Included in Purchase Price
If the initial purchase price includes multiple elements, such as training, maintenance, data conversion costs, reengineering costs and rights to future upgrades and enhancements, the purchase price should be allocated to these various elements based on an objective fair value, not necessarily the separate prices stated within the contract for each element. The individual elements should be accounted for in accordance with this policy.
Project Stages - SOP 98-1 breaks an internal use computer software project into three separate stages: (1) Preliminary Project Stage, (2) Application Development Stage, and (3) Post implementation Operation Stage.
Preliminary Project Stage
Computer software costs that are incurred in the preliminary project stage should be expensed as incurred. Capitalization of costs should not begin until the preliminary project stage is completed and management approval has been authorized to fund the computer software project. However, in determining whether a preliminary expenditure should be capitalized, the greater concern should be the nature of the cost rather than the timing of when they are incurred.
Activities in the preliminary project stage include:Conceptual formulation of alternativesEvaluation of alternativesDetermination of existence of needed technologyFinal selection of alternatives
Application Development Stage
Capitalizable costs include internal and external costs incurred to develop internal-use software during the application development stage and costs to develop or obtain software that allows for access or conversion of old data by new systems. However, costs incurred from the process of data conversion from old to new systems which may include purging or cleansing of existing data, reconciliation or balancing of the old data and data in the new system, creation of new/additional data, and conversion of old data to the new system should be expensed as incurred. In addition, any training costs incurred during this stage should also be expensed as incurred.
Activities in the application development stage include:Design of chosen path, including software configuration and software interfacesCodingInstallation to hardwareTesting, including parallel processing phase
Post-Implementation/Operation Stage
Internal and external training costs and maintenance costs should be expensed as incurred.
Activities in the post-implementation/operation stage include:TrainingApplication maintenance
Upgrades and Enhancements - Upgrades and enhancements are defined as modifications to existing internal-use software that result in additional functionality, such that the software is able to perform tasks that it was previously incapable of performing. Upgrades and Enhancements normally require a change to all or part of the existing software specifications.
In order for costs to be capitalized, the expenditures must result in additional functionalityand meet the $500/one year capitalization threshold. Internal costs incurred for upgrades and enhancements should be expensed or capitalized in accordance with the three computer software project stages discussed earlier in this document under Computer Software Systems – Project Stages.An upgrade or enhancement which only results in an extension of the useful life with no new functionality would NOTqualify for capitalization and should be expensed as incurred (SOP 98-1 paragraph 73).
If costs for upgrades and enhancements cannot be separated on a reasonably cost effective basis between maintenance and relatively minor upgrades and enhancements then all costs should be expensed as incurred.
Additional capitalization guidelines for all types of upgrades and enhancements:
 1.   Costs to build reports are only capitalizable during the initial development of software. 2.   New coding costs to access data for reporting can be capitalized if it results in additional functionality and meets the $500/one year useful life capitalization threshold. 3.   To meet the criteria of a long term asset (greater than one year), an upgrade or enhancement is capitalized if the remaining expected life of the base software is greater than one year, otherwise it is expensed in the period incurred. 4.   Subsequent license renewals, nominal upgrades and warranty/maintenance agreements should be expensed as incurred (as outlined above).

Other forms of upgrades and enhancements are defined as follows:
    Releases – upgrades/enhancements in the form of a single or series of small enhancements to an existing software package for a given fiscal year are expensed as incurred unless they meet capitalization criteria. Annual studies to determine an allocation between Capital/Expense will be conducted by participating departments.
    Patches – software updates provided by vendors to resolve issues with their product will be expensed unless a true addition to functionality can be identified.
     Hardware Upgrades and Patches – vendor-provided upgrades and patches for software components of computer hardware are expensed unless a substantial betterment can be demonstrated (greater durability, capacity, usefulness or efficiency and exceeds the cost of the replacement in kind by a minimum of $5,000). In such situations, the estimated cost of replacement in kind is considered maintenance expense and the incremental cost of the betterment would be capitalized. Spreadsheet Modeling – The development of models or programs using “off-the-shelf” spreadsheet software such as Excel is considered to be utilization of existing software programs without providing additional functionality and, therefore, should be expensed as incurred. If spreadsheet modeling requires the use of professional third-party services or tools and meets the $15,000capitalization threshold, the costs may be capitalized.
WEB SITE DEVELOPMENT
PacifiCorphas adopted the requirements of Emerging Issues Task Force (EITF) Abstract Issue No. 00-2, “Accounting for Web Site Development Costs”, which is consistent with the accounting requirements set forth in Statement of Position 98-1 (SOP 98-1), “ Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. The following guidelines summarize the capitalization criteria to be followed:
Capitalization Threshold - Initial web site or graphics design that is developed internally or contracted/obtained from third party vendors with direct costs of $15,000or greater will be considered capital, otherwise all costs should be expensed as incurred.
Capitalizable Costs – Capitalization of web site or graphics design development costs should apply paragraph 31 of SOP 98-1. (See Capitalizable Costs under Computer Software Systems.)
Project Stages – EITF No. 00-2 breaks an internal use web site design project into four separate stages: (1) Preliminary Planning Stage, (2) Web Site Application and Infrastructure Development Stage, (3) Graphics and Content Development Stage and (4) Operating Stage.
Preliminary Planning Stage
Web site development costs that are incurred in the preliminary planning stage should be expensed as incurred. Capitalization of costs should not begin until the preliminary planning stage is completed and management approval has been authorized to fund the web site development project. However, in determining whether a preliminary expenditure should be capitalized, the greater concern should be the nature of the cost rather than the timing of when they are incurred.
Activities in the preliminary planning stage include among others:Development of a business, project plan, or bothDetermination of the functionalities of the web site and the required technologyIdentification of necessary hardware and web applicationsConceptual formulation and/or identification of graphics and contentFinal selection of alternatives
Web Site Application and Infrastructure Development Stage
Internal and external costs incurred to develop internal-use web sites during the application and infrastructure development stage should be capitalized. The process of data conversion from old to new systems may include purging or cleansing of existing data, reconciliation or balancing of the old data and data in the new system, creation of new/additional data, and conversion of old data to the new system. Costs to develop or obtain software that allows for access or conversion of old data by new systems should be capitalized.
Activities in the web site application and infrastructure development stage include among others:Acquisition or development of software tools required for development work or web site operationsDevelopment, acquisition or customization of code for web applications, database software and software to integrate distributed applicationsDevelopment of initial HTML web pages or template developmentCreation of initial hypertext links to other web sites or to destinations within the web siteTesting of web site applications
Graphics and Content Development Stage
Graphics are a component of software and the development costs should be capitalized if related to the initial overall design of the web page that affects the “look and feel” and generally remains consistent regardless of changes to the content.
Content refers to information included on the web site, which may be textual or graphical in nature, such as articles, photos, maps and charts. Content may reside in separate databases that are integrated into (or accessed from) the web page with software or it may be coded directly into the web pages. The accounting for content will be addressed as a separate issue by the EITF; therefore, the accounting treatment of data conversion and database creation described in SOP 98-1 should be used to determine capital and expense costs for content activities (Application Development Stage). Costs to input content into a web site or database generally should be expensed as incurred, while software specifically developed or purchased to integrate content or a database with a web site should be capitalized in accordance with paragraph 21 of SOP 98-1.
Activities in the web site graphics and content development stage include:
Creation of initial graphics including the design or layout of each page, color, images and the overall “look and feel” of the web site (capitalize)
Creation or population of databases (capitalize or expense)
Entering initial content into the web site (expense)
Post-Implementation/Operation Stage
Internal and external training costs and maintenance costs should be expensed as incurred.
Activities in the post-implementation/operation stage include:
Training
Register the web site with Internet search enginesUpdate site graphics and creation of new linksPerformance of routine security reviews and usage analysisUpgrades and Enhancements – Web page upgrades and enhancements may be capitalized if additional functionality will be achieved and meet the $500/one year capitalization threshold (see Computer Software Systems). If costs for upgrades and enhancements cannot be separated on a reasonably cost effective basis between maintenance and relatively minor upgrades and enhancements then all costs should be expensed as incurred. Changes to the “look andfeel” or the web page content do not provide additional functionality and therefore should be expensed.
CAPITALIZING PROPERTY TAX
Policy
Property tax should be capitalized during the period of construction for individual projects with taxable property greater than $5 million on December 31. This will not include blanket projects with multiple WBS's and orders. PacifiCorp's property tax department will evaluate the qualifying projects to determine if the related property is taxable or exempt from taxation. Absent an exemption, property tax shall be capitalized on both real and personal property.
Property tax on taxable projects meeting the above threshold is calculated on an annual basis and, commencing in January of each assessment year, is capitalized on a straight-line basis each month until each project's estimated completion month. In the event that the actual completion month varies from the estimated completion month, the remaining property tax to be capitalized will be reallocated and capitalized on a straight-line monthly basis over the remaining periods. This reallocation should occur at the time that the variation between the actual and estimated completion months becomes known and reasonably certain.
Rationale
FERC: A component of capital construction cost includes property taxes associated with the project during the construction period.  Per Electric Plant Instruction 3, “Taxes includes taxes on physical property (including land) during the period of construction and other taxes properly includible in construction costs before the facilities become available for service.” 
US GAAP:  The application of authoritative accounting guidance for regulated operations results in a consistent treatment with the FERC guidelines.  PacifiCorp has a long history of regulatory recovery of such costs and the capitalization of these allowable costs is the most prudent method of accounting as it leads to the best matching of PacifiCorp’s revenues and expenses. The alternative of expensing such costs as periodic operating expenses would result in the recognition of operating expenses related to assets that were not in service or providing operational benefit to the company.
Materiality: Management has evaluated any accounting benefits that would result from calculating property tax on taxable projects valued at less than $5 million does not outweigh the costs PacifiCorp would incur to administer such a calculation.
CAPITAL SURCHARGE
PURPOSE
The purpose of the capital surcharge policy is to establish guidelines for the capitalization of administrative and general costs, which cannot be charged directly to a capital project, in accordance with the Federal Energy Regulatory Commission (FERC) and generally accepted accounting principles (GAAP). This policy will accomplish the following: Provide accounting guidance for the proper identification of overheads, which can be appropriately capitalized as an overhead.Reiterate guidance found in the company’s capitalization policy to help users utilize consistent application when determining capital versus expense.Augment the company’s capitalization policy by helping to ensure costs of capitalized overheads relate to assets that provide future benefits to ratepayers (“used and useful”) and, thereby, are allocated through depreciation expense to the periods expected to benefit from the asset. Establish accountability and consistency at the business unit level.
SCOPE
The following capital surcharge policy applies to the operations of the company’s regulated electric utility.
CAPITAL OVERHEAD RECOGNITION CRITERIA
FERC’s Electric Plant Instruction No. 4 contains the definition of Overhead Construction Costs:
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 and axes 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 distribution 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.
Costs included in capital surcharge will include, but not be limited to, the following: Salaries and expenses of corporate and business unit support staff when they are performing construction related activities.Engineering and supervision labor and expenses related to capital expenditures.Support activities such as computer support, safety, security and material handling that can be directly determined to be construction related.The annual incentive plan (AIP) accruals as determined by the relationship of labor capitalized to total labor.
Costs accounted for as expense and that should not be included in capital surcharge are expenditures related to the following:Preventing failureRestoring serviceabilityMaintaining the life of plant The net cost of installing, maintaining and removing temporary facilities to prevent interruptions in serviceRearranging and changing the location of plant not retiredInspecting, testing and reporting on the condition of plant to determine the need for repairs and replacementsRepairing for reuse materials recovered from plantPerforming efficiency and other tests on equipment after the in-service dateTraining costs, except when related to facilities that are not conventional in nature or are new to company operationsReplacing minor items of plant that are not identified as a property retirement unitOther normal departmental costs, which are not directly construction related (e.g., bank fees, interest expense, and depreciation)All capital projects, with the exception of large capital projects, will be flagged to receive capital surcharge through the system allocation methodology. Large capital projects will also receive capital surcharge, however the amount will be determined and booked in accordance with internal control procedures. (See Item 5 below)
CAPITAL SURCHARGE DETERMINATION
Each business unit is responsible for the creation and maintenance of records supporting costs being allocated to the capital surcharge pools. Their responsibilities include, but are not limited to, the following: Determining which costs should be included in the pool as well as properly instructing employees as to whether their costs should be direct charges (preferred method) or allocated to the pool through the assessment process. Determining an appropriate methodology to accurately capture capital related costs and calculating the assessment rate to be applied to each included cost center (e.g., timesheet distribution, number of invoices, number and types of jobs). Determining the allocation of costs between the business unit capital surcharge pools using appropriate methodology in order to accurately assign costs to each business unit. Determining the clearing percentage for their respective pool including estimates of costs and related capital to which it is projected to be applied.
CAPITAL SURCHARGE POOLS MAINTENANCE AND CONTROLS
The following will help ensure proper financial reporting and internal controls:Each business unit will continually monitor costs allocated to the capital surcharge pools.Each business unit controller or their delegate will approve all changes to capital surcharge components. Each business unit will identify and monitor large capital projects that will be called out as an exception to the capital surcharge. These projects will be of the magnitude that would distort the overall allocation of overheads to normal capital projects (>$10 million). Regulatory accounting will control and maintain all tables related to capital surcharge. This will include the capital surcharge cost element groupings (O_SURASSMT & O_SURASSM3), cost centers and associated percentages included in the assessment calculation, allocation factors and capital surcharge clearing rate. Each business unit will prepare an annual capital surcharge study in accordance with the capital surcharge procedures. Regulatory accounting will perform an annual capital surcharge review. For monthly reporting, the capital surcharge pools will be cleared to account 148002 (assets under construction reserve), which is a contra account to assets under construction and will be reinstated back into the pools at the beginning of the following quarter. For auditing purposes, all records and studies supporting capital surcharge amounts charged or allocated shall be retained by each business unit for no less than seven years. The supporting documentation that regulatory accounting requires from the business units shall also be retained for no less than seven years. For abandoned or cancelled CWIP projects, all recorded capital surcharge will be written off along with material and labor charges. Recorded capital surcharge shall not be reverted back to the capital surcharge pools excerpt for capital surcharge related to costs that were incorrectly charged to capital rather than operations and maintenance.
PRELIMINARY SURVEY & INVESTIGATION
Preliminary survey and investigation charges should be charged based on the FERC definition contained in the Code of Federal Regulations account 183, Preliminary survey and investigation charges, as follows.
This account shall be charged with all expenditures for preliminary surveys, plans, investigations, etc., made for the purpose of determining the feasibility of utility capital projects under contemplation where it is probable that construction will result. When active construction begins, this account shall be credited and the appropriate construction work in progress project charged. If such preliminary surveys, plans, investigations, etc. are routine in nature, not expected to result in capital additions or abandoned, then the costs should be charged directly to the appropriate operating expense account.
This account shall also include costs of studies and analyses mandated by regulatory bodies related to plant in service. If construction results from such studies, this account shall be credited and the appropriate construction work in progress project charged with an equitable portion of such study costs directly attributable to new construction. The portion of such study costs not attributable to new construction, or the entire cost if construction does not result, shall be charged to the appropriate operating expense account. The costs of such studies relative to active plant under construction shall be included directly in construction work in progress.
Costs included in this account should relate to projects where the actual construction is not anticipated to start within the current or following calendar year. For projects expected to begin within one year and for which approval has occurred, expenditures for preliminary surveys, plans, investigations, etc. should be recorded directly to construction work in progress. If for any reason a project in construction work in progress is deferred beyond the current or following calendar year that has incurred study costs and no tangible assets, the costs will be transferred from construction work in progress to this account until construction begins.
The records supporting the entries to this account shall be so kept that the utility can furnish complete information as to the nature and the purpose of the survey, plans, or investigations and the nature and amounts of the several charges.
The amount of preliminary survey and investigation charges recorded in this account or as construction work in progress shall not exceed the expenditures that may reasonably be determined to contribute directly and immediately and without duplication to utility plant. This will ensure the inclusion of these costs in rate base.
In the event construction is no longer considered probable, any costs accumulated should be charged to the appropriate operating expense account.