| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: Our consolidated financial statements include the accounts of the Association, our wholly‑owned and majority‑owned subsidiaries, and certain variable interest entities for which we or our subsidiaries are the primary beneficiaries. See Note 14—Variable Interest Entities. Our consolidated financial statements also include our undivided interests in jointly owned facilities.
All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) as applied to regulated enterprises.
JOINTLY OWNED FACILITIES: We own undivided interests in two jointly owned generating facilities that are operated by the operating agent of each facility under joint facility ownership agreements with other utilities as tenants in common. These projects include the Yampa Project (operated by us) and the Missouri Basin Power Project (“MBPP”) (operated by Basin Electric Power Cooperative (“Basin”)). Each participant in these agreements receives a portion of the total output of the generation facilities, which approximates its percentage ownership. Each participant provides its own financing for its share of each facility and accounts for its share of the cost of each facility. The operating agent for each of these projects allocates the fuel and operating expenses to each participant based upon its share of the use of the facility. Therefore, our share of the plant asset cost, interest, depreciation and operating expenses is included in our consolidated financial statements. See Note 3 – Property, Plant and Equipment.
SEGMENT REPORTING: We are organized for the purpose of supplying wholesale power to our Members and do so through the utilization of a portfolio of resources, including generation and transmission facilities, long‑term purchase contracts and short‑term energy purchases. In support of our coal-fired generating resources, we have direct ownership and investments in coal mines. Our Board serves as our chief operating decision maker who manages and reviews our operating results and allocates resources as one operating segment. Therefore, we have one reportable segment for financial reporting purposes.
BUSINESS COMBINATIONS: We account for business acquisitions by applying the accounting standard related to business combinations. In accordance with this method, the identifiable assets acquired, the liabilities assumed and any noncontrolling interests in the acquired entities are required to be recognized at their acquisition date fair values. We typically engage an independent valuation firm to determine the acquisition date fair values of most of the acquired assets and assumed liabilities. The excess of total consideration transferred over the net assets acquired is recognized as goodwill. Acquisition‑related costs such as legal fees, accounting services fees and valuation fees, are expensed as incurred. We are required to consolidate these acquired entities.
If an acquisition does not result in acquiring a business, the transaction is accounted for as an acquisition of assets. This method requires measurement and recognition of the acquired net assets based upon the amount of cash transferred and the amount paid for acquisition‑related costs. There is no goodwill recognized in an acquisition of assets.
USE OF ESTIMATES: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
IMPAIRMENT EVALUATION: Long-lived assets (property, plant and equipment, intangible assets, investments and preliminary surveys and investigation costs) that are held and used are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value based on quoted market prices or other valuation techniques. There were no impairments of long-lived assets recognized for 2018 and 2016. In June 2017, we determined that the $93.5 million of development costs (which excluded the costs of land and water rights) for a new coal-fired generating unit or units at Holcomb Generating Station were impaired. The impairment loss was deferred in accordance with the accounting requirements related to regulated operations at the discretion of our Board. See Note 2 – Accounting for Rate Regulation.
VARIABLE INTEREST ENTITIES: We evaluate our arrangements and relationships with other entities, including our investments in other associations and investments in coal mines, in accordance with the accounting standard related to consolidation of variable interest entities. This guidance requires us to identify variable interests (contractual, ownership or other financial interests) in other entities and whether any of those entities in which we have a variable interest in, meets the criteria of a variable interest entity. An entity is considered to be a variable interest entity when its total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, or its equity investors, as a group, lack the characteristics of having a controlling financial interest. In making this assessment, we consider the potential that our arrangements and relationships with other entities provide subordinated financial support, the potential for us to absorb losses or rights to residual returns of an entity, the ability to directly or indirectly make decisions about the entity’s activities and other factors. If an entity that we have a variable interest in meets the criteria of a variable interest entity, we must determine whether we are the primary beneficiary of that entity. The primary beneficiary is the entity that has the power to direct the activities of the variable interest entity that most significantly impact the variable interest entity’s economic performance, and the obligation to absorb losses or the right to receive benefits from the variable interest entity that could be potentially significant to the variable interest entity. If we are determined to be the primary beneficiary of (has controlling financial interest in) a variable interest entity, then we would be required to consolidate that entity. In certain situations, it may be determined that power is shared among multiple unrelated parties such that no one party has the power to direct the activities of a variable interest entity that most significantly impact the variable interest entity’s economic performance (decisions about those activities require the consent of each of the parties sharing power). In accordance with the accounting guidance prescribed by consolidation of variable interest entities, if the determination is made that power is shared among multiple unrelated parties, then no party is the primary beneficiary. See Note 14—Variable Interest Entities.
ACCOUNTING FOR RATE REGULATION: We are subject to the accounting requirements related to regulated operations. In accordance with these accounting requirements, some revenues and expenses have been deferred at the discretion of our Board, which has budgetary and rate‑setting authority, if it is probable that these amounts will be refunded or recovered through future rates. Regulatory assets are costs we expect to recover from our Members based on rates approved by our Board in accordance with our rate policy. Regulatory liabilities represent probable future reductions in rates associated with amounts that are expected to be refunded to our Members based on rates approved by our Board in accordance with our rate policy. We recognize regulatory assets as expenses and regulatory liabilities as operating revenues, other income, or a reduction in expense concurrent with their recovery in rates.
Regulatory assets and liabilities are as follows (dollars in thousands):
December 31,
December 31,
2018
2017
Regulatory assets
Deferred income tax expense (1)
$
18,098
$
17,205
Deferred prepaid lease expense – Craig Unit 3 Lease (2)
—
3,237
Deferred prepaid lease expense – Springerville Unit 3 Lease (3)
86,005
88,296
Goodwill – J.M. Shafer (4)
51,994
54,843
Goodwill – Colowyo Coal (5)
38,227
39,261
Deferred debt prepayment transaction costs (6)
149,559
158,187
Deferred Holcomb expansion impairment loss (7)
93,494
93,494
Total regulatory assets
437,377
454,523
Regulatory liabilities
Interest rate swap - unrealized gain (8)
8,576
4,311
Interest rate swap - realized gain (9)
4,215
4,614
Deferred revenues (10)
82,006
30,327
Membership withdrawal (11)
42,572
42,572
Total regulatory liabilities
137,369
81,824
Net regulatory asset
$
300,008
$
372,699
(1)
A regulatory asset or liability associated with deferred income taxes generally represents the future increase or decrease in income taxes payable that will be received or settled through future rate revenues.
(2)
Represented deferral of the loss on acquisition related to the Craig Generating Station (“Craig Station”) Unit 3 prepaid lease expense upon acquisitions of equity interests in 2002 and 2006. The regulatory asset for the deferred prepaid lease expense was amortized to depreciation, amortization and depletion expense in the amount of $6.5 million annually through December 31, 2017. The remaining $3.2 million was amortized to depreciation, amortization and depletion expense for the six month period ending June 30, 2018 and recovered from our Members in rates.
(3)
Represents deferral of the loss on acquisition related to the Springerville Generating Station Unit 3 (“Springerville Unit 3”) prepaid lease expense upon acquiring a controlling interest in the Springerville Unit 3 Partnership LP (“Springerville Partnership”) in 2009. The regulatory asset for the deferred prepaid lease expense is being amortized to depreciation, amortization and depletion expense in the amount of $2.3 million annually through the 47-year period ending in 2056 and recovered from our Members in rates.
(4)
Represents goodwill related to our acquisition of Thermo Cogeneration Partnership, LP (“TCP”) in December 2011. Goodwill is being amortized to depreciation, amortization and depletion expense in the amount of $2.8 million annually through the 25-year period ending in 2036 and recovered from our Members in rates.
(5)
Represents goodwill related to our acquisition of Colowyo Coal Company LP (“Colowyo Coal”) in December 2011. Goodwill is being amortized to depreciation, amortization and depletion expense in the amount of $1.0 million annually through the 44-year period ending in 2056 and recovered from our Members in rates.
(6)
Represents transaction costs that we incurred related to the prepayment of our long-term debt in 2014. These costs are being amortized to depreciation, amortization and depletion expense in the amount of $8.6 million annually over the 21.4-year period ending in 2036 and recovered from our Members in rates.
(7)
Represents deferral of the impairment loss related to development costs, including costs for the option to purchase development rights for the expansion of the Holcomb Generating Station. The plan for the recovery from our Members in rates has not been determined by our Board. Once the plan for recovery is determined, the deferred impairment loss will be recognized in other operating expenses.
(8)
Represents deferral of an unrealized gain related to the change in fair value of a forward starting interest rate swap that was entered into in 2016 in order to hedge interest rates on anticipated future borrowings. Upon settlement of this interest rate swap, the realized gain or loss will be deferred and subsequently recognized as interest expense when amortized over the term of the associated long-term debt borrowing. See Note 6 – Long-Term Debt and Note 8 – Fair Value.
(9)
Represents deferral of a realized gain of $4.6 million related to the October 2017 settlement of a forward starting interest rate swap. This realized gain was deferred as a regulatory liability and is being amortized to interest expense over the 12-year term of the First Mortgage Obligations, Series 2017A and refunded to Members through reduced rates when recognized in future periods.
(10)
Represents deferral of the recognition of non-member electric sales revenues. These deferred non-member electric sales revenues will be refunded to Members through reduced rates when recognized in non-member electric sales revenue in future periods.
(11)
Represents the deferral of the recognition of other income recorded in connection with the withdrawal of a former member from membership in us. This deferred membership withdrawal income will be refunded to Members through reduced rates when recognized in other income in future periods.
ELECTRIC PLANT AND DEPRECIATION: Electric plant is stated at cost. The cost of internally constructed assets includes payroll, overhead costs and interest charged during construction. Interest rates charged during construction of 4.7 percent were used for 2018, 2017 and 2016. The amount of interest capitalized during construction was $8.6, $11.0 and $13.8 million during 2018, 2017 and 2016, respectively. At the time that units of electric plant are retired, original cost and cost of removal, net of the salvage value, are charged to the allowance for depreciation. Replacements of electric plant that involve less than a designated unit value are charged to maintenance expense when incurred. Electric plant is depreciated based upon estimated depreciation rates and useful lives that are periodically re‑evaluated. See Note 3 ‑ Property, Plant and Equipment.
COAL RESERVES AND DEPLETION: Coal reserves are recorded at cost. Depletion of coal reserves is computed using the units‑of‑production method utilizing only proven and probable reserves.
LEASES: The accounting for lease transactions in conformity with GAAP requires management to make various assumptions, including the discount rate, the fair market value of the leased assets and the estimated useful life, in order to determine whether a lease should be classified as operating or capital.
INVESTMENTS IN OTHER ASSOCIATIONS: Investments in other associations include investments in the patronage capital of other cooperatives and other required investments in the organizations. Our investment in a cooperative increases when a cooperative allocates patronage capital credits to us and it decreases when we receive a cash retirement of the allocated capital credits from the cooperative. A cooperative allocates its patronage capital credits to us based upon our patronage (amount of business done) with the cooperative.
Investments in other associations are as follows (dollars in thousands):
December 31,
December 31,
2018
2017
Basin Electric Power Cooperative
$
118,115
$
101,820
National Rural Utilities Cooperative Finance Corporation - patronage capital
11,704
11,232
National Rural Utilities Cooperative Finance Corporation - capital term certificates
16,018
16,085
CoBank, ACB
9,062
8,174
Western Fuels Association, Inc.
2,392
2,346
Other
4,196
3,951
Investments in other associations
$
161,487
$
143,608
Our investments in other associations are considered equity securities without readily determinable fair values, and as such are measured at cost minus impairment. We have evaluated these investments for indicators of impairment. There were no impairments of these investments recognized during 2018, 2017 or 2016.
INVESTMENTS IN AND ADVANCES TO COAL MINES: We have direct ownership and investments in coal mines to support our coal-fired generating resources. We, and certain participants in the Yampa Project, are members of Trapper Mining, Inc. (“Trapper Mining”), which is organized as a cooperative and is the owner and operator of the Trapper Mine near Craig, Colorado. Our investment in Trapper Mining is recorded using the equity method. In addition, we have ownership in Western Fuels Association, Inc. (“WFA”), which is an owner of Western Fuels‑Wyoming, Inc. (“WFW”), the owner and operator of the Dry Fork Mine near Gillette, Wyoming. Dry Fork Mine provides coal to MBPP, which is the operator of Laramie River Generating Station. We, through our undivided interest in the jointly owned facility MBPP, advance funds to the Dry Fork Mine.
Investments in and advances to coal mines are as follows (dollars in thousands):
December 31,
December 31,
2018
2017
Investment in Trapper Mine
$
15,350
$
14,998
Advances to Dry Fork Mine
3,578
3,276
Investments in and advances to coal mines
$
18,928
$
18,274
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AND INVESTMENTS: We consider highly liquid investments with an original maturity of three months or less to be cash equivalents. The fair value of cash equivalents approximates their carrying values due to their short-term maturity.
Restricted cash and investments represent funds designated by our Board for specific uses and funds restricted by contract or other legal reasons. A portion of the funds are funds that have been restricted by contract that are expected to be settled within one year. These funds are therefore classified as current on our consolidated statements of financial position. The other funds are for funds restricted by contract or other legal reasons that are expected to be settled beyond one year. These funds are classified as noncurrent and are included in other assets and investments on our consolidated statements of financial position.
The following table provides a reconciliation of cash, cash equivalents and restricted cash and investments reported within our consolidated statements of financial position that sum to the total of the same such amount shown in our consolidated statements of cash flows (dollars in thousands):
December 31,
December 31,
2018
2017
Cash and cash equivalents
$
116,858
$
143,694
Restricted cash and investments - current
126
1,292
Restricted cash and investments - noncurrent
10,606
5,979
Cash, cash equivalents and restricted cash and investments
$
127,590
$
150,965
Our Board Policy for Financial Goals and Capital Credits was revised in 2018 to provide that our Board will endeavor to fund an internally restricted cash account for the purpose of cash funding deferred revenues and incomes held as regulatory liabilities. In connection with such policy, at the end of 2018, our Board internally restricted cash in the amount of $4.6 million.
MARKETABLE SECURITIES: We hold marketable securities in connection with the directors’ and executives’ elective deferred compensation plans which consist of investments in stock funds, bond funds and money market funds. These securities are measured at fair value on a recurring basis with changes in fair value recognized in earnings. The estimated fair value of the investments is based upon their active market value (Level 1 inputs) and is included in other noncurrent assets on our consolidated statements of financial position. At December 31, 2018, the cost and estimated fair value of the investments were $0.8 and $0.7 million, respectively. At December 31, 2017, the cost and estimated fair value of the investments were $1.0 and $1.2 million, respectively.
INVENTORIES: Coal inventories at our owned generating facilities are stated at LIFO (last‑in, first‑out) cost and were $24.6 and $26.8 million as of December 31, 2018 and 2017, respectively. The remaining coal inventories, other fuel, and materials and supplies inventories are stated at average cost. In 2018, we realized lower coal fuel expense of $0.8 million as a result of a LIFO inventory liquidation at our generating facilities.
OTHER DEFERRED CHARGES: We make expenditures for preliminary surveys and investigations for the purpose of determining the feasibility of contemplated generation and transmission projects. If construction results, the preliminary survey and investigation expenditures will be reclassified to electric plant—construction work in progress. If the work is abandoned, the related preliminary survey and investigation expenditures will be charged to the appropriate operating expense account or the expense could be deferred as a regulatory asset to be recovered from our Members in rates subject to approval by our Board, which has budgetary and rate-setting authority.
We make advance payments to the operating agents of jointly owned facilities to fund our share of costs expected to be incurred under each project including MBPP – Laramie River Station and Yampa Project – Craig Generating Station Units 1 and 2. We also make advance payments to the operating agent of Springerville Unit 3.
We have entered into a forward starting interest rate swap to hedge a portion of our future long-term debt interest rate exposure. The unrealized gain of $8.6 and $4.3 million as of December 31, 2018 and 2017, respectively, was deferred in accordance with the accounting requirements related to regulated operations. See Note 2 – Accounting for Rate Regulation.
Other deferred charges are as follows (dollars in thousands):
December 31,
December 31,
2018
2017
Preliminary surveys and investigations
$
20,660
$
19,737
Advances to operating agents of jointly owned facilities
13,161
10,740
Interest rate swap
8,576
4,311
Other
4,056
3,704
Total other deferred charges
$
46,453
$
38,492
DEBT ISSUANCE COSTS: We account for debt issuance costs as a direct deduction of the associated long-term debt carrying amount consistent with the accounting for debt discounts and premiums. Deferred debt issuance costs are amortized to interest expense using an effective interest method over the life of the respective debt.
ASSET RETIREMENT OBLIGATIONS: We account for current obligations associated with the future retirement of tangible long‑lived assets in accordance with the accounting guidance relating to asset retirement and environmental obligations. This guidance requires that legal obligations associated with the retirement of long‑lived assets be recognized at fair value at the time the liability is incurred and capitalized as part of the related long‑lived asset. Over time, the liability is adjusted to its present value by recognizing accretion expense and the capitalized cost of the long‑lived asset is depreciated in a manner consistent with the depreciation of the underlying physical asset. In the absence of quoted market prices, we determine fair value by using present value techniques in which estimates of future cash flows associated with retirement activities are discounted using a credit adjusted risk‑free rate and a market risk premium. Upon settlement of an asset retirement obligation, we will apply payment against the estimated liability and incur a gain or loss if the actual retirement costs differ from the estimated recorded liability. These liabilities are included in asset retirement obligations.
Coal mines: We have asset retirement obligations for the final reclamation costs and post‑reclamation monitoring related to the Colowyo Mine, the New Horizon Mine, and the Fort Union Mine. New Horizon Mine started final reclamation on June 8, 2017.
Generation: We, including our undivided interest in jointly owned facilities, have asset retirement obligations related to equipment, dams, ponds, wells and underground storage tanks at the generating stations.
Transmission: We had an asset retirement obligation to remove a certain transmission line and related substation assets resulting from an agreement to relocate the line. The asset retirement obligation was settled during the third quarter of 2017.
Aggregate carrying amounts of asset retirement obligations are as follows (dollars in thousands):
2018
2017
Asset retirement obligations at beginning of period
$
56,855
$
58,583
Liabilities incurred
6,065
4,294
Liabilities settled
(5,475)
(4,935)
Accretion expense
2,458
2,623
Change in cash flow estimate
(3,131)
(3,710)
Total asset retirement obligations at end of period
$
56,772
$
56,855
Less current asset retirement obligations at end of period
(2,183)
(3,087)
Long-term asset retirement obligations at end of period
$
54,589
$
53,768
We also have asset retirement obligations with indeterminate settlement dates. These are made up primarily of obligations attached to transmission and other easements that are considered by us to be operated in perpetuity and therefore the measurement of the obligation is not possible. A liability will be recognized in the period in which sufficient information exists to estimate a range of potential settlement dates as is needed to employ a present value technique to estimate fair value.
OTHER DEFERRED CREDITS AND OTHER LIABILITIES: In 2015, we renewed transmission right of way easements on tribal nation lands where certain of our electric transmission lines are located. $32.3 million will be paid by us for these easements from 2019 through the individual easement terms ending between 2036 and 2040. The present value for the easement payments were $21.0 and $21.3 million as of December 31, 2018 and December 31, 2017, respectively, which is recorded as other deferred credits and other liabilities.
A contract liability represents an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer. We have received deposits from others and these deposits are reflected in contract liabilities (unearned revenue) until recognized in other operating revenues over the life of the agreement. We have received deposits from various parties and those that may still be required to be returned are a liability and these are reflected in customer deposits.
The following other deferred credits and other liabilities are reflected on our consolidated statements of financial position (dollars in thousands):
December 31,
December 31,
2018
2017
Transmission easements
$
20,966
$
21,337
Unearned revenue
4,592
3,735
Customer deposits
2,458
2,898
Other
22,250
25,426
Total other deferred credits and other liabilities
$
50,266
$
53,396
MEMBERSHIPS: There are 43 $5 memberships outstanding at December 31, 2018 and 2017.
PATRONAGE CAPITAL: Our net margins are treated as advances of capital from our Members and are allocated to our Members on the basis of their electricity purchases from us. Net losses, should they occur, are not allocated to Members, but are offset by future margins. Margins not yet distributed to Members constitute patronage capital. Patronage capital is held for the account of our Members and is distributed through patronage capital retirements when our Board deems it appropriate to do so, subject to debt instrument restrictions.
ELECTRIC SALES REVENUE: Revenue from electric energy deliveries is recognized when delivered. See Note 10 – Revenue.
OTHER OPERATING REVENUE: Other operating revenue consists primarily of wheeling, transmission and lease revenues, coal sales and revenue from supplying steam and water to a paper manufacturer located adjacent to the Escalante Generating Station. Wheeling revenue is received when we charge other energy companies for transmitting electricity over our transmission lines. Transmission revenue is from our membership in the Southwest Power Pool, a regional transmission organization. The lease revenue is primarily from a power sales arrangement that is required to be accounted for as an operating lease since it conveys to others the right to use power generating equipment for a stated period of time. See Note 9 – Leases. Coal sales revenue results from the sale of coal from the Colowyo Mine to other joint owners in the Yampa Project (the “Yampa Participants”) under a contract which ended December 31, 2017. We sell coal from the Colowyo Mine under other contracts with third parties. The associated Colowyo Mine expenses are included in coal mining, depreciation, amortization, and depletion and interest expense on our consolidated statements of operations.
INCOME TAXES: We are a taxable cooperative subject to federal and state taxation. As a taxable electric cooperative, we are allowed a tax exclusion for margins allocated as patronage capital. We utilize the liability method of accounting for income taxes. However, in accordance with our regulatory accounting treatment, changes in deferred tax assets or liabilities result in the establishment of a regulatory asset or liability. A regulatory asset or liability associated with deferred income taxes generally represents the future increase or decrease in income taxes payable that will be received or settled through future rate revenues. Under this regulatory accounting approach, the income tax expense (benefit) on our consolidated statements of operations includes only the current provision. See Note 9 – Income Taxes.
INTERCHANGE POWER: We occasionally engage in interchanges, or non‑cash swapping, of energy. Based on the assumption that all energy interchanged will eventually be received or delivered in‑kind, interchanged energy is generally valued at the average cost of fuel to generate power. Additionally, portions of the energy interchanged are valued per contract with the utility involved in the interchange. When we are in a net energy advance position, the advanced energy balance is recorded as an asset. If we owe energy, the net energy balance owed to others is recorded as a liability. The net activity for the year is included in purchased power expense. The interchange liability balance of $2.3 and $1.5 million at December 31, 2018 and 2017, respectively, is included in accounts payable. The net interchange activity recorded in purchased power expense was an expense of $0.6 million in 2018 and a credit of $0.4 million and $0.3 million in 2017 and 2016.
EVALUATION OF SUBSEQUENT EVENTS: We evaluated subsequent events through March 8, 2019, which is the date when the financial statements were issued.
A CCOUNTING PRONOUNCEMENTS-NOT YET ADOPTED: In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“Topic 842”). Topic 842 supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) 840, Leases. Under Topic 842, a lessee is required to recognize a right-of-use asset and a corresponding lease liability on the balance sheet for most leases greater than twelve months and disclose certain key qualitative and quantitative information about lease arrangements. The right-of-use asset represents a lessee’s right to use (control the use of) the underlying asset for the lease term. The lease liability represents a lessee’s obligation to make lease payments. The right-of-use asset and the lease liability are initially measured at the present value of the lease payments over the lease term. For operating leases, the lessee subsequently recognizes straight-line lease expense over the life of the lease, similar to accounting for operating leases under Topic 840. For finance leases, the lessee subsequently recognizes interest expense and amortization of the right-of-use asset, similar to accounting for capital leases under Topic 840. Lessor accounting remains substantially the same as that applied under Topic 840. Topic 842 requires that leases be recognized and measured as of the earliest period presented, using a modified retrospective approach, with all periods presented being adjusted and presented under the new standard. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements , which provides companies an optional adoption method and thereby not adjusting comparative financial statements. Topic 842 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
We are finalizing the implementation of Topic 842 related to policies, processes and internal controls during the first quarter of 2019. We anticipate electing the optional adoption method provided by ASU 2018-11 and not adjusting comparative financial statements. Topic 842 provides a number of optional practi |
