Financial processes and systems: Integrating capitalization policies and units of property for a large utility merger
“The new unit of property catalogues are used daily by our accountants and engineers. The catalogues are better organized, more user friendly and are written in a language that field personnel can understand. MCR took out the confusion and created a logical, well thought out system.”
—Director of Accounting
Background
Upon completing its merger with another utility, our client needed to integrate its capitalization policies and unit of property (UoP) catalogues for its expanded generation fleet, transmission, distribution and general utility property. The merger presented an opportunity to align capitalization policies, incorporate best practices and resolve previous organizational disputes. MCR had previously worked with our client on a UoP catalogue integration for its merger with a former utility and was asked to assist again.
Solution
Our review of legacy UoP catalogues from both companies highlighted differences in the level of detail and component listings in multiple accounts. Functional areas became candidates for uniform application of capitalization guidance.
Referencing our capitalization best practices database of industry peers, we developed a solution to simplify the catalogue and provide more consistent guidance in classifying expenditures for capitalization. Finally, we developed an impact assessment to determine if there would be a shift between capital and O&M expense classification.
Results
The project resulted in an 80% reduction in the number of units of property. The new common units of property, along with well-defined capitalization thresholds and a user-friendly catalogue structure, simplify guidance for site organizations and reduce accounting staff time needed to analyze capital funding requests. The impact assessment estimated a minor shift in classifying expenditures from O&M to capital, easing management’s concerns about the level of capitalization in the newly merged entity.