PG&E 2007 Annual Report Download - page 102

100
Interest expense was calculated and included in the poten-
tial liability for uncertain tax positions for the 12 months
ended December 31, 2007. Interest expense was classifi ed
as income tax expense in the Consolidated Statements of
Income as follows:
PG&E
(in millions) Corporation Utility
For the 12 months ended
December 31, 2007
Increase in interest expense accrued on
unrecognized tax benefi ts $7 $2
PG&E Corporation and the Utility believe that it is
reasonably possible that the total amount of unrecognized
tax benefi ts could decrease by up to $10 million in the
next 12 months as a result of a potential settlement of the
2001–2002 Internal Revenue Service (“IRS”) audit.
For a description of tax years that remain subject to
examination, see discussion in Note 11 of the Notes to the
Consolidated Financial Statements.
ACCOUNTING PRONOUNCEMENTS
ISSUED BUT NOT YET ADOPTED
Fair Value Measurements
On January 1, 2008, PG&E Corporation and the Utility
adopted the provisions of SFAS No. 157, “Fair Value
Measurements,” (“SFAS No. 157”), which defi nes fair value
measurements and implements a hierarchical disclosure.
SFAS No. 157 defi nes fair value as “the price that would
be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the
measurement date,” or the “exit price.” Accordingly, an entity
must now determine the fair value of an asset or liability
based on the assumptions that market participants would
use in pricing the asset or liability, not those of the reporting
entity itself. The identifi cation of market participant assump-
tions provides a basis for determining what inputs are to be
used for pricing each asset or liability. Additionally, SFAS
No. 157 establishes a fair value hierarchy which gives prece-
dence to fair value measurements calculated using observable
inputs to those using unobservable inputs. Accordingly, the
following levels were established for each input:
• Level 1 — “Inputs that are quoted prices (unadjusted) in
active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measure-
ment date.”
• Level 2 — “Inputs other than quoted prices included in
Level 1 that are observable for the asset or liability, either
directly or indirectly.”
• Level 3 — “Unobservable inputs for the asset or liability.”
These are inputs for which there is no market data avail-
able, or observable inputs that are adjusted using Level 3
assumptions.
SFAS No. 157 requires entities to disclose fi nancial fair-
valued instruments according to the above hierarchy in each
reporting period after implementation. The standard deferred
the disclosure of the hierarchy for certain non-fi nancial instru-
ments to fi scal years beginning after November 15, 2008.
SFAS No. 157 should be applied prospectively except if
certain criteria are met. Congestion Revenue Rights (“CRRs”)
held by the Utility meet the criteria and will be adjusted
upon adoption to comply with SFAS No. 157 requirements.
CRRs allow market participants, including load serving enti-
ties, to hedge the fi nancial risk of California Independent
System Operator (“CAISO”) imposed congestion charges in
the Market Redesign and Technology Upgrade (“MRTU”)
day-ahead market. PG&E Corporation and the Utility
are still evaluating the impact of the adjustment to price
risk management assets and regulatory liabilities on their
Consolidated Balance Sheets. The costs associated with pro-
curement of CRRs are currently being recovered in rates or
are probable of recovery in future rates; therefore, the adop-
tion of SFAS No. 157 will not have an impact on earnings.
Fair Value Option
In February 2007, the FASB issued SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities”
(“SFAS No. 159”). SFAS No. 159 establishes a fair value
option under which entities can elect to report certain
fi nancial assets and liabilities at fair value, with changes in
fair value recognized in earnings. SFAS No. 159 is effective
for fi scal years beginning after November 15, 2007. PG&E
Corporation and the Utility do not expect the adoption of
SFAS No. 159 to materially impact the fi nancial statements.
Amendment of FASB Interpretation No. 39
In April 2007, the FASB issued FASB Staff Position on
Interpretation 39, “Amendment of FASB Interpretation
No. 39” (“FIN 39-1”). Under FIN 39-1, a reporting entity
is permitted to offset the fair value amounts recognized for
cash collateral paid or cash collateral received against the fair
value amounts recognized for derivative instruments executed
with the same counterparty under a master netting arrange-
ment. FIN 39-1 is effective for fi scal years beginning after
November 15, 2007. PG&E Corporation and the Utility are
currently evaluating the impact of FIN 39-1.