Xcel Energy 2010 Annual Report Download - page 77

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of the consolidated financial statements and related disclosures in compliance with GAAP requires the application of
accounting rules and guidance, as well as the use of estimates. The application of these policies necessarily involves judgments
regarding future events, including the likelihood of success of particular projects, legal and regulatory challenges and anticipated
recovery of costs. These judgments could materially impact the consolidated financial statements and disclosures, based on
varying assumptions. In addition, the financial and operating environment also may have a significant effect on the operation of
the business and on the results reported even if the nature of the accounting policies applied have not changed. The following is a
list of accounting policies that are most critical to the portrayal of Xcel Energy’s financial condition and results, and that require
management’s most difficult, subjective or complex judgments. Each of these has a higher potential likelihood of resulting in
materially different reported amounts under different conditions or using different assumptions. Each critical accounting policy
has been discussed with the Audit Committee of the Xcel Energy Board of Directors.
Regulatory Accounting
Xcel Energy is a holding company with rate-regulated subsidiaries that are subject to the accounting for Regulated Operations,
which provides that rate-regulated entities account for and report assets and liabilities consistent with the recovery of those
incurred costs in rates, if the rates established are designed to recover the costs of providing the regulated service and if the
competitive environment makes it probable that such rates could be charged and collected. Xcel Energy’s rates are derived
through the ratemaking process, which results in the recording of regulatory assets and liabilities based on the probability of
current and future cash flows. Regulatory assets represent incurred or accrued costs that have been deferred because they are
probable of future recovery from customers. Regulatory liabilities represent amounts that are expected to be refunded to
customers in future rates or amounts collected in current rates for future costs. In other businesses or industries, regulatory assets
would be charged to expense and regulatory liabilities would be recorded as income.
As of Dec. 31, 2010 and 2009, Xcel Energy has recorded regulatory assets of approximately $2.5 billion and $2.3 billion and
regulatory liabilities of approximately $1.3 billion and $1.3 billion, respectively. Each subsidiary is subject to regulation that
varies from jurisdiction to jurisdiction. If future recovery of costs, in any such jurisdiction, ceases to be probable, Xcel Energy
would be required to charge these assets to current earnings. While there are no current or expected proposals or changes in the
regulatory environment that impact the probability of future recovery of these assets, if the SEC should mandate the use of
international financial accounting standards (IFRS) the lack of an accounting standard for rate-regulated entities under IFRS could
require us to charge incurred regulatory assets to earnings and regulatory liabilities to income. See Note 16 to the consolidated
financial statements for further discussion of regulatory assets and liabilities.
Income Tax Accruals
Judgment, uncertainty, and estimates are a significant aspect of the income tax accrual process that accounts for the effects of
current and deferred income taxes. Uncertainty associated with the application of tax statutes and regulations and the outcomes of
tax audits and appeals require that judgment and estimates be made in the accrual process and in the calculation of the ETR.
ETRs are also highly impacted by assumptions. ETR calculations are revised every quarter based on best available year-end tax
assumptions (income levels, deductions, credits, etc.) by legal entity; adjusted in the following year after returns are filed, with the
tax accrual estimates being trued-up to the actual amounts claimed on the tax returns; and further adjusted after examinations by
taxing authorities have been completed.
In accordance with the interim reporting guidance, a tax expense or benefit is recorded every quarter to eliminate the difference in
continuing operations tax expense computed based on the actual year-to-date ETR and the forecasted annual ETR.
Accounting for income taxes also requires that only tax benefits that meet the “more likely than not” recognition threshold can be
recognized or continue to be recognized. The change in the unrecognized tax benefits needs to be reasonably estimated based on
evaluation of the nature of uncertainty, the nature of event that could cause the change and an estimated range of reasonably
possible changes. At any period end, and as new developments occur, management will use prudent business judgment to
unrecognize appropriate amounts of tax benefits. Unrecognized tax benefits can be recognized as issues are favorably resolved
and loss exposures decline.
As disputes with the IRS and state tax authorities are resolved over time, we may need to adjust our unrecognized tax benefits and
interest accruals to the updated estimates needed to satisfy tax and interest obligations for the related issues. These adjustments
may be favorable or unfavorable, increasing or decreasing earnings. See Note 6 to the consolidated financial statements for
further discussion.