Dominion Power 2000 Annual Report Download - page 45

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that future revenues will be provided for the payment of deferred
tax liabilities.
Dominion accounts for investment tax credits related to utility
plant subject to cost-based regulation under the “deferral method,”
which provides for the amortization of these credits over the ser-
vice lives of the property giving rise to the credits.
Regulatory Assets and Liabilities
Generally, Dominion uses the same accounting policies and prac-
tices used by nonregulated companies for financial reporting under
generally accepted accounting principles. However, regulatory
authorities may order an accounting treatment different from that
used by nonregulated companies to determine the rates charged to
customers. When this occurs, certain utility income and expenses
are deferred as regulatory assets and liabilities. See Notes 7 and
12 for additional information on regulatory assets and liabilities and
the impact of legislation on continued application of SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation.
Foreign Currency Translation
Dominion translates foreign currency financial statements by
adjusting balance sheet accounts using the exchange rate at the
balance sheet date and income statement accounts using the aver-
age exchange rate for the year. Translation gains and losses are
recorded in shareholders’ equity as a component of accumulated
other comprehensive income. Gains and losses resulting from the
settlement of transactions in a currency other than the functional
currency are reflected in income.
Amortization of Debt Issuance Costs
Dominion defers and amortizes the expenses incurred in the
issuance of long-term debt, together with premiums and discounts
associated with such debt, over the lives of the respective issues.
Any gains or losses resulting from the refinancing of debt alloca-
ble to utility operations that are subject to cost-based regulation
are also deferred and amortized over the lives of the new issues
of long-term debt as permitted by regulatory commissions. In addi-
tion, gains or losses resulting from the redemption of debt allocable
to utility operations that are subject to cost-based regulation with-
out refinancing are amortized over the remaining lives of the
redeemed issues.
Investment Securities
Dominion accounts for and classifies investments in equity securi-
ties that have readily determinable fair values and for all invest-
ments in debt securities based on management’s intent. The
investments are classified into three categories. Debt securities
which are intended to be held to maturity are classified as held-to-
maturity securities and reported at amortized cost. Debt and equity
securities purchased and held with the intent of selling them in the
current period are classified as trading securities and are reported
at fair value with unrealized gains and losses included in earnings.
Debt and equity securities that are neither held-to-maturity nor
trading are classified as available-for-sale securities. These are
reported at fair value with unrealized gains and losses reported in
shareholders’ equity, as a component of accumulated other compre-
hensive income, net of tax. For a discussion of the treatment for
securities held in nuclear decommissioning trusts and classified as
available-for-sale, see Note 14.
Mortgage Loans Held for Sale
Mortgage loans held for sale consist of mortgage loans secured by
single family residential properties. Any price premiums or
discounts on mortgage loans, including any capitalized costs or
deferred fees on originated loans, are deferred as an adjustment to
the cost of the loans and are therefore included in the determina-
tion of any gains or losses on sales of the related loans. Mortgage
loans held for sale are carried at the lower of cost or market value.
Loans Receivable, Net and Finance Receivables
Held for Sale
Loans receivable and finance receivables held for sale are stated at
their outstanding principal balance, net of the allowance for credit
losses and any deferred fees or costs. Origination fees, net of cer-
tain direct origination costs, are deferred and recognized as an
adjustment of the yield of the related loans receivable.
The allowance for credit losses is established through provi-
sions for credit losses charged against income. Loans and finance
receivables deemed to be uncollectible are charged against the
allowance for credit losses, and subsequent recoveries, if any,
are credited to the allowance. At December 31, 2000 and 1999,
the allowance for credit losses for loans receivable, net was
$61 million and $47 million, respectively.
Gain on Sale of Loans
Gain on sale of loans represents the present value of amounts
based on the difference between the interest rate to be received
on the mortgage loans sold and the interest rate to be paid to
investors participating in securitizations, after considering
estimated prepayments, credit losses, servicing costs, and non-
refundable fees and premiums. Securitizations involve selling
mortgage loans to an unconsolidated special purpose trust in
exchange for cash proceeds and an interest in the loans securitized
(residual assets). Gains on the sale of loans are recognized on the
settlement date. Residual assets may include interest-only strips
and servicing rights. Interest-only residual assets are recorded
based on the net present value of the projected cash flows, using
management’s best estimates of the key assumptions, including
credit losses, prepayment speeds, forward yield curves, and
discount rates commensurate with the risks involved.
Loan Servicing Rights
Dominion recognizes as separate assets its rights to service mort-
gage loans. Mortgage servicing rights are recorded when pur-
chased or when mortgage loans are originated and subsequently
sold or securitized with the servicing rights retained. Servicing
rights are recorded based on the relative fair value of the mortgage
loans and the servicing rights. The fair value of the servicing rights