Dominion Power 2001 Annual Report Download - page 57

Accounting Change for Pension Costs
Effective January 1, 2000 and in connection with Dominion’s
acquisition of CNG, Dominion adopted a new company-wide
method of calculating the market-related value of pension plan
assets used to determine the expected return on pension plan
assets, a component of net periodic pension cost. Dominion
believes the new method enhances the predictability of the
expected return on pension plan assets; provides consistent treat-
ment of all investment gains and losses; and results in calculated
market-related pension plan asset values that are closer to mar-
ket value than the values calculated under the pre-acquisition
methods used by Dominion and CNG.
The $21 million cumulative effect of the change on prior
years (net of income taxes of $11 million) is included in income
for the year ended December 31, 2000. The effect of the change
on 2000 was to increase income before extraordinary item and
cumulative effect of a change in accounting principle by $11
million ($0.05 per share-basic and diluted) and net income by
$32 million ($0.14 per share-basic and diluted).
Retroactive application of the new method, on a pro forma
basis, would not have materially changed Dominion’s net
income for 1999.
Recently Issued Accounting Standards
Business Combinations and Goodwill
In 2001, the Financial Accounting Standards Board (FASB)
issued SFAS Nos. 141, Business Combinations, and 142, Goodwill
and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also
includes guidance on the initial recognition and measurement
of goodwill and other intangible assets arising from business
combinations initiated after June 30, 2001. SFAS No. 142 pro-
hibits the amortization of goodwill and intangible assets with
indefinite useful lives. SFAS No. 142 also requires that these
assets be reviewed for impairment at least annually. Intangible
assets with finite lives will continue to be amortized over their
estimated useful lives.
Dominion will adopt SFAS No. 142 effective January 1,
2002. The discontinuance of goodwill amortization under SFAS
No. 142 is expected to result in an increase in net income of $95
million in 2002. Dominion will test goodwill for impairment
using an annual two-step process described in SFAS No. 142.
The first step is a screen for potential impairment, while the
second step measures the amount of the impairment, if any.
Dominion will perform the first step of the required impairment
tests of goodwill as of January 1, 2002 before the end of the sec-
ond quarter of 2002. The standard requires that if impairment
Note 4
Note 3 were determined to exist under that test, it would be reflected as
the cumulative effect of a change in accounting principle.
Dominion has not yet determined the effect these tests may
have on its earnings or financial position.
Asset Retirement Obligations
In 2001, FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which provides accounting requirements
for the recognition and measurement of liabilities associated
with the retirement of tangible long-lived assets. Under the stan-
dard, these liabilities will be recognized at fair value as incurred
and capitalized as part of the cost of the related tangible long-
lived assets. Accretion of the liabilities due to the passage of time
will be an operating expense. Dominion will adopt the standard
effective January 1, 2003.
Dominion has identified retirement obligations associated
with the decommissioning of its nuclear generation facilities and
certain dismantlement and restoration activities for its gas and
oil wells. However, Dominion has not yet performed a complete
assessment of possible retirement obligations associated with
other electric and gas utility property. Dominion has not yet
determined the financial impact of adopting the new standard.
Also, under the new standard, the realized and unrealized
earnings of external trusts available for funding decommission-
ing activities at Dominion’s utility nuclear plants will be
recorded in other income and other comprehensive income, as
appropriate. Currently, Dominion records these trusts’ earnings
in other income with an offsetting charge to expense, also
recorded in other income, associated with the accretion of the
decommissioning liability. See Note 16. Upon adoption of the
new standard, Dominion will discontinue its practice of accru-
ing, as part of depreciation expense, amounts associated with the
future costs of removal for its gas and electric utility and gas and
oil exploration and production assets. However, Dominion may
continue its practice of accruing for such costs subject to cost-of-
service utility rate regulation even when an asset removal obliga-
tion does not exist but would do so through the recognition of
regulatory assets and liabilities, as appropriate.
Impairment or Disposal of Long-Lived Assets
In 2001, FASB issued SFAS No. 144, Accounting for the Impair-
ment or Disposal of Long-Lived Assets, which provides guidance
that will eliminate inconsistencies in accounting for the impair-
ment or disposal of long-lived assets under existing accounting
pronouncements. Dominion will apply the provisions of this
standard prospectively beginning January 1, 2002 and does not
expect the adoption to have a material impact on its results of
operations or financial condition.
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