Dominion Power 2005 Annual Report Download - page 67

Note 3. Newly Adopted Accounting Standards
2005
SFAS No. 153
On July 1, 2005, we adopted SFAS No. 153, Exchanges of Non-
monetary Assets
— an amendment of APB Opinion No. 29, which
requires that all commercially substantive exchange transactions,
for which the fair value of the assets exchanged are reliably
determinable, be recorded at fair value, whether or not they are
exchanges of similar productive assets. This amends the exception
from fair value measurements in APB Opinion No. 29, Accounting
for Nonmonetary Transactions, for nonmonetary exchanges of simi-
lar productive assets and replaces it with an exception for only
those exchanges that do not have commercial substance. There
was no impact on our results of operations or financial condition
related to our adoption of SFAS No. 153 and we do not expect the
ongoing application of SFAS No. 153 to have a material impact
on our results of operations or financial condition.
FIN 47
We adopted Financial Accounting Standards Board (FASB) Interpre-
tation No. 47, Accounting for Conditional Asset Retirement Obliga-
tions (FIN 47) on December 31, 2005. FIN 47 clarifies that an
entity is required to recognize a liability for the fair value of a condi-
tional asset retirement obligation when the obligation is incurred
—
generally upon acquisition, construction, or development and/or
through the normal operation of the asset, if the fair value of the
liability can be reasonably estimated. A conditional asset retirement
obligation is a legal obligation to perform an asset retirement activ-
ity in which the timing and/or method of settlement are conditional
on a future event that may or may not be within the control of the
entity. Uncertainty about the timing and/or method of settlement is
required to be factored into the measurement of the liability when
sufficient information exists. Our adoption of FIN 47 resulted in the
recognition of an after-tax charge of $6 million, representing the
cumulative effect of the change in accounting principle.
Presented below are our pro forma net income and earnings per
share as if we had applied the provisions of FIN 47 as of January 1,
2003.
Year Ended December 31, 2005 2004 2003
(millions, except per share amounts)
Net income — as reported $1,033 $1,249 $ 318
Net income — pro forma 1,038 1,248 317
Basic EPS — as reported 3.02 3.80 1.00
Basic EPS — pro forma 3.03 3.79 1.00
Diluted EPS — as reported 3.00 3.78 1.00
Diluted EPS — pro forma 3.02 3.78 1.00
If we had applied the provisions of FIN 47 as of January 1, 2003,
our asset retirement obligations would have increased by $124 mil-
lion, $131 million and $140 million as of January 1, 2003,
December 31, 2003 and December 31, 2004, respectively.
2004
FIN 46R
We adopted FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities (FIN 46R), for our inter-
ests in VIEs that are not considered special purpose entities on
March 31, 2004. FIN 46R addresses the identification and consoli-
dation of VIEs, which are entities that are not controllable through
voting interests or in which the VIEs’ equity investors do not bear
the residual economic risks and rewards in proportion to voting
rights. There was no impact on our results of operations or financial
position related to this adoption. See Note 16.
EITF 04-8
On December 31, 2004, we adopted EITF Issue No. 04-8, The
Effect of Contingently Convertible Instruments on Diluted Earnings
per Share, which requires the shares issuable under contingently
convertible instruments to be included in the diluted EPS calcula-
tion regardless of whether the market price trigger (or other contin-
gent feature) has been met. Prior to adoption, we exchanged
$219 million of outstanding contingent convertible senior notes for
new notes with a conversion feature that requires that the principal
amount of each note be repaid in cash. The new notes outstanding
on December 31, 2004 were included in the diluted EPS calcula-
tion retroactive to the date of issuance using the method described
in EITF 04-8. Under this method, the number of shares included in
the denominator of the diluted EPS calculation is calculated as the
net shares issuable for the reporting period based upon the average
market price for the period. This did not result in an increase to the
average shares outstanding used in the 2004 calculation of our
diluted EPS since the conversion price included in the notes was
greater than the average market price. In 2005, we exchanged an
additional $1 million of outstanding contingent convertible senior
notes for new notes with a conversion feature that requires that the
principal amount of each note be repaid in cash.
2003
SFAS No. 143
Effective January 1, 2003, we adopted SFAS No. 143, which pro-
vides accounting requirements for the recognition and measure-
ment of liabilities associated with the retirement of tangible
long-lived assets. The effect of adopting SFAS No. 143 for 2003, as
compared to an estimate of net income reflecting the continuation
of former accounting policies, was to increase net income by
$201 million. The increase is comprised of a $180 million after-tax
benefit, representing the cumulative effect of a change in account-
ing principle and an increase in income before the cumulative
effect of a change in accounting principle of $21 million.
EITF 02-3
On January 1, 2003, we adopted EITF Issue No. 02-3, Issues
Involved in Accounting for Derivative Contracts Held for Trading Pur-
poses and Contracts Involved in Energy Trading and Risk Manage-
ment Activities, that rescinded EITF Issue No. 98-10, Accounting for
Contracts Involved in Energy Trading and Risk Management Activi-
ties. Adopting EITF 02-3 resulted in the discontinuance of fair value
accounting for non-derivative contracts held for trading purposes.
Those contracts are recognized as revenue or expense at the time
of contract performance, settlement or termination. The EITF 98-10
rescission was effective for non-derivative energy trading contracts
initiated after October 25, 2002. For all non-derivative energy trad-
ing contracts initiated prior to October 25, 2002, we recognized a
charge of $67 million ($43 million after-tax) as the cumulative
effect of this change in accounting principle on January 1, 2003.
EITF 03-11
We adopted EITF Issue No. 03-11, Reporting Realized Gains and
Losses on Derivative Instruments That Are Subject to FASB State-
ment No. 133 and Not “Held for Trading Purposes” as Defined in
EITF Issue No. 02-3, on October 1, 2003. EITF 03-11 addresses
classification of income statement related amounts for derivative
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