Tax effects of AFUDC: financial accounting aspects. [Allowance for funds used during construction]

The use of generally accepted accounting principles in financial statements of regulated utilities requires the recognition of the utility's revenues and expenses for financial-reporting purposes in a manner that is temporally consistent with their recognition for ratemaking purposes. The achievement of this temporal consistency between financial and ratemaking accounting can be confusing, particularly in the area of income taxes. This study examines the possible treatment of the tax effects of capitalized interest for ratemaking and financial-reporting purposes. Various strategies are available to utilities seeking to maximize their financial-accounting return as well as their cash flow.