Capitalizing an allowance for funds used during construction: the impact on earnings quality

Journal Article · Thu Jan 19 04:00:00 EST 1978 · Public Util. Fortn.; (United States)

OSTI ID:5284736

Fizpatrick, D B; Stitzel, T E

Allowances for funds used during construction (AFUDC) of utilities are isolated and analyzed to determine their influence on utility common stock prices. Accounting procedures for construction work in progress (CWIP) require that all charges be included in the project's cost and capitalized, while AFUDC are added to income. This procedure is generally understood to lower the quality of earnings. The authors outline their methodology and findings in terms of the impact of lower quality earnings on investors, utilities, customers, and regulators. Empirical tests show that AFUDC accounting tends to depress market-to-book valuations of electric utility stocks. This may result partly because AFUDC rates are lower than the incremental weighted average cost of capital.

• Research Organization: Boise State Univ., ID
• OSTI ID: 5284736
• Journal Information: Public Util. Fortn.; (United States), Journal Name: Public Util. Fortn.; (United States) Vol. 101:2; ISSN PUFNA
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200 -- Energy Planning & Policy-- Economics & Sociology
296000* -- Energy Planning & Policy-- Electric Power
ACCOUNTING
CAPITAL
CONSTRUCTION
COST
ECONOMIC IMPACT
ECONOMICS
ELECTRIC UTILITIES
FINANCING
INCOME
INVESTMENT
MANAGEMENT
PUBLIC UTILITIES