Summary
Lease accounting can be understood in relatively simple terms, and can be very beneficial to both preparers and users of financial statements. In the case of utilities, recording the leased asset as a component of rate base would allow them the opportunity to earn a return on this asset.
Analysis
To discern proper accounting for leases (by lessees) one must understand a basic bookkeeping principle: if an entity incurs a lease obligation (i.e. a liability), the "other side of the entry" is in this case an asset-- namely, the right to utilize the leased object. This concept has long been recognized by savvy financial analysts and authors of debt covenants who have placed lease obligations on the balance sheet even though these may be only the object of footnote disclosure under GAAP. Further, many utility managers recognize a need to record the leased asset as a component of rate base in order to earn a return to compensate their equity owners for the added risk of being in a position junior to the lessor.
