USA P&L question

[SolakJP]

I am a shareholder in a closely held Texas C Corp. As shareholders we receive a monthly P&L statement. A new treasurer has made some changes that are admittedly minor but several of us don't like.

We submeter electricity to our members who use it and we comply with submetering regulations in our state. Previously, on the P&L we would see our total electric bill under expenses and the revenue received from our members for their sub metered power on the income side of the statement. Our new treasurer has removed the revenue from the submetering from the income side of the statement and subtracts it from the electric bill and shows only the net power bill on the expense side.

She says the revenue received from submetering shouldn't be on the P&L because it is not 'profit' it is simply passthrough from our members to the utility. She has also said this is the 'generally accepted accounting principle'

By this same logic I would expect that we should also not show sales tax or hotel motel tax collected on behalf of the state. I'm not sure where this logic ends.

We don't like this change and would prefer to see the P&L as it previously was done. The gives us a better idea of the cash flow and we can use it as a confirmation that taxes and utilities are correctly being paid. (and historically speaking, there is a reason to want to verify these things.)

As I said, this is minor, but is there a 'right or wrong' way or is it just user preference?

Thanks!

 

[DrStrangeLove]

I am a shareholder in a closely held Texas C Corp. As shareholders we receive a monthly P&L statement. A new treasurer has made some changes that are admittedly minor but several of us don't like.

We submeter electricity to our members who use it and we comply with submetering regulations in our state. Previously, on the P&L we would see our total electric bill under expenses and the revenue received from our members for their sub metered power on the income side of the statement. Our new treasurer has removed the revenue from the submetering from the income side of the statement and subtracts it from the electric bill and shows only the net power bill on the expense side.

She says the revenue received from submetering shouldn't be on the P&L because it is not 'profit' it is simply passthrough from our members to the utility. She has also said this is the 'generally accepted accounting principle'

Let me make sure I understand the submetering arrangement. Your members consume electricity. You pay the power company for the power, and collect payments for the same total amount from your members. Either 1.) the power company bills an amount, you front the cash, and then collect that exact amount from your members; or 2.) you collect the members' payments and forward them to the power company. The members aren't paying a price for electricity you set; you aren't collecting a spread or a fee on the electricity consumed, and you aren't collecting estimated charges prospectively and absorbing the difference between what members paid and what the power company billed in total. Do I have that right?

If a member doesn't pay, is your C-corp on the hook for the bill for the power the member consumed? I'm wondering if there's some credit risk involved that might need to be captured in case of credit loss. Is there an allowance held on your balance sheet in case a member doesn't pay?

By this same logic I would expect that we should also not show sales tax or hotel motel tax collected on behalf of the state. I'm not sure where this logic ends.

I would agree that you shouldn't be showing sales tax or hotel/motel tax on your P&L if all you're doing is collecting an amount and forwarding it to a taxing authority. Those items wouldn't ever be contributing to net income, and including them in the P&L would overstate revenues and overstate expenses, which would be misleading if the amounts are material. That is, unless your C-corp is responsible for covering taxes not paid by the members. In that case there's some credit risk, and credit losses may arise.

We don't like this change and would prefer to see the P&L as it previously was done. The gives us a better idea of the cash flow and we can use it as a confirmation that taxes and utilities are correctly being paid. (and historically speaking, there is a reason to want to verify these things.)

As I said, this is minor, but is there a 'right or wrong' way or is it just user preference?

Thanks!

If your statements are on an accrual basis, a P&L--an income statement--should be used to show revenues, expenses and earnings, and a cashflow statement should be used to show cashflow.

 

[SolakJP]

thanks for the answer. this explanation is very helpful.

We are accrual basis.

We pay the power company when our bill arrives. we read meters close to the end of the month, bill on the first, and want payment by the 20th. so yes, there is credit risk though we have no where near the risk most places have. We use the same rate we are charged and we also pass along the meter charges. Nothing actually 'lines up' because our meter read dates are not the same as the power companies. That said, on a calendar month basis, there would be a difference between the amounts paid by the residents and the amounts we are billed for the residents because the meter reads don't happen on the same day.