2016-07759. Accounting and Reporting of Business Combinations, Security Investments, Comprehensive Income, Derivative Instruments, and Hedging Activities

AGENCY:

Surface Transportation Board.

ACTION:

Final rule.

SUMMARY:

The Surface Transportation Board (STB or Board) is adopting final rules that update the accounting and reporting requirements in its Uniform System of Accounts (USOA) for Class I Railroads so that they are more consistent with current generally accepted accounting principles (GAAP). The Board is also revising the schedules and instructions for the Annual Report for Class I Railroads (R-1 or Form R-1) to better meet regulatory requirements and industry needs.

DATES:

This rule is effective on May 6, 2016.

FOR FURTHER INFORMATION CONTACT:

Pedro Ramirez at [phone]. Assistance for the hearing impaired is available through the Federal Information Relay Service (FIRS) at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

The Interstate Commerce Act, as amended by the ICC Termination Act of 1995 (ICCTA), Public Law 104-88, 109 Stat. 803, authorizes the Board, in 49 U.S.C. 11142, to prescribe a uniform accounting system for rail carriers subject to our jurisdiction and, in 49 U.S.C. 11161, to maintain cost accounting rules for rail carriers.^[1] Sections 11142 and 11161 both require the Board to conform its accounting rules to GAAP “[t]o the maximum extent practicable.” The USOA is set forth in the Board's regulations at 49 CFR part 1201—Subpart A. The USOA is used by the Class I Railroads ^[2] to comply with their statutory requirement to provide the Board an annual report, known as the R-1 report, that contains information about their finances and operating statistics. 49 U.S.C. 11145(b)(1) and 49 CFR 1241.11.

In a notice of proposed rulemaking served on July 8, 2015 (NPR), the Board proposed to make a number of changes to the USOA. First, the Board noted that the existing USOA does not specifically address the proper accounting and reporting for changes in the fair value of certain security investments, derivative instruments, and hedging activities, nor does it contain specific accounts to record amounts related to items of Other Comprehensive Income or provide a format to display comprehensive income in the Form R-1. Without specific instructions and accounts for recording and reporting these transactions and events, inconsistent and incomplete accounting would result. Thus, the Board proposed to amend its USOA and Form R-1 to account for those types of transactions and events. Specifically, the Board proposed updating the USOA to provide for: (1) Fair value presentation of certain security investments, derivative instruments, and hedging activities; and (2) presentation of comprehensive income and components of other comprehensive income.

The Board proposed these revisions based on the GAAP promulgated by the Financial Accounting Standards Board (FASB) ^[3] in the following Accounting Standards Codifications (ASC): ASC 320 Investments—Debt and Equity Securities; ASC 220 Comprehensive Income; ASC 815 Derivatives and Hedging; and ASC 805 Business Combinations.^[4] The Board stated that the purpose of the proposed revisions is to provide consistent accounting and reporting of changes in the fair value of security investments, derivative instruments, and hedging activities. The Board further stated that the proposed changes would minimize the accounting and reporting burden on railroads under the Board's jurisdiction, assist the Board in its overall monitoring effort, and improve transparency.

Second, the Board proposed revising the USOA to reflect current accounting practices for business combinations by removing existing instructions for the pooling-of-interest method of accounting and replacing those instructions with the acquisition accounting method. This method of accounting has been standard practice in the accounting industry for some time, and the Board has already agreed that the acquisition method better reflects the investment made in an acquired entity and has affirmed the use of this treatment.^[5] Thus, in the NPR, the Board proposed to update the USOA to reflect this accounting treatment.

Finally, the Board proposed revising the Form R-1 to include new accounts and a new reporting schedule and eliminating 15 schedules that the Board no longer uses.

The proposed rules were published in the Federal Register, 80 FR 39,021 (July 8, 2015). The Board received comments from the Association of American Railroads (AAR); no reply comments were filed.

Final Rules

The Board has reviewed the issues raised in AAR's comments and addresses them below, along with any revisions made in response. The final rules in full are below.

Accounting and Reporting of Business Combinations, Security Investments, Comprehensive Income, Derivative Instruments, and Hedging Activities

In the NPR, the Board proposed to amend its USOA and Form R-1 by adding new general instructions and accounts to recognize changes in the fair value of certain security investments, items of other comprehensive income, derivative instruments, and hedging activities. Additionally, the Board proposed revising its USOA to reflect current accounting practices for business combinations by removing existing instructions for the pooling-of-interest method of accounting and requiring only the acquisition accounting methodology. The Board also sought comment on its proposal to revise the Form R-1 to include the new accounts and a new reporting schedule.

No comments were filed in opposition to these proposals. Thus, the Board adopts such proposals here in the final rules. These changes will improve completeness and consistency of accounting and reporting. The addition of the proposed new accounts and related reporting requirements to the Form R-1 will reduce regulatory uncertainty as to the proper accounting and reporting for these items and minimize regulatory burden by reducing the potential differences in the manner in which certain amounts are reported to shareholders and to the Board. Finally, the reporting of derivative instruments and hedging activities by regulated carriers will assist the Board in its overall monitoring effort as well as its ability to assess railroad industry growth and financial stability.

Elimination of, or Changes to, Certain Schedules

The Board stated in the NPR that it had examined the current Form R-1 and determined that 15 of the 47 schedules were no longer used by the Board to perform regulatory and oversight functions. The Board, therefore, proposed to eliminate the following 15 schedules:

230 Capital Stock

339 Accrued Liability—Leased Property

340 Depreciation Base and Rates—Improvements to Road and Equipment Leased from Others

350 Depreciation Base and Rates—Road and Equipment Leased to Others

351 Accumulated Depreciation—Road and Equipment Leased to Others

416 Supporting Schedule—Road

418 Supporting Schedule—Capital Leases

460 Items in Selected Income and Retained Earnings Accounts for the Year

702 Miles of Road at Close of Year—By States and Territories (Single Track)

721 Ties Laid in Replacement

722 Ties Laid in Additional Tracks and in New Lines and Extensions

723 Rails Laid in Replacement

724 Rails Laid in Additional Tracks and in New Lines and Extensions

725 Weight of Rail

726 Summary of Track Replacements

In its comments, AAR states that it supports the Board's proposal to eliminate these schedules from the Form R-1, with the exception of Schedule 702, Miles of Road at Close of Year-By States and Territories (Single Track). According to AAR, Schedule 702 should be retained because this schedule is used to calculate state tax rates in the Revenue Shortfall Allocation Method.^[6]

We agree with AAR that Schedule 702 should be retained. The Form R-1 report, filed annually by Class I railroads, includes the mileage necessary to weight average state tax rates that are utilized in the Revenue Shortfall Allocation methodology.^[7] Therefore, Schedule 702 will be retained.

In addition to the schedules proposed for elimination in the NPR, AAR requests, consistent with its comments previously filed in Improving Regulation & Regulatory Review, Docket No. EP 712, that the Board eliminate Schedule 220, Retained Earnings; Schedule 342, Accumulated Depreciation—Improvements to Road and Equipment Leased from Others; Schedule 501, Guarantees and Suretyships; and Schedule 502, Compensating Balances and Short-Term Borrowing Arrangements. AAR further requests that the Board eliminate Schedule 310, Investments and Advances Affiliated Companies and Schedule 310A, Investments in Common Stocks of Affiliated Companies. According to AAR, these schedules are unnecessary because they capture data that is neither used nor usable to support the Board's regulatory objectives.

The Board will not adopt AAR's proposals to eliminate these other schedules. Schedule 220, Retained Earnings, will be retained because it is a significant financial disclosure for stakeholders interested in changes in the retained earnings account during the reporting period and gives important insight into the rail carrier's financial performance. Schedule 342, Accumulated Depreciation—Improvements to Road and Equipment Leased from Others, will be retained because it is used in the Board's Uniform Rail Costing System (URCS) and review of depreciation studies. In addition, eliminating Schedule 342 would limit the Board's ability to collect sufficient detail for R-1 reporting regarding rail carriers' implementation of the updated GAAP standard for leases. Finally, Schedules 501 (Guarantees and Suretyships), 502 (Compensating Balances and Short-Term Borrowing Arrangements), 310 (Investments and Advances Affiliated Companies), and 310A (Investments in Common Stocks of Affiliated Companies), are currently used by the Board's Office of Economics in intercompany audits, as they provide detailed information related to the railroads' financial arrangements with affiliated companies and financial agreements with borrowers and lenders. Those schedules therefore will be retained.

AAR further suggests, consistent with its comments in Improving Regulation and Regulatory Review, Docket No. EP 712, that the Board make certain changes to either conform Form R-1 schedules to GAAP or otherwise harmonize Form R-1 reporting requirements. In Schedule 210, Results of Operations, AAR suggests that the Board change the description in Line 41 from “Amortization of Discount on Funded Debt,” to “Amortization of Premium or Discount on Funded Debt,” to reflect that premium amortization is included in interest expenses. AAR also suggests removing Line 22 where amortization of premium on funded debt is currently reported. In Schedule 412, Way and Structures, AAR suggests adding a separate line for “Shop Machinery” to reconcile the amortization expenses and depreciation for road accounts required in Schedules 412 and 335, Accumulated Depreciation—Road and Equipment Owned and Used. For Schedule 415, Supporting Schedule—Equipment, AAR proposes that the Board combine owned and capitalized leases in the schedule and eliminate lines pertaining to “Machinery” because, according to AAR, this data is not in or supported by Schedule 410, Equipment Accounts. Finally, for Schedule 755, Railroad Operating Statistics, AAR suggests eliminating Line 89—Caboose Miles—due to the significant reduction in the use of cabooses by reporting rail carriers.

While the Board will not adopt AAR's suggestions that the Board make certain other changes to either conform Form R-1 schedules to GAAP or otherwise harmonize Form R-1 reporting requirements, the Board will provide clarifying instructions with respect to one of AAR's proposals.

First, we will not adopt AAR's requested changes to Schedule 210, Results of Operations. Although AAR's proposal would simplify the reporting presentation in the Form R-1, the Board's current practice of presenting premiums and discounts of funded debt separately is preferable because it allows for transparent financial reporting by showing both interest income and expense.

Additionally, AAR's suggestion that the Board combine owned and capitalized leases in Schedule 415 (Supporting Schedule—Equipment) will not be adopted because this change would limit the Board's ability to collect sufficient detail for R-1 reporting regarding railroads' implementation of the updated GAAP standards for leases. This change would also require a modification in how Schedule 415 is inputted in URCS. In addition, although AAR suggests that lines pertaining to “Machinery” be eliminated in Schedule 415 because, according to AAR, such data is not in or supported by Schedule 410 (Equipment Accounts), the Board will not do so because Schedule 415, Lines 38-40 reconcile to Schedule 410, Lines 203, 222, and 306.

In Schedule 755 (Railroad Operating Statistics), the Board will retain Line 89-Caboose Miles. While reporting carriers have been reducing the use of cabooses over time, a level of use still exists. Further, removing Line 89 would eliminate an operating statistic from the URCS calculation.

While AAR suggests adding a separate line for “Shop Machinery” in Schedule 412 (Way and Structures) to reconcile the amortization expenses and depreciation for road accounts required in Schedules 412 (Way and Structures) and 335 (Accumulated Depreciation—Road and Equipment Owned and Used), the Board notes that Schedule 412 reports a railroad's fixed roadway facilities; “Shop Machinery” does not fall into such a category, but should be recorded in equipment accounts. The Board, however, will clarify instruction 4 in Schedule 412 to read as follows: “Amortization adjustment of each road property type which is included in column (b) shall be repeated in column (d) as a debit or credit to the appropriate line item. The net adjustment on line 29 shall equal the adjustment reported on line 29 of Schedule 335, excluding Account 44, Shop Machinery.”

In sum, the final rules will eliminate the schedules previously identified in the NPR except for Schedule 702, Miles of Road at Close of Year-By States and Territories (Single Track), as discussed above. The Board will also clarify R-1 Schedule 412 instruction 4 as it pertains to the treatment of Shop Machinery.

Instruction 2-15

As noted in the NPR, ASC 805 Business Combinations requires the use of the acquisition method of accounting for all business combinations. While this method of accounting has been standard practice in the accounting industry for some time, and the Board has already agreed that the acquisition method better reflects the investment made in an acquired entity and has affirmed the use of this treatment, the USOA has not been updated to incorporate the method.^[8] Thus, the NPR proposed to update the USOA to reflect this accounting treatment.

In connection with that proposal, the Board specifically sought comment on the application of Instruction 2-15, paragraph (d) with respect to use of the pooling of interest method for transactions involving the acquisition and merger of property of subsidiaries in INSTRUCTIONS FOR PROPERTY ACCOUNTS. No comments were submitted regarding the treatment or application of Instruction 2-15, paragraph (d). Therefore, we will update Instruction 2-15, paragraph (d) to reflect the use of the acquisition accounting methodology and remove any reference or instruction pertaining to the pooling-of-interest methodology.^[9]

ASC 410

In response to the NPR, AAR also suggests that the Board adopt ASC 410, Asset Retirement and Environmental Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. AAR, however, does not explain why it believes ASC 410 should be adopted. The Board has already determined in an Accounting Series Circular served on June 11, 2003, and sent to all accounting officers of Class I railroads, that the Board would not adopt Financial Accounting Standard (FAS) 143, Accounting for Asset Retirement Obligations, now codified as ASC 410, because to do so would be inconsistent with the Board's accounting rules.^[10] Nothing in AAR's comments suggests any reason for altering the Board's 2003 determination. Accordingly, we will not adopt ASC 410 as suggested by AAR.

Periodic Review

As noted above, 49 U.S.C. 11142 and 11161 require the Board to conform its accounting rules to GAAP “[t]o the maximum extent practicable.” Therefore, in keeping with this requirement, the Board will conduct a periodic review of its accounting standards not less than every five years.

Paperwork Reduction Act

In the NPR the Board sought comments pursuant to the Paperwork Reduction Act (PRA), 44 U.S.C. 3501-3549, and Office of Management and Budget (OMB) regulations at 5 CFR 1320.11, regarding: (1) Whether the revisions to the collection of information proposed here are necessary for the proper performance of the functions of the Board, including whether the collection has practical utility; (2) the accuracy of the Board's burden assessment; (3) ways to enhance the quality, utility, and clarity of the information collected; and (4) ways to minimize the burdens of the collections of information on the respondents, including the use of automated collection techniques or other forms of information technology, when appropriate. Comments regarding the necessity, utility, and clarity of the information collection were received and are addressed above. No comments concerning the Board's burden estimates were received.

The proposed collection was submitted to OMB for review as required under the PRA, 44 U.S.C. 3507(d), and 5 CFR 1320.11. OMB withheld approval pending submission of the final rule. We are today submitting the collection contained in this final rule to OMB for approval. Once approval is received, we will post a copy of the revised Form R-1 on the Board's Web site. Unless renewed, OMB approval of this collection expires three years after the date that OMB approves the collection.

Regulatory Flexibility Act Statement

The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601-612, generally requires a description and analysis of new rules that would have a significant economic impact on a substantial number of small entities. In drafting a rule, an agency is required to: (1) Assess the effect that its regulation will have on small entities; (2) analyze effective alternatives that may minimize a regulation's impact; and (3) make the analysis available for public comment. 5 U.S.C. 601-604. Under § 605(b), an agency is not required to perform an initial or final regulatory flexibility analysis if it certifies that the proposed or final rules will not have a “significant impact on a substantial number of small entities.”

Because the goal of the RFA is to reduce the cost to small entities of complying with federal regulations, the RFA requires an agency to perform a regulatory flexibility analysis of small entity impacts only when a rule directly regulates those entities. In other words, the impact must be a direct impact on small entities “whose conduct is circumscribed or mandated” by the proposed rule. White Eagle Coop. Ass'n v. Conner, 553 F.3d 467, 478, 480 (7th Cir. 2009). An agency has no obligation to conduct a small entity impact analysis of effects on entities that it does not regulate. United Distrib. Cos. v. FERC, 88 F.3d 1105, 1170 (D.C. Cir. 1996).

The rule changes adopted here will not have a significant economic impact upon a substantial number of small entities, within the meaning of the RFA. The reporting requirements are applicable only to entities that are required to file Form R-1 reports, i.e., the Class I carriers. 49 CFR 1241.1. Class I carriers are large railroads; accordingly, there will be no impact on small railroads (small entities).^[11] Therefore, the Board certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities within the meaning of the RFA.

Authority: 49 U.S.C. 11142 and 11164.

List of Subjects in 49 CFR Part 1201.

• Railroads
• Uniform System of Accounts

It is ordered:

1. The final rules set forth below are adopted and will be effective on May 6, 2016. Notice of the rules adopted here will be published in the Federal Register.

2. This decision is effective on the date of service.

Decided: March 30, 2016.

By the Board, Chairman Elliott, Vice Chairman Miller, and Commissioner Begeman.

Tia Delano,

Clearance Clerk.

For the reasons set forth in the preamble, the Surface Transportation Board is amending part 1201 of title 49, chapter X, of the Code of Federal Regulations as follows:

PART 1201—RAILROAD COMPANIES

The authority citation for part 1201 continues to read as follows:

Authority: 49 U.S.C. 11142 and 11164.

Subpart A—Uniform System of Accounts

2. Amend Regulations Prescribed by revising paragraph (ii), item 16(c), to read as follows:

List of Instructions and Accounts

REGULATIONS PRESCRIBED

* * * * *

(ii) * * *

16. * * *

(c) Cost, as applied to a marketable equity security, refers to the original cost as adjusted for unrealized holding gains and losses.

* * * * *

3. Amend General Instructions by adding instructions 1-19 and 1-20, to read as follows:

GENERAL INSTRUCTIONS

* * * * *

1-19 Accounting for Other Comprehensive Income. (a) Railroads will record items of Other Comprehensive Income in account 799.1, Other comprehensive income. Amounts included in this account will be maintained by each category of Other Comprehensive Income. Examples of categories of Other Comprehensive Income include foreign currency items, minimum pension liability adjustments, unrealized gains and losses on available-for-sale type securities and cash-flow hedge amounts.

(b) Supporting records will be maintained for account 799 so that the company can readily identify the cumulative amount of Other Comprehensive Income for each item included in this account.

(c) When an item of Other Comprehensive Income enters into the determination of earnings in the current or subsequent periods, a reclassification adjustment will be recorded in account 799 to avoid double counting of when an item included in net income was also included in Other Comprehensive Income in the same or prior period.

1-20 Accounting for derivative instruments and hedging activities. (a) A carrier will recognize derivative instruments as either assets or liabilities in the financial statements and measure those instruments at fair value. A derivative instrument is a financial instrument or other contract with all three of the following characteristics:

(1) The derivative instrument has one or more underlyings and a notional amount or payment provision. Those terms determine the amount of the settlement or settlements, and, in some cases, whether or not a settlement is required.

(2) The derivative instrument requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have similar responses to changes in market factors.

(3) The derivative instrument's terms require or permit net settlement; the derivative instrument can readily be settled net by a means outside the contract; or the derivative instrument's terms provide for delivery of an asset that puts the recipient in a position not substantially different from net settlement.

(b) The accounting for the changes in the fair value of derivative instruments depends upon their intended use and designation. Changes in the fair value of derivative instruments not designated as fair value or cash flow hedges will be recorded in account 713.5, Derivative instrument assets, or account 763.5, Derivative instrument liabilities, as appropriate, with the gains or losses charged to earnings in account 551, Miscellaneous income charges.

(c) A derivative instrument may be specifically designated as a fair-value or cash-flow hedge. A hedge may be used to manage risk to price, interest rates, or foreign currency transactions. An entity will maintain documentation of the hedge relationship at the inception of the hedge that details the risk management objective and strategy for undertaking the hedge, the nature of the risk being hedged, and how hedge effectiveness will be determined.

(d) If the carrier designates the derivative instrument as a fair-value hedge against exposure to changes in the fair value of a recognized asset, liability, or a firm commitment, it will record the change in fair value of the derivative instrument designated as a fair-value hedge to account 713.6, Derivative instruments assets—hedges, or account 763.6, Derivative instrument liabilities—hedges, as appropriate, with a corresponding adjustment to the sub-account of the item being hedged. The ineffective portion of the hedge transaction will be reflected in the same income or expense account that would have been used if the hedged item had been disposed of or settled. In the case of a fair-value hedge of a firm commitment, a new asset or liability is created. As a result of the hedge relationship, the new asset or liability will become part of the carrying amount of the item being hedged.

(e) If the carrier designates the derivative instrument as a cash-flow hedge against exposure to variable cash flows of a probable forecasted transaction, it will record changes in the fair value of the derivative instrument in account 713.6, Derivative instrument assets—hedges, or account 763.6, Derivative instrument liabilities—hedges, as appropriate, with a corresponding amount in account 799.1, Other comprehensive income, for the effective portion of the hedge. The ineffective portion of the hedge transaction will be reflected in the same income or expense account that would have been used if the hedged item had been disposed of or settled. Amounts recorded in Other Comprehensive Income will be reclassified into earnings in the same period or periods that the hedged forecasted item affects earnings.

4. Amend Instructions For Property Accounts by:

a. Revising paragraph (a) in Instruction 2-15;

b. Removing paragraph (b) in Instruction 2-15;

c. Redesignating paragraph (c) as paragraph (b) in Instruction 2-15;

d. Revising the newly designated paragraph (b) in Instruction 2-15;

e. Redesignating paragraph (d) as paragraph (c) in Instruction 2-15; and

f. Revising the newly designated paragraph (c) in Instruction 2-15.

The revisions read as follows:

INSTRUCTIONS FOR PROPERTY ACCOUNTS

* * * * *

2-15 * * * (a) When a railway or portion thereof constituting an operating unit or system is acquired in a business combination, that business combination shall be recorded in the accounts in the manner stated hereunder.

(b) Purchase:

(1) The amount includable in account 731, Road and equipment property, shall be the cost at the date of acquisition to the purchaser of the transportation property acquired. The cost assigned the property, as well as other assets acquired, shall be the amount of the cost consideration given. Where property and other assets are acquired for other than cash, including liabilities assumed and shares of stock issued, cost shall be determined by either the fair value of the consideration given or the fair value of the assets acquired, whichever is more clearly evident. In addition to any liabilities assumed, provision shall be made for such estimated liabilities as may be necessary.

(2) When the costs of individual units or classes of transportation property are not specified in the agreement, the cost assigned such property shall be apportioned among the appropriate primary accounts using the percentage relationship between the fair values for each class of property acquired and the total of such values.

(c) Merger of subsidiaries:

The acquisition and merger of property of subsidiaries controlled through ownership of the majority shares of voting stock is to be accounted for using the acquisition accounting methodology.

5. Amend Instructions For Income And Balance Sheet Accounts by revising Instruction 5-2, paragraph (a), items (2), (3), and (4) to read as follows:

INSTRUCTIONS FOR INCOME AND BALANCE SHEET ACCOUNTS

* * * * *

5-2 * * *

(a) * * *

(2) Account 702, Temporary cash investments, account 721, Investments and advances; affiliated companies, and account 722, Other investments and advances, shall be maintained in such a manner as to reflect the marketable equity portion (see definition 26) and other securities or investments.

(3) For the purpose of determining net ledger value, the marketable equity securities in account 702 shall be considered the current portfolio and the marketable equity securities in accounts 721 and 722 (combined) shall be considered the noncurrent portfolio.

(4) Carriers will categorize their security investments as held-to-maturity, trading, or available-for-sale. Unrealized holding gains and losses on trading type investment securities will be recorded in account 551, Miscellaneous income charges. Unrealized holding gains and losses on available-for-sale type investment securities will be recorded in account 799.1, Other comprehensive income.

* * * * *

6. Amend Income Accounts—Ordinary Items by adding a sentence at the end of the list of inclusions for account 551 “Miscellaneous income charges,” paragraph (a) to read as follows:

INCOME ACCOUNTS

Ordinary Items

* * * * *

551 Miscellaneous income charges.

(a) * * *

Unrealized holding gains and losses on trading type investment securities.

* * * * *

7. Amend General Balance Sheet Accounts Explanations—Assets, Current Assets by:

a. Adding a sentence to the end of the first paragraph in account 702 “Temporary cash investment”;

b. Adding accounts 713.5 “Derivative instrument assets” and 713.6 “Derivative instrument assets-hedges.”

The additions read as follows:

GENERAL BALANCE SHEET ACCOUNTS EXPLANATIONS

Assets

Current Assets

* * * * *

702 Temporary cash investments.

* * * This account shall also include unrealized holding gains and losses on trading and available-for-sale types of security investments.

* * * * *

713.5 Derivative instrument assets.

This account shall include the amounts paid for derivative instruments, and the change in the fair value of all derivative instrument assets not designated as cash-flow or fair-value hedges. Account 551, Miscellaneous income charges, will be charged with the corresponding amount of the change in the fair value of the derivative instrument.

713.6 Derivative instrument assets—hedges.

(a) This account shall include the amounts paid for derivative instruments, and the change in the fair value of derivative instrument assets designated by the carrier as cash-flow or fair-value hedges.

(b) When a carrier designates a derivative instrument asset as a cash-flow hedge, it will record the change in the fair value of the derivative instrument in this account with a concurrent charge to account 799.1, Other comprehensive income, with the effective portion of the derivative's gain or loss. The ineffective portion of the cash-flow hedge will be charged to the same income or expense account that would have been used if the hedged item had been disposed of or otherwise settled.

(c) When a carrier designates a derivative instrument as a fair-value hedge, it will record the change in the fair value of the derivative instrument in this account with a concurrent charge to a sub-account of the asset or liability that carries the item being hedged. The ineffective portion of the fair-value hedge will be charged to the same income or expense account that would have been used if the hedged item had been disposed of or otherwise settled.

* * * * *

8. Amend General Balance Sheet Accounts Explanations—Assets, Special Funds by:

a. In account 715 “Sinking funds,” adding two sentences to the end of paragraph (b);

b. In account 716 “Capital funds,” adding a sentence to the end of paragraph (a); and

c. In account 717 “Other funds,” adding Note E.

The additions read as follows:

GENERAL BALANCE SHEET ACCOUNTS EXPLANATIONS

Assets

Special Funds

715 Sinking funds.

* * * * *

(b) * * * This account shall also include unrealized holding gains and losses on trading and available-for-sale types of security investments. The cash value of life insurance policies on the lives of employees and officers to the extent that the carrier is the beneficiary of such policies shall also be included in this account.

* * * * *

716 Capital funds.

(a) * * * This account shall also include unrealized holding gains and losses on trading and available-for-sale types of security investments.

* * * * *

717 Other funds.

* * * * *

Note E:

This account shall also include unrealized holding gains and losses on trading and available-for-sale types of security investments.

9. Amend General Balance Sheet Accounts Explanations—Assets, Investments by:

a. In account 722 “Other investments and advances,” adding two sentences to the end of paragraph (a); and

b. Removing account 724 “Allowance for net unrealized loss on noncurrent marketable equity securities—Cr.”

The addition reads as follows:

GENERAL BALANCE SHEET ACCOUNTS EXPLANATIONS

Assets

Investments

* * * * *

722 Other investments and advances.

(a) * * * This account shall also include unrealized holding gains and losses on trading and available-for-sale types of security investments. Include also the offsetting entry to the recording of amortization of discount or premium on interest bearing investments.

* * * * *

10. Amend General Balance Sheet Accounts Explanations—Liabilities and Shareholders' Equity, Current Liabilities by adding accounts 763.5 “Derivative instrument liabilities” and 763.6 “Derivative instrument liabilities-hedges”, to read as follows:

GENERAL BALANCE SHEET ACCOUNTS EXPLANATIONS

Liabilities and Shareholders' Equity

Current Liabilities

* * * * *

763.5 Derivative instrument liabilities.

This account shall include the change in the fair value of all derivative instrument liabilities not designated as cash-flow or fair-value hedges. Account 551, Miscellaneous income charges, will be charged with the corresponding amount of the change in the fair value of the derivative instrument.

763.6 Derivative instrument liabilities—hedges.

(a) This account shall include the change in the fair value of derivative instrument liabilities designated by the carrier as cash-flow or fair-value hedges.

(b) A carrier will record the change in the fair value of a derivative instrument liability related to a cash-flow hedge in this account, with a concurrent charge to account 799.1, Other comprehensive income, with the effective portion of the derivative instrument's gain or loss. The ineffective portion of the cash-flow hedge will be charged to the same income or expense account that would have been used if the hedged item had been disposed of or otherwise settled.

(c) A carrier will record the change in the fair value of a derivative instrument liability related to a fair-value hedge in this account, with a concurrent charge to a sub-account of the asset or liability that carries the item being hedged. The ineffective portion of the fair-value hedge will be charged to the same income or expense account that would have been used if the hedged item had been disposed of or otherwise settled.

* * * * *

11. Amend General Balance Sheet Accounts Explanations—Liabilities and Shareholders' Equity, Shareholders' Equity by:

a. Removing account 798.1 “Net unrealized loss on noncurrent marketable securities”; and

b. Adding account 799 “Accumulated Other Comprehensive Income.”

The addition reads as follows:

GENERAL BALANCE SHEET ACCOUNTS EXPLANATIONS

Liabilities and Shareholders' Equity

Shareholders' Equity

* * * * *

799 Accumulated Other Comprehensive Income.

(a) This account shall include revenues, expenses, gains, and losses that are properly includable in Other Comprehensive Income during the period. Examples of items of Other Comprehensive Income include foreign currency items, minimum pension liability adjustments, unrealized gains and losses on certain investments in debt and equity securities, and cash-flow hedges. Records supporting the entries to this account shall be maintained so that the carrier can furnish the amount of Other Comprehensive Income for each item included in this account.

(b) This account shall also be debited or credited, as appropriate, with amounts of accumulated Other Comprehensive Income that have been included in the determination of net income during the period and in accumulated Other Comprehensive Income in prior periods. Separate records for each category of items will be maintained to identify the amount of the reclassification adjustments from accumulated Other Comprehensive Income to earnings made during the period.

12. Revise Form of General Balance Sheet Statement to read as follows:

Form of General Balance Sheet Statement

The classified form of general balance sheet statement is designed to show the financial condition of the accounting company at any specified date.

Current assets:

701. Cash.

702. Temporary cash investments.

703. Special deposits.

704. Loans and notes receivable.

705. Accounts receivable; Interline and other balances.

706. Accounts receivable; Customers.

707. Accounts receivable; Other.

708. Interest and dividends receivable.

708.5. Receivables from affiliated companies.

709. Accrued accounts receivable.

709.5. Allowance for uncollectible accounts.

Net receivables.

710. Working funds.

711. Prepayments.

712. Material and supplies.

713. Other current assets.

713.5 Derivative instrument assets.

713.6 Derivative instrument assets-hedges.

714. Deferred income tax debits.

Total current assets.

Special funds:

715. Sinking funds.

716. Capital funds.

717. Other funds.

Total special funds.

Investments:

721. Investments and advances; affiliated companies.

Undistributed earnings from certain investments in account 751.

721.5. Adjustments; investments and advances—affiliated companies.

Net—investments and advances—affiliated companies.

722. Other investments and advances.

723. Adjustments; Other investments and advances.

 Net—other investments and advances.

 Total investments.

Tangible property:

731. Road and equipment property.

735. Accumulated depreciation; Road and equipment property.

736. Accumulated amortization; Road and equipment property—Defense projects.

 Net road and equipment property.

732. Improvements on leased property.

733. Accumulated depreciation; Improvements on leased property.

734. Accumulated amortization; Improvements on leased property—Defense projects.

 Net improvements on leased property.

 Total carrier property.

737. Property used in other than carrier operations.

738. Accumulated depreciation; Property used in other than carrier operations.

 Net—property used in other than carrier operations.

 Total tangible property.

Intangible property:

739. Organization expenses.

Other assets and deferred debits:

741. Other assets.

743. Other deferred debits.

744. Accumulated deferred income tax debits.

Total other assets and deferred debits.

Total assets.

Liabilities and Shareholders' Equity

Current liabilities:

751. Loans and notes payable.

752. Accounts payable; Interline and other balances.

753. Audited accounts and wages payable.

754. Accounts payable; Other.

755. Interest payable.

756. Dividends payable.

757. Payables to affiliated companies.

759. Accrued accounts payable.

760. Federal income taxes accrued.

761. State and other income taxes accrued.

761.5. Other taxes accrued.

762. Deferred income tax credits.

763. Other current liabilities.

763.5 Derivative instrument liabilities.

763.6 Derivative instrument liabilities—hedges.

764. Equipment obligations and other long-term debt due within one year.

Total current liabilities.

Long-term debt due after one year: ¹

765. Funded debt unmatured.

766. Equipment obligations.

766.5. Capitalized lease obligations.

767. Receivers' and trustees' securities.

768. Debt in default.

769. Accounts payable; Affiliated companies.

770.1 Unamortized debt discount.

770.2 Unamortized premium on debt.

Total long-term debt due after one year.

Other long-term liabilities:

771. Accrued liability; Pension and welfare.

772. Accrued liability; Leased property.

774. Accrued liability; Casualty and other claims.

775. Other accrued liabilities.

781. Interest in default.

782. Other liabilities.

Total other long-term liabilities.

Deferred credits:

783. Deferred revenues—transfers from government authorities.

784. Other deferred credits.

786. Accumulated deferred income tax credits.

Total deferred credits.

Shareholders' equity:

 Capital stock:

791. Capital stock.

792. Liability for conversion of capital stock.

793. Discount on capital stock.

Total capital stock.

 Additional capital:

794. Premiums and assessments on capital stock.

795. Other capital.

Total additional capital.

Retained earnings:

797. Retained earnings; Appropriated.

798. Retained earnings; Unappropriated.

Total retained earnings.

798.5 Treasury stock.

799. Accumulated Other Comprehensive Income.

Total shareholders' equity.

Total liabilities and shareholders' equity.

¹ To be divided as to “Total issued” and “Held by or for company.”

13. Amend Conversion Tables by revising General Balance Sheet Accounts Conversion Table to read as follows:

CONVERSION TABLES

* * * * *

General Balance Sheet Accounts Conversion Table

System of accounts eff. prior to April 2016		System of accounts eff. April 2016
Account title	No.	No.	Account title
Cash	701	701	Cash.
Temporary cash investments	702	702	Temporary cash investments.
Special deposits	703	703	Special deposits.
Loans and notes receivable	704	704	Loans and notes receivable.
		708.5	Receivables from affiliated companies.
		709.5	Allowance for uncollectible accounts.
Traffic, car service and other balances—dr	705	705	Accounts receivable; interline and other balances.
		709.5	Allowances for uncollectible accounts.
		752	Accounts payable; interline and other balances.
Net balance receivable from agents and conductors	706	706	Accounts receivable; customers.
Miscellaneous accounts receivable	707	707	Accounts receivable; other.
		708.5	Receivables from affiliated companies.
		709.5	Allowance for uncollectible accounts.
Interest and dividends receivable	708	708	Interest and dividends receivable.
		708.5	Receivables from affiliated companies.
		709.5	Allowance for uncollectible accounts.
Accrued accounts receivable	709	709	Accrued accounts receivable.
Working fund advances	710	710	Working funds.
Prepayments	711	711	Prepayments.
Material and supplies	712	712	Material and supplies.
Other current assets	713	713	Other current assets.
		713.5	Derivative instrument assets.
		713.6	Derivative instrument assets—hedges.
Deferred income tax charges	714	714	Deferred income tax debits.
Sinking funds	715	715	Sinking funds.
Capital and other reserve funds	716	716	Capital funds.
Insurance and other funds	717	717	Other funds.
Investment in affiliated companies	721	721	Investments and advances; affiliated companies.
Other investments	722	722	Other investments and advances.
Reserve for adjustment of investment in securities—cr	723	721.5	Adjustments; investments and advances—affiliated companies.
		723	Adjustments; other investments and advances.
Road and equipment property	731	731	Road and equipment property.
Organization expenses	71	739	Organization expenses.
Improvements on leased property	732	732	Improvements on leased property.
Accrued depreciation; improvements on leased property	733	733	Accumulated depreciation; improvements on leased property.
Accrued depreciation; road and equipment	735	735	Accumulated depreciation; road and equipment property.
Amortization of defense projects; road and equipment	736	736	Accumulated amortization; road and equipment property—defense projects.
		734	Accumulated amortization; improvements on leased property—defense projects.
Miscellaneous physical property	737	737	Property used in other than carrier operations.
Accrued depreciation; miscellaneous physical property	738	738	Accumulated depreciation; property used in other than carrier operations.
Other assets	741	741	Other assets.
Unamortized discount on long-term debt	770.1	770.1	Unamortized debt discount.
Other deferred charges	743	743	Other deferred debits.
Accumulated deferred income tax charges	744	744	Accumulated deferred income tax debits.
Liabilities
Loans and notes payable	751	751	Loans and notes payable.
		757	Payables to affiliated companies.
Traffic, car service and other balances—cr	752	752	Accounts payable; interline and other balances.
		705	Accounts receivable; interline and other balances.
		709.5	Allowance for uncollectible accounts.
Audited accounts and wages payable	753	753	Audited accounts and wages payable.
Miscellaneous accounts payable	754	754	Accounts payable; other.
		757	Payables to affiliated companies.
Interest matured unpaid	755	755	Interest payable.
		757	Payables to affiliated companies.
Dividends matured unpaid	756	756	Dividends payable.
		757	Payables to affiliated companies.
Unmatured interest accrued	757	755	Interest payable.
		757	Payables to affiliated companies.
Unmatured dividends declared	758	756	Dividends payable.
		757	Payables to affiliated companies.
Accrued accounts payable	759	759	Accrued accounts payable.
Federal income taxes accrued	760	760	Federal income taxes accrued.
Other taxes accrued	761	711	Prepayments.
		761	State and other income taxes accrued.
		761.5	Other taxes accrued.
Deferred income tax credits	762	762	Deferred income tax credits.
Other current liabilities	763	763	Other current liabilities.
		763.5	Derivative instrument liabilities
		763.6	Derivative instrument liabilities—hedges
Equipment obligations and other debt due within one year	764	764	Equipment obligations and other long-term debt due within 1 year.
Funded debt unmatured	765	765	Funded debt unmatured.
Equipment obligations	766	766	Equipment obligations.
Capitalized lease obligations	766.5	766.5	Capitalized lease obligations.
Receivers' and trustees' securities	767	767	Receivers' and trustees' securities.
Debt in default	768	768	Debt in default.
Amounts payable to affiliated companies	769	769	Accounts payable; affiliated companies.
Pension and welfare reserves	771	771	Accrued liability; pension and welfare.
Casualty and other reserves	774	774	Accrued liability; casualty and other claims.
		775	Other accrued liabilities.
Interest in default	781	781	Interest in default.
Other liabilities	782	782	Other liabilities.
Deferred revenues—transfers from government authorities.	783	783	Deferred revenues—transfers from government authorities
Unamortized premium on long-term debt	790.2	770.2	Unamortized premium on debt.
Other deferred credits	784	784	Other deferred credits.
Accrued liability; leased property	785	772	Accrued liability; leased property.
Accumulated deferred income tax credits	786	786	Accumulated deferred income tax credits.
Shareholders' Equity
Capital stock issued	791	791	Capital stock.
Stock liability for conversion	792	792	Liability for conversion of capital stock.
Discount on capital stock	793	793	Discount on capital stock.
Premiums and assessment on capital stock	794	794	Premiums and assessments on capital stock.
Paid-in surplus	795	795	Other capital.
Other capital surplus	796	795	Do.
Retained income; appropriated	797	797	Retained earnings; appropriated.
Retained income; unappropriated	798	798	Retained earnings; unappropriated.
Treasury stock	798.5	798.5	Treasury stock.
		799	Accumulated Other Comprehensive Income.

Note:

The following appendix will not appear in the Code of Federal Regulations.

Footnotes

1.  The Board has broad economic oversight of railroads, 49 U.S.C. 10101-11908, and prescribes a uniform accounting system for rail carriers to use for regulatory purposes, 49 U.S.C. 11141-43, 11161-64; 49 CFR parts 1200-1201. In addition, the Board requires Class I railroads to submit quarterly and annual reports containing financial and operating statistics, including employment and traffic data. 49 U.S.C. 11145; 49 CFR 1241-1246, 1248.

2.  The Board designates three classes of freight railroads based upon their operating revenues, for three consecutive years, in 1991 dollars, using the following scale: Class I—$250 million or more; Class II—less than $250 million but more than $20 million; and Class III—$20 million or less. These operating revenue thresholds are adjusted annually for inflation. 49 CFR pt. 1201, 1-1. Adjusted for inflation, the revenue threshold for a Class I rail carrier using 2014 data is $475,754,803. Today, there are seven Class I carriers.

3.  FASB is a private, non-profit organization responsible for setting accounting standards for public companies in the United States.

4.  These accounting pronouncements are available at https://asc.fasb.org.

5.  See W. Coal Traffic League—Pet. for Declaratory Order, FD 35506, slip op at 6-17 (STB served July 25, 2013).

6.  The Revenue Shortfall Allocation Method is one of the three benchmarks used to determine the reasonableness of a challenged rate under the Board's Three Benchmark methodology. See Simplified Standards for Rail Rate Cases, EP 646 (Sub-No. 1) (STB served Sept. 5, 2007); Simplified Standards for Rail Rate Cases—Taxes in Revenue Shortfall Allocation Method, EP 646 (Sub-No. 2) (STB served Nov. 21, 2008).

7.  See Annual Submission of Tax Info. for Use in Revenue Shortfall Allocation Method, EP 682, slip op. at 2 n.3 (STB served Feb. 26, 2010).

8.  See Western Coal Traffic League—Pet. for Declaratory Order, FD 35506, slip op at 6-17.

9.  We believe that removing references or instructions pertaining to the pooling-of-interest methodology in Instruction 2-15, paragraph (d) directly follows from the NPR and the Board's adoption of the acquisition accounting methodology. It is also a logical outgrowth of the overall approach proposed in the NPR of shifting to the acquisition method of accounting for all business combinations. In proceedings governed by the rulemaking provisions of the Administrative Procedure Act, 5 U.S.C. 553, notice is sufficient if the final rule adopted by an agency is the logical outgrowth of the proposed rule on which it sought comment. See EC-MAC Motor Carriers Serv. Ass'n, SSM 118 (Sub-No. 2), slip op. at 3 (STB served Mar. 27, 2003) (citing Fertilizer Inst. v. EPA, 935 F.2d 1303, 1311 (D.C. Cir. 1991)).

10.  Surface Transportation Board, Office of Economics, Environmental Analysis and Administration, Accounting Series Circular No. 202 (2003).

11.  Class I carriers generally do not fall under the definition of a “small rail carrier” as defined by the Small Business Administration (SBA). The SBA's Office of Size Standards has established a size standard for rail transportation, pursuant to which a “line-haul railroad” is considered small if its number of employees is 1,500 or less, and a “short line railroad” is considered small if its number of employees is 500 or less. 13 CFR 121.201 (industry subsector 482).