The Cooperative Accountant - Fall 2024

Vice

Julia Sevald, CPA Land O'Lakes, Inc.

Immediate

Executive

From the Editor

Frank M. Messina, DBA, CPA Alumni & Friends Endowed Professor of Accounting UAB Department of Accounting & Finance

Collat School of Business

CSB 319, 710 13th Street South Birmingham, AL 35294-1460 • (205) 934-8827

fmessina@uab.edu

We have consistently heard that this is the most important time in our country’s history. However, those words have been echoed many, many times throughout our country’s relatively short history.

As we all know, the great thing about accounting is that it is social science and it changes, adapts and re-emerges with the times as society changes. Whether we liked it or not, we adapted to those changes in accounting. Hopefully, they were for the better. Our country is no different. Because of so many variable factors well beyond most of our control, it will continue to change. Those changes may be drastic or insignificant. No one knows. However, it will continue to change as technology and social media have influenced people’s changes in their social norms.

For us “older” folks. Our generation has undergone what is inevitably the most significant changes in the modern world. My kids are still in awe of how limited our options (tv, telephone, no cell phone, limited travel, etc. etc.) were. I will admit, it is getting harder and harder for me to keep up with the younger generations in both language, technology and values.

For Bob Dylan sang in best in 1964 – “The Times They Are A-Changin’”(check out at the lyrics as they still apply). Its just a different time and place. And for us today, the times continue to change. Hopefully, we will all enjoy the ride.

Remember, we too are always looking for you to share your knowledge since you may have some extra time on your hands (like others continue to do) with us through articles in The Cooperative Accountant. Feel free to contact me (fmessina@uab.edu) if you have any ideas or thoughts on a potential article contribution. Sharing knowledge is a wonderful thing for all!!! Knowledge can change our world!

That is why we must remember – “The Past is history; the Future is a mystery, but this Moment is a Gift – that’s why it’s called the Present.”

Positively Yours,

Frank M. Messina, DBA, CPA

Articles and other information which appear in The Cooperative Accountant do not necessarily reflect the official position of the NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES and the publication does not constitute an endorsement of views or information which may be expressed.

The Cooperative Accountant (ISSN 0010-83910) is published quarterly by the National Society of Accountants for Cooperatives at Centerville, Ohio 45459 digitally. The Cooperative Accountant is published as a direct benefit/ service to the members of the Society and is only available to those that are eligible for membership. Subscriptions are available to university libraries, government agencies and other libraries. Land Grant colleges may receive a digital copy. Send requests and contact changes to: The National Society of Accountants for Cooperatives, 7946 Clyo Road, Suite A, Centerville, Ohio 45459.

ROI For Electric Cooperatives

Introduction

This article will discuss what Return on Investment (ROI) is and how it can be used in an electric cooperative in evaluating investment decisions to enhance and improve decision making. It discusses the key components of ROI, how it is calculated, factors that could influence ROI results, tools that can be used to create ROI, pitfalls in ROI analysis to avoid, and an example of an ROI analysis for a new smart meter project.

ROI for electric cooperatives

Investopedia defines ROI as “a ratio that measures the profitability of an investment by comparing the gain or loss to its cost” (Beattie, 2024, para. 1). Beattie goes on to point out that ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100. This value is then represented as a percentage of ROI. ROI helps stakeholders understand how effectively a company is using its capital to generate profits or net margins. While ROI has many uses, ROI for electric cooperatives is somewhat

different from traditional investorowned electric companies because cooperatives are typically non-profit organizations owned by their members, who are also their customers. The primary goal of electric cooperatives is not to maximize profits but instead to provide reliable electricity at the lowest possible cost to their members. However, understanding ROI is still important for electric cooperatives to ensure they are financially sustainable and can continue to provide reliable services. Some of the practical applications where ROI is deployed include improving operational efficiency, process optimization, technology integration, capital investment analysis, and risk management.

peggym@DEMCO.ORG

There are several key components of ROI as it relates to electric cooperatives, and these are listed below. These focus on revenue generation, costs, and net margins.

Editor & Guest Writer

Peggy Maranan, Ph.D.

Revenue Generation:

• Electricity Sales: Like investor-owned utilities, the primary revenue source for electric cooperatives is the sale of electricity to their members, who are often residential, agricultural, or industrial or commercial customers. This is typically measured in kilowatt-hours (kWh).

• Other Services: Some electric companies may offer other services, such as energy consulting, grid management services, or equipment maintenance services.

• Membership Fees: Cooperatives may charge a small fee to their members for joining the cooperative, which can be a minor source of revenue.

• Grants and Subsidies: Electric cooperatives may receive federal or state grants and subsidies, especially if they are in rural or underserved areas. These funds can be used for infrastructure projects and other initiatives.

Costs:

• Capital Expenditures (CapEx): Investments in infrastructure like power lines, transformers, and substations. Since many electric cooperatives serve rural or sparsely populated areas, the cost of extending and maintaining infrastructure can be significant.

• Operating Expenses (OpEx): Ongoing expenses to maintain and operate the electricity distribution network, including labor, equipment maintenance, administrative costs, and purchasing power from generation companies.

• Debt Servicing Costs: Many electric cooperatives use loans to finance their capital expenditures. Therefore, interest payments and principal repayments are significant costs.

• Regulatory Compliance Costs: Compliance with safety, environmental, and reliability standards adds to operating costs.

Net Margins:

• Unlike investor-owned utilities, cooperatives focus on “net margins” rather than “net profits.” Net margins are the revenues remaining after covering all expenses, including costs and interest. These margins are often returned to the members in the form of “capital credits” or reinvested in the cooperative.

ROI calculation formula for electric cooperatives

While traditional ROI formulas may not apply directly due to the non-profit nature of cooperatives, a similar concept can be used to assess their financial performance. ROI for an electric company can be calculated using the following formula: ROI = (Net Margins/Total Equity) x 100

Where:

Net Margins: This is the amount of revenue that remains after all operating expenses, debt service, and other costs have been deducted. Essentially, it represents the cooperative’s profit or surplus for a given period.

Total Equity: This represents the total equity of the cooperative, including member contributions, retained earnings, and accumulated capital credits. It reflects the cooperative’s net worth.

Example Calculation:

Here is an example to illustrate how this ROI calculation works for an electric cooperative.

Assumptions:

Net Margins: $150,000 (This is the cooperative’s margin after all expenses have been paid.)

Total Equity: $2,000,000 (This includes all member contributions, retained earnings, and accumulated capital credits.)

Calculation:

1. Apply the formula: ROI = (Net Margins/Total Equity) x 100

2. Substitute the values:

ROI = (150,000/2,000,000) x 100

3. Calculate the ROI:

ROI = (0.075) x 100 = 7.5%

Interpretation of the ROI: 7.5% ROI: This means that for every dollar of equity, the electric cooperative is generating 7.5 cents in net margins.

A higher ROI indicates better financial performance and efficiency in utilizing the cooperative’s equity to generate surplus or profits. Conversely, a lower ROI suggests that the cooperative may need to review its operations and financial strategies to enhance sustainability.

Practical Considerations

When calculating and interpreting ROI for electric cooperatives, consider the following:

A. Financial Health: ROI helps assess the financial health of the cooperative by showing how effectively it is using its equity to generate profits.

B. Comparative Analysis: Comparing ROI with previous periods or industry benchmarks can provide insights into performance trends and help identify areas for improvement.

C. Long-Term Planning: A consistent ROI over time is favorable as it indicates steady performance, while significant fluctuations might require a deeper analysis of operational and financial strategies.

D. Member Equity Considerations: Since electric cooperatives are typically memberowned, ROI can reflect how well the cooperative is managing members’ investments.

By understanding these elements, cooperatives can make informed decisions

about their financial strategies, investment opportunities, and overall management practices.

Some factors that could influence ROI results for electric cooperatives include the following:

• Member Density and Geography: Electric cooperatives often serve rural or lowdensity areas, which increases infrastructure costs per member. The more spread out the members are, the higher the cost of extending and maintaining power lines.

• Energy Sources and Costs: The cost of purchasing power from generation companies or generating electricity, if the cooperative owns its power generation assets, affects ROI. Cooperatives often seek long-term, stable contracts to manage costs effectively.

• Debt Levels and Interest Rates: Electric cooperatives often rely on loans to fund capital projects, and their ROI is influenced by interest rates and their ability to manage debt.

• Operational Efficiency: Efficient management of operations and maintenance can reduce costs, positively impacting ROI. This includes using technology for smart grid management and reducing energy losses.

• Regulatory and Compliance Environment: Compliance with federal and state regulations, including safety, environmental standards, and reliability requirements, can add to the costs, affecting ROI.

• Community and Economic Development: Cooperatives are often involved in community development projects, which might not directly contribute to ROI but can increase member satisfaction and support.

• Return of Capital Credits: Electric cooperatives return any excess revenue (net margins) to their members in the form of capital credits, typically on a rotation basis. The decision of how much to retain

and how much to return can impact the cooperative’s financial stability and ROI.

While ROI analysis for electric cooperatives is not all that dissimilar than for other industries, there are some challenges in measuring ROI. Electric cooperatives are typically capital-intensive operations. The high cost of maintaining and expanding infrastructure in rural areas, where member density is low, can make ROI appear lower compared to investor-owned utilities. Additionally, member expectations and satisfaction play a key role in the overall mission of the organization. Unlike investorowned utilities, where the focus is on returns for shareholders, cooperatives must balance financial metrics with member satisfaction and service quality. Finally, many investments made by electric cooperatives have long payback periods, making it difficult to measure ROI on a short-term basis.

Tools that can be used to create ROI

Selecting the right tools for calculating and analyzing ROI depends on the specific needs of the business, the complexity of the investments, and the level of detail required. By leveraging these tools, organizations can gain a clearer understanding of their financial performance and make more informed decisions to optimize their investments.

These tools can help in data gathering, analysis, visualization, and decision-making. While one is advised to research available tools to find the one best suited to your organization, and the proprietary products discussed below are not being endorsed, here are some key tools that can be used to create ROI:

1. Spreadsheet Software

Microsoft Excel: Excel is one of the most widely used tools for financial analysis. It allows users to input data, create formulas, and perform calculations to determine ROI. Excel also provides powerful data visualization tools, such as charts and graphs, which can help illustrate ROI trends and patterns.

Google Sheets: Similar to Excel, Google Sheets offers robust spreadsheet functionalities. It is a cloud-based tool that allows for real-time collaboration and sharing, making it ideal for teams working on ROI calculations.

2. Financial Modeling Software

There are various types of modeling software available in the market for purchase. Many can be used as a tool for financial planning, budgeting, and forecasting, and can help organizations build financial models that include ROI analysis. These are often used by larger organizations due to their scalability and integration with other enterprise systems. Some of these software solutions can

be cloud-based financial planning software that allows for comprehensive budgeting, forecasting, and ROI analysis. They can support scenario planning, which can help assess the impact of different investment decisions on ROI.

3. Business Intelligence (BI) Tools

Tableau: Tableau is a powerful data visualization tool that allows users to create interactive dashboards and reports. It can be used to visualize ROI and other key performance indicators (KPIs), providing a clear view of financial performance over time.

Power BI: Microsoft’s BI tool enables users to connect to various data sources, create detailed reports, and share insights. It can be used to track ROI and other financial metrics across different departments or projects.

4. Accounting and Financial Management Software

QuickBooks: A popular accounting software for small to medium-sized businesses, QuickBooks can track income, expenses, and investments. It offers reporting features that can help calculate ROI by analyzing profitability and financial performance.

There are also other cloud-based financial management systems designed for small to medium-sized enterprises (SMEs). They can provide advanced accounting capabilities and can track ROI by integrating data across various business functions.

5. ROI Calculators and Templates

ROI Calculator Tools: There are numerous online ROI calculators available, which can be used for quick and simple ROI calculations. These tools typically require

users to input basic financial data, such as initial investment, net profit, and time frame, to calculate ROI.

ROI Templates: Many organizations provide downloadable ROI templates, often in Excel format, which include prebuilt formulas and fields for data entry. These templates can help standardize ROI calculations and ensure consistency across different projects.

6. Enterprise Resource Planning (ERP) Systems

ERP Systems: An ERP system is a comprehensive solution that integrates various business processes, including finance, supply chain, and operations. An ERP can help organizations calculate ROI by consolidating financial data and providing advanced analytics and reporting capabilities. These can be cloud based or hosted within your organization.

7.

Project Management Software

Microsoft Project: A project management tool that allows users to plan, execute, and track project performance. It can be used to calculate ROI by comparing the planned and actual costs and benefits of a project.

8. CRM Software (Customer Relationship Management)

There are multiple CRM platforms available that can provide tools for managing customer relationships and sales. ROI analysis features can help organizations understand the return on marketing and sales investments. Some platforms can be helpful in tracking ROI for marketing campaigns or initiatives.

9. Analytics and Reporting Tools

Google Analytics: Used primarily for digital marketing and web analytics, Google Analytics can provide insights into the ROI of online marketing efforts by tracking

conversions, sales, and other key metrics. There are other cloud-based business dashboard tools available that allow companies to create custom KPI dashboards, including ROI calculations. These solutions can pull data from multiple sources and visualize performance metrics in real-time.

10.

Custom Software Development

Organizations may choose to develop custom software solutions tailored to their specific needs for calculating ROI. These tools can integrate with existing data systems and provide customized reports and analytics to support decision-making. Additionally, depending upon the situation or ROI considered, using consultants to assist in calculating and optimizing the ROI can be highly beneficial, especially given the unique challenges and characteristics of electric cooperatives. Consultants can provide specialized knowledge, experience, and an objective perspective that can help electric cooperatives improve their financial performance, optimize their operations, and enhance member satisfaction. If a consultant is considered, one is advised to perform due diligence to select the right consultant for the job.

Pitfalls to avoid in ROI analysis

ROIs can be misleading if they are measuring the wrong process or result. Some of the pitfalls to avoid is obtaining inaccurate data, not having complete cost estimates in the analysis, not anticipating risks to the ROI results, and not understanding the challenges in measurements. While financial measurements are concrete and easily understood, qualitative and non-monetary measurements can be just as important in the overall analysis and ultimate story the ROI tells.

Petersen (2018), of BarnRaisers, writes

about the ten most common mistakes. Some of these include confusion between cash flow and gains, underestimating initial costs, failure to include people’s time, not knowing the minimum return required, measuring the wrong things or too many things, not leveraging existing capabilities, not getting the right business team members involved, and not accounting for change.

The Psico-smart Editorial Team (2024) further expands on pitfalls to avoid. They advise defining the ROI clearly and establish metrics and performance indicators that are meaningful, don’t overlook long-term benefits, set clear ROI objectives, don’t ignore participant feedback and engagement, avoid miscalculating costs and resources needed, don’t neglect the impact or risk of external factors, and don’t rely solely on quantitative data.

Aldana (2024), of the ROI Institute and two-time “ROI Practitioner of the Year” award winner, offers six of the biggest measurement pitfalls and offers advice for how to avoid them. The pitfalls include performing an ROI post-implementation of the project or investment, not being very specific about the expectations or objectives of the project, thinking the ROI analysis is too hard, surprising stakeholders by what is measured, not encouraging stakeholder involvement, and not learning what should be learned about the contributing factors for success and failure of an initiative.

Example of combined ROI analysis for electric cooperatives: investing in smart meters

Introduction: An electric cooperative is considering investing in smart meters to enhance grid management, improve customer service, and achieve operational efficiencies. Conducting an ROI analysis requires a combination of quantitative and qualitative approaches to thoroughly evaluate the effectiveness and profitability of

the project. Below is an example of such an analysis.

Quantitative Analysis: Costs:

1. Installation Costs: $500,000 (one-time cost)

2. Annual Maintenance Costs: $50,000 per year

Benefits:

1. Annual Savings from Reduced Manual Meter Reading: $120,000

Smart meters eliminate the need for manual meter readings, resulting in labor and transportation cost savings.

2. Improved Billing Accuracy and Reduced Billing Errors: $50,000 per year

Accurate, real-time data reduces billing discrepancies and improves customer trust.

3. Reduction in Energy Theft: $30,000 per year

Smart meters provide more accurate data, enabling the cooperative to detect and prevent energy theft more effectively.

Total Annual Benefits: $120,000 (manual reading savings) + $50,000 (billing accuracy) + $30,000 (reduced theft) = $200,000

ROI Calculation:

To calculate ROI over a 10-year period:

Total Costs = Initial Installation Cost + (Annual Maintenance Cost x Number of Years)

Thus, the ROI for the investment in smart meters is 100% over 10 years, indicating a

doubling of the investment over this period.

Qualitative Analysis:

1. Strategic Alignment:

• The investment supports the cooperative’s goals for modernization and improved customer satisfaction.

• Aligns with regulatory requirements and industry trends towards smart grid technology.

2. Stakeholder Impact:

• Customers: Enhanced customer service through more accurate billing and faster resolution of service issues. Reduction in customer complaints due to transparency and reliability of metering.

• Employees: Potential job shifts from manual meter reading to roles in data analysis and customer service. May require retraining programs.

3. Risk and Uncertainty:

• Technology Adoption: Risk associated with the acceptance and adaptation of new technology by both customers and employees.

• Upfront Training Costs: Initial costs for training employees on the use of new smart meter technology.

• Cybersecurity Risks: Need for robust cybersecurity measures to protect against data breaches and ensure data privacy.

4. Long-Term Benefits:

• Increased Grid Reliability: Real-time data improves grid management, reduces outages, and enhances response times.

• Data Analytics Capabilities: Enhanced data collection enables better demand forecasting, load management, and operational efficiency.

• Environmental Impact: Potential reduction in energy waste and enhanced support for renewable energy integration through more precise monitoring.

Scenario Conclusion:

The ROI analysis shows that investing in smart meters offers a significant financial return and aligns with strategic goals for modernization and improved service delivery. While there are risks and initial costs associated with technology adoption and training, the long-term benefits in terms of operational efficiency, customer satisfaction, and enhanced data capabilities provide a compelling case for the investment. Overall, this investment represents a strategic move towards a more sustainable and customerfocused future for the electric cooperative.

Summary remarks

ROI for electric companies is influenced by a combination of revenue generation, operating costs, regulatory environment, energy mix, and market conditions. To maximize ROI, electric companies need to manage both their capital and operational expenditures efficiently, while also adapting to changing regulatory and market dynamics. An accurate, comprehensive, and persuasive ROI analysis not only helps in making betterinformed investment decisions but also builds credibility and trust with stakeholders.

ROI for electric cooperatives is more about ensuring the financial health and sustainability of the cooperative while providing reliable service at the lowest possible cost to its members. While the calculation of ROI may differ from that of profit-oriented utilities, understanding net margins, managing costs, and efficiently using capital are still crucial for the long-term success of electric cooperatives.

References

Aldana, K. (January 8, 2024). The 6 biggest measurement pitfalls and how to avoid them. Retrieved August 29, 2024 from the following website: https://roiinstitute.net/the-6-biggestmeasurement-pitfalls-and-how-to-avoid-them/

Beattie, A. (August 22, 2024). ROI: Return on Investment Meaning and Calculation Formulas. Retrieved August 29, 2024 from the following website: https://www.investopedia.com/articles/ basics/10/guide-to-calculating-roi.asp

Peterson, R. (December 2, 2018). 10 most common mistakes in calculating ROI. Retrieved August 29, 2024 from the following website: https://barnraisersllc.com/2018/12/02/ calculating-roi-most-common-mistakes/

Psico-smart Editorial Team. (August 28, 2024). What are the common pitfalls to avoid when calculating the ROI of training programs? Retrieved August 29, 2024 from the following website: https://psico-smart.com/en/blogs/blog-what-are-the-common-pitfalls-to-avoid-whencalculating-the-roi-of-training-programs-146632

Useful resource:

ROI Institute: https://roiinstitute.net/roi-methodology/

By Greg Taylor

FASB ISSUES Proposed Accounting Standards Update (exposure draft) DERIVATIVES AND HEDGING (Topic 815) and REVENUE FROM CONTRACTS WITH CUSTOMERS (Topic 606) Derivatives Scope Refinements and Scope Clarification for a Share-Based Payment for a Customer in a Revenue Contract. July 23, 2024, Comment Deadline: October 21, 2024

Summary

The Board is issuing the amendments in this proposed Update to address stakeholders’ concerns about (1) the application of derivative accounting to contracts with features based on the operations or activities of one of the parties to the contract and (2) the diversity in accounting for a sharebased payment from a customer that is consideration for the transfer of goods or services. The proposed amendments are expected to (a) reduce the cost and complexity of evaluating whether these contracts are derivatives, (b) better portray the economics of those contracts in the financial statements, and (c) reduce diversity in practice resulting from changing interpretations of the existing guidance. The proposed amendments also are expected to reduce diversity in practice by clarifying the applicability of Topic 606 to a share-

gregt@dwilliams.net

based payment from a customer that is consideration for the transfer of goods or services.

Issue 1: Derivatives Scope Refinements

Why Is the FASB Issuing This Proposed Accounting Standards Update (Update)? Topic 815, Derivatives and Hedging, establishes accounting requirements for contracts that meet the characteristicsbased definition of a derivative and are not otherwise excluded from the Topic’s scope. Because of the broad interpretation of the definition of a derivative, many types of contracts are being evaluated and potentially accounted for as derivatives.

In response to the 2021 Invitation to Comment, Agenda Consultation, stakeholders indicated that practice questions have emerged about the application of the definition of a derivative (and the related scope exceptions) to (1) certain emerging transactions, such as bonds in which interest payments may vary based on environmental, social, and governance (ESG)-linked metrics, and (2) certain longstanding transactions, such as research and development funding arrangements and litigation funding arrangements.

A frequently cited challenge was the broad and evolving interpretation of the derivative

definition and the complexity of applying scope exceptions to certain contracts with variables (referred to as “underlyings”) based on operations or activities specific to one of the parties to the contract. Some respondents noted that because those contracts relate to the performance of a party to the contract, accounting for those contracts as derivatives measured at fair value does not provide decision-useful information. Those respondents indicated that other guidance in generally accepted accounting principles (GAAP) exists to account for those contracts. Furthermore, respondents noted that because of the cost and complexity of applying the derivative guidance, some entities may structure those transactions to avoid accounting for them as derivatives. The amendments in this proposed Update address the issues raised by stakeholders by expanding the scope of an existing exception in Topic 815.

Who Would Be Affected by the Amendments in This Proposed Update?

The amendments in this proposed Update would apply to all entities that enter into certain contracts with underlyings based on operations or activities specific to one of the parties to the contract.

What Are the Main Provisions?

The amendments in this proposed Update would exclude from derivative accounting contracts with underlyings that are based on operations or activities specific to one of the parties to the contract. The scope exception would include variables based on financial statement metrics of one of the parties to the contract (for example, earnings before interest, taxes, depreciation, and amortization; net income; expenses; or total equity), as well as the occurrence or nonoccurrence of an event related to the operations or activities specific to one of the parties to the contract. However, contracts with a single underlying based on either

(1) a market rate, market price, or market index or (2) the price or performance of a financial asset or financial liability of one of the parties to the contract would not qualify for the proposed scope exception. Contracts with multiple underlyings for which some are excluded from derivative accounting, and some are not would be evaluated on the basis of the predominant characteristics of the contract to determine whether the entire contract (or embedded feature) is subject to the requirements of Topic 815. 3 The amendments in this proposed Update would change the predominant characteristics assessment to require that an entity assess which underlying is expected to have the largest expected effect on changes in the fair value of the contract (or embedded feature).

How Would the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Would They Be an Improvement?

A contract may meet the definition of a derivative in its entirety or contain provisions or features that may be required to be accounted for separately as derivatives. Existing GAAP provides certain scope exceptions from Topic 815, including for contracts that are not traded on an exchange when settlement is based on the specified volume of sales or service revenues of one of the parties to the contract.

The amendments in this proposed Update would expand the scope exception for certain contracts not traded on an exchange to include contracts for which settlement is based on operations or activities specific to one of the parties to the contract. This improvement is expected to result in more contracts and embedded features being excluded from the scope of Topic 815.

The amendments in this proposed Update also would change the predominant characteristics assessment applicable to certain contracts that are not traded on an exchange by replacing the existing

correlation assessment in the predominant characteristics assessment with a fair value assessment.

The amendments in this proposed Update are expected to improve the decision usefulness of financial reporting for contracts with underlyings based on operations or activities specific to one of the parties to the contract and reduce cost and complexity for entities analyzing and applying the derivative guidance.

When Would the Amendments Be Effective and What Are the Transition Requirements?

The effective date for the amendments in this proposed Update will be determined after the Board considers stakeholders’ feedback on the proposed amendments. 4 The amendments in this proposed Update would be applied prospectively to contracts entered into after the date of adoption. Entities would have the option to apply the guidance to contracts that exist as of the beginning of the fiscal year of adoption through a cumulative-effect adjustment made to the opening balance of retained earnings as of the beginning of the fiscal year of adoption. Early adoption would be permitted as of the beginning of the fiscal year. An entity that no longer applies Topic 815 to existing contracts (or embedded features) as a result of applying the amendments in this proposed Update would have a one-time option, as of the beginning of the year of adoption, to irrevocably elect to apply the fair value option in Topic 825, Financial Instruments.

Issue 2: Scope Clarification for a ShareBased Payment from a Customer in a Revenue Contract

Why Is the FASB Issuing This Proposed Accounting Standards Update (Update)?

The Board received feedback from some stakeholders that there is a lack of clarity about which guidance an entity should apply to recognize share-based payments, such as warrants or shares, received from a customer

that are consideration for the transfer of goods or services. For example, if an entity receives share-based payments from a customer and those share-based payments are contingent on the satisfaction of performance obligations, some stakeholders recently indicated that it is unclear to them whether those share based payments (1) should be recognized at contract inception as a derivative asset under Topic 815 or an equity security under Topic 321, Investments –Equity Securities, or (2) should not be recognized until the entity satisfies its performance obligations under Topic 606, Revenue from Contracts with Customers.

In response to this feedback, the Board decided to clarify the accounting by an entity that receives a share-based payment from a customer that is consideration for the transfer of goods or services.

Who Would Be Affected by the Amendments in This Proposed Update?

The amendments in this proposed Update would apply to all entities that receive a share-based payment from a customer that is consideration for the transfer of goods or services.

What Are the Main Provisions?

The amendments in this proposed Update would clarify that an entity should apply the guidance in Topic 606, including the guidance on noncash consideration in paragraphs 606-10-32-21 through 32-24, to a contract with a share-based payment (for example, shares, share options, or other equity instruments) from a customer that is consideration for the transfer of goods or services. Accordingly, under Topic 606, the share-based payment should be recognized as an asset measured at the estimated fair value at contract inception under Topic 606 when the entity’s right to receive or retain the share-based payment from a customer is no longer contingent on the satisfaction of a performance obligation.

In addition, the amendments in this

proposed Update would clarify that the guidance in Topic 815 and Topic 321 should not be applied unless and until the sharebased payment from a customer that is consideration for the transfer of goods or services is recognized as an asset under Topic 606.

How Would the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Would They Be an Improvement?

The amendments in this proposed Update would reduce diversity in the accounting for share-based payments from a customer that are consideration for the transfer of goods or services by clarifying that entities should apply the guidance in Topic 606. The proposed amendments would provide investors with more comparable information and would reduce accounting complexity and related reporting costs for preparers and auditors.

When Would the Amendments Be Effective and What Are the Transition Requirements?

The effective date for the amendments in this proposed Update will be determined after the Board considers stakeholders’ feedback on the proposed amendments.

An entity would be required to apply the amendments in this proposed Update to revenue contracts that exist as of the beginning of the fiscal year of adoption through a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the fiscal year of adoption. Early adoption would be permitted as of the beginning of the fiscal year.

The Proposed ASU, including questions for respondents and effective date information, is available at www.fasb.org

TENTATIVE BOARD DECISIONS

Wednesday, July 17, 2024, FASB Board Meeting

Induced conversions of convertible debt instruments. The Board discussed feedback

received on the proposed Accounting Standards Update, Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments. The Board made the following decisions.

Form and Amount of Consideration, Assessment Date, One-Year Look-Back

The Board affirmed its decisions to require that:

1. To be eligible for induced conversion accounting, an inducement offer should preserve the consideration (in form and amount) issuable under the conversion privileges provided in the terms of the debt instrument.

2. The assessment of the form and amount of consideration in the inducement offer should be performed as of the offer acceptance date.

3. For convertible debt instruments that have been exchanged or modified (without being deemed substantially different in accordance within the guidance in Subtopic 470-50, Debt—Modifications and Extinguishments) in the one-year period preceding the offer acceptance date, the conversion privileges provided in the debt terms that existed one year before the offer acceptance date (rather than the conversion privileges provided in the terms of the debt instrument) should be used for the induced conversion assessment.

Application to Instruments Not Currently Convertible

The Board affirmed its decision that an entity should apply induced conversion accounting to all convertible debt instruments that contain a substantive conversion feature and are within the scope of Subtopic 470-20, including instruments that are not currently convertible. The Board decided that an entity should be required to assess whether a conversion feature is substantive as of both the issuance date and the offer acceptance date.

Transition, Effective Date, and Early Adoption

The Board affirmed its decision to permit either prospective or retrospective application of the amendments with related transition disclosures.

The Board decided that the amendments will be effective for fiscal years (including interim periods within fiscal years) beginning after December 15, 2025, for all entities. The Board also decided to permit early adoption as of the beginning of the fiscal year for all entities that have adopted the amendments in Accounting Standards Update No. 202006, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

Analysis of Benefits and Costs

The Board concluded that it has received sufficient information and analysis to make an informed decision on the expected benefits and expected costs of the amendments and that the expected benefits of the amendments would justify the expected costs.

Next Steps

The Board directed the staff to draft a final Accounting Standards Update for vote by written ballot.

Determining the acquirer in the acquisition of a VIE. The Board added a project to its technical agenda to clarify the guidance in Topic 805, Business Combinations, and Topic 810, Consolidation, on whether the primary beneficiary should always be the accounting acquirer of a variable interest entity (VIE) that meets the definition of a business. The Board made the following decisions during the meeting.

Consistent with the Emerging Issues Task Force (EITF) recommendation, the Board decided to require that an entity consider the factors in paragraphs 805-10-55-12 through

55-15 in determining which entity is the accounting acquirer when a VIE is acquired in a business combination effected primarily by exchanging equity interests. The Board also decided that the proposed amendments should be applied prospectively, and that early adoption would be permitted.

The Board decided that an entity would be required to disclose the nature of and reason for the change in accounting principle in the period of adoption.

Analysis of Benefits and Costs

The Board concluded it has received sufficient information and analysis to make an informed decision on the expected benefits and expected costs of the amendments in the proposed Update and that the expected benefits of the amendments would justify the expected costs.

Next Steps

The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot. The Board also decided on a 45-day comment period for the proposed Update.

Wednesday, June 26, 2024, FASB Board Meeting

Disaggregation—income statement expenses. The Board completed redeliberation on the proposed Accounting Standards Update, Income Statement— Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 22040): Disaggregation of Income Statement Expenses. The Board made the following decisions.

Follow-On Issues

for the Disaggregation of Relevant Expense Captions That Contain Purchases of Inventory

The Board decided to clarify that entities that disclose the purchases of inventory category should:

1. Include only amounts recognized in accordance with Topic 330, Inventory

2. Exclude amounts recognized in (a) a business combination, (b) a joint venture formation, and (c) an initial consolidation of a variable interest entity that is not a business combination.

The Board decided to clarify that an entity may disaggregate a relevant expense caption that contains amounts recognized in accordance with Topic 330 on either a costsincurred basis or an expenses-incurred basis. The Board also decided to require an entity to recast its disclosure of the disaggregation of relevant expense captions that contain amounts recognized in accordance with Topic 330 if it changes its basis of presentation for that disclosure between reporting periods unless it is impracticable to do so. The Board decided to provide a practical expedient that would allow an entity that presents purchases or materials on the income statement for which substantially all of that expense caption comprises amounts recognized in accordance with Topic 330 to qualitatively describe the composition of that expense caption instead of disclosing disaggregated amounts for that expense caption. The Board decided not to require an entity to supplement the disaggregation of relevant expense captions that contain amounts recognized in accordance with Topic 330 with accounting policy disclosures.

Using Estimates and Other Methods

The Board decided to clarify that an entity may use accounting estimates or other methods of approximation to determine the amounts for disclosure. The Board also decided to expand the disclosure objective to (a) emphasize the use of estimates and other methods of approximation and (b) enhance the auditability of the amounts in the disclosures.

Interim Reporting

The Board affirmed its decision to require all disclosures for interim reporting periods,

except for the disclosure of an entity’s definition of selling expenses.

Transition

The Board affirmed its decision to require prospective application of the amendments with optional retrospective application.

Effective Date and Early Adoption

The Board decided that the amendments will be effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. The Board also decided to permit early adoption.

Analysis of Benefits and Costs

The Board concluded that it has received sufficient information and analysis to make an informed decision on the expected benefits and expected costs of the amendments and that the expected benefits of the amendments would justify the expected costs.

Next Steps

The Board directed the staff to draft a final Accounting Standards Update for vote by written ballot.

RECENT ACTIVITIES OF THE PRIVATE COMPANY COUNCIL

The Private Company Council (PCC) and the Small Business Advisory Committee (SBAC) met on Tuesday, June 25, 2024. Below is a summary of topics discussed by PCC and SBAC members at the meeting:

• PCC Agenda Priorities: PCC

and SBAC members discussed the PCC agenda prioritization process and two of the four areas that the PCC is considering: (a) credit losses—short-term trade accounts receivable and contract assets and (b) debt modifications and extinguishments. PCC and SBAC members have not observed a significant financial statement effect from

the application of Topic 326, Financial Instruments—Credit Losses, to short-term trade accounts receivable and contract assets. While some SBAC members observed that most companies do not experience significant ongoing costs beyond the initial cost to implement the credit losses guidance, other PCC and SBAC members observed that companies incur ongoing costs, particularly related to the documentation of certain assumptions, such as a reasonable and supportable forecast. Second, SBAC members supported simplifying the guidance on debt modifications and extinguishments. Some PCC and SBAC members that make capital allocation decisions noted that they do not have a preference for the accounting treatment (modification or extinguishment), as long as the transaction and the terms of the refinanced debt agreement are disclosed.

• Accounting for and Disclosures of Software Costs: PCC and SBAC members generally supported the Board’s tentative decisions on the targeted improvements to Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software. Some PCC and SBAC members observed that certain judgments related to the evaluation of the probable to complete recognition threshold may be challenging to audit. Those members emphasized the importance of providing illustrative examples of this evaluation, particularly for companies that are implementing common software solutions or platforms to manage their internal operations. Some PCC preparer members suggested that further clarification on the accounting for maintenance and enhancements costs would improve the operability of the guidance in Subtopic 350-40. PCC practitioner members noted that their clients typically do not apply Subtopic 350-50, Intangibles—Goodwill and

Other—Website Development Costs, and supported subsuming that guidance into Subtopic 350-40. PCC and SBAC members also discussed the Board’s tentative decision on presentation in the statement of cash flows. Members observed that requiring a separate presentation of cash outflows for software costs capitalized under Subtopic 350-40 as cash flows from investing activities would generally be operable but would result in entities incurring some costs.

• Accounting for Government Grants: PCC and SBAC members received an update on the Board’s tentative decisions in this project. A PCC member noted that leveraging the accounting guidance in IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, would establish authoritative guidance in GAAP that generally reflects current practice. That member also suggested that it would be helpful to provide implementation guidance about the probable recognition threshold.

• Derivatives Scope Refinements: PCC and SBAC members discussed the Board’s tentative decisions in this project. A PCC practitioner member and a SBAC practitioner member supported the Board’s tentative decision that would exclude from derivative accounting certain contracts with underlyings that are based on the operations or activities of one of the parties to the contract.

• Accounting Alternatives and Changes in Accounting Principles: PCC and SBAC members discussed the circumstances and factors the Board should consider when determining whether to provide accounting alternatives in GAAP, including options and practical expedients. Those circumstances and factors could include the complexity of the accounting guidance,

additional resources needed by private companies and related costs, and the level (entity level or transaction level) at which an accounting policy election should be applied. PCC and SBAC members also provided input about the application of the guidance on changes in accounting principles. PCC and SBAC members that make capital allocation decisions emphasized the importance of consistent financial reporting within a company and comparability among companies. Those members suggested requiring companies to disclose all accounting alternatives and changes in accounting principles in a single note to the financial statements to improve the transparency and accessibility of the information about changes in accounting. Some PCC and SBAC preparer members observed that it is important to strike a balance between providing comparable financial information and reporting financial information that reflects the economics of a company’s business. PCC and SBAC members also discussed the criteria under which a preferability assessment under Topic 250, Accounting Changes and Error Corrections, would generally be made.

The Private Company Council (PCC) met on Monday, June 24, 2024. Below is a summary of topics discussed by PCC and FASB members at the meeting:

• PCC Agenda Priorities: The PCC discussed its agenda priorities and expressed continued support for conducting research in the following areas identified at the April 2024 PCC meeting: credit losses— short-term trade accounts receivable and contract assets, debt modifications and extinguishments, presentation of conditional retainage and overbillings as contract assets and liabilities, and lease accounting simplifications such as practical expedients or accounting alternatives.

• PCC members discussed the challenges

of applying Topic 326, Financial Instruments—Credit Losses (CECL), to short-term trade accounts receivable and contract assets and what solution could address those challenges. PCC members discussed several potential solutions including (1) permitting a private company to exclude the evaluation of reasonable and supportable forecasts or (2) allowing for the collection of receivables after the balance sheet date but before the financial statements are available to be issued to be considered in measuring expected credit losses at the balance sheet date. PCC members also discussed the types of assets that might be within the scope of a potential private company alternative.

• PCC members discussed the costs and complexities in applying Subtopic 470-50, Debt—Modifications and Extinguishments. PCC members suggested that outreach be conducted with private company financial statement users to understand their views on the different financial reporting outcomes that can arise when applying Subtopic 470-50 to term loans that are exchanged or modified.

• PCC members expressed support for providing private companies in the construction industry with an option for presenting conditional retainage and overbillings gross on the balance sheet. PCC members and FASB staff also discussed stakeholder feedback obtained to date on this issue and whether additional outreach with the construction industry and sureties may be needed.

• PCC members discussed forming a working group to identify specific issues in Topic 842, Leases, for the PCC to conduct further research. PCC members preliminarily discussed areas of ongoing

challenges in applying the leases guidance, such as embedded leases and lease modifications. PCC members also discussed how they could assist with the FASB’s leases post-implementation review activities.

• Topic 815—Hedge Accounting Improvements: FASB staff provided PCC members with an update on the project, including a brief overview of improvements that the Board is proposing to similar risk assessments in cash flow hedges, hedging forecasted interest payments on choose-your-rate debt instruments, and cash flow hedges of nonfinancial forecasted transactions. Overall, PCC members generally agreed with the Board’s decisions, noting that the forthcoming proposed amendments will simplify the guidance, make it easier to qualify for and apply hedge accounting, and will be appreciated by private company preparers.

• Induced Conversions of Convertible Debt Instruments (EITF Issue No. 23A): FASB staff summarized the key proposed amendments in the proposed Update, Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments, comment letter feedback, and next steps. PCC members asked about the effects of the proposed amendments on certain debt arrangements and about next steps in the Board’s redeliberation.

The next PCC meeting is scheduled for Tuesday, September 24, 2024.

THE FOLLOWING ARE SELECTED TOPICS FROM THE WEEKLY ACCOUNTING HIGHLIGHTS PUBLISHED BY THOMSON REUTERS – FULL ATTRIBUTION TO SOYOUNG HO (SEC matters) and DENISE LUGO (FASB, AICPA matters), WHO WRITE THESE SUMMARIES FOR THOMSON REUTERS

FASB Pushes Forward with Targeted Accounting Reforms, Investors to Benefit Denise Lugo  Editor, Accounting and Compliance Alert

August 16, 2024

The FASB remains on track with its efforts to enhance financial reporting standards, with a slew of new proposals and final standards set to be issued in the coming months.

In a meeting with the Financial Accounting Foundation’s (FAF) Standards-Setting Oversight Committee, FASB Chair Richard Jones and Technical Director Jackson Day provided the most current updates on the board’s progress on several key projects.

In a major push to address investor concerns, the board is poised to release seven proposals in the third quarter, tackling critical areas such as financial asset purchases, software cost accounting, and more.

By year-end, the board plans to unveil two standards designed to make financial statements more transparent and user-friendly for investors, a key milestone in its efforts to improve financial reporting. These standards focus on the disaggregation of income statement expenses and induced conversions of convertible debt instruments.

“We need to be cognizant of any standard that we put out there, there is a cost, and there has to be a benefit associated with it,” Jones told trustees on August 12, 2024.

He highlighted the importance of addressing investor priorities, including projects on digital assets, income tax disclosures, and the breakdown of financial reporting information. The completion of the conceptual framework, particularly the measurement methods, was also touted as a significant milestone, providing a robust foundation for consistent decision-making.

In response, FAF Trustees acknowledged the delicate balance the FASB must strike in meeting the diverse demands of its stakeholders, noting that some push for swifter action while others feel overwhelmed by the sheer volume of projects. In this

context, trustee Richard Reisig asked, “Would an argument be fair to say, ‘well, a lot of those are kind of targeted’” allowing for a more focused approach?

In agreement, Jones said, “we scoped them to deal with what we thought was the most critical need,” and also carefully weighed various factors, including the timing of proposals and rules. To ensure a manageable approach, he explained, “we were very careful to make sure that it wouldn’t be overwhelming to the extent you did want to respond to all.” Jones noted that the response would likely vary depending on the stakeholder, with large public accounting firms probably responding to all proposals, while preparers in the community might pick and choose.

In terms of investor outreach, the board is “being deliberate in our approach with this critical stakeholder group, sharing examples of outcomes and seeking their feedback to ensure we’re meeting their needs,” he added.

The meeting also touched on the ongoing post-implementation reviews of major standards, such as revenue recognition, credit losses, and leases. Jones emphasized the importance of continuous improvement and stakeholder outreach to ensure the standards’s effectiveness and relevance.

With Threat of Lawsuit, SEC Once Again Delays Approving

PCAOB’s New Quality Control Standard - Soyoung Ho Senior Editor, Accounting and Compliance Alert August 15, 2024

The Public Company Accounting Oversight Board (PCAOB) recently finalized quality control (QC) standard, which is strongly opposed by auditors, and it appears to have hit a wall. The Securities and Exchange Commission (SEC) oversees the board, and the commission must approve the audit regulator’s rule changes before they can become effective. And the commission

for the second time in a row is delaying its action whether to approve, reject, or institute proceedings to determine whether the standard should be disapproved. Now the commission will be decided by September 9, 2024, according to Release No. 34-100724, published on August 13th.

Potential Lawsuit Causing Delay?

A delay means there are issues that need to be resolved. While the SEC does not divulge details about exactly why it needs more time to make up its mind, it is highly likely that it is concerned about the threat of litigation by the U.S. Chamber of Commerce if the commission goes ahead and greenlights the PCAOB’s  QC standard without addressing what it sees as fundamental problems with a new requirement that would apply to larger audit firms: External Quality Control Function (EQCF). Among other things, the EQCF must evaluate significant judgments, and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of the QC system. The U.S. Chamber’s concerns largely reflect the views of the Center for Audit Quality (CAQ) and larger audit firms, even if they won’t threaten with a legal action publicly. The CAQ, an affiliate of the AICPA, represents accounting firms that audit public companies. But the U.S. Chamber has an excellent track record of winning lawsuits on rules it sees as being “arbitrary and capricious.” Further, with the conservative Supreme Court’s recent rulings that rein in regulatory agencies actions, the SEC cannot ignore the business group’s threat of legal action.

Thorny EQCF

In particular, the EQCF applies to firms that audit more than 100 public companies. Today, there are about a dozen such firms. In comment letters to the SEC, the CAQ, the larger firms, including the Big Four, and the U.S. Chamber noted that the EQCF is not a logical outgrowth of the PCAOB’s proposal

issued in November 2022. The board adopted the rules in May. Moreover, Tom Quaadman, an executive vice president of the Chamber, claimed that the EQCF requirement is fundamentally flawed because QC criticisms by the PCAOB following inspections are only made public if a firm does not fix QC deficiencies to the satisfaction of the board within 12 months.

“The EQCF cannot evaluate the significant judgments made and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of its QC system without having the details of the nonpublic … QC criticisms and … remediation activities,” he wrote. “Yet, disclosing [the] information to the EQCF consisting of one or more independent third-parties would be considered a public disclosure, which negates the confidentiality provided by SOX for QC inspection findings and deficiencies (appropriately remediated).”

SOX is the Sarbanes-Oxley Act of 2002, which created the PCAOB following accounting scandals at companies like Enron and WorldCom. The Chamber also said that the PCAOB ’s approval is based on a cost-benefit analysis that falls short of what is legally required. “Instead, the SEC must conduct its cost-benefit analysis of the standard with due regard of the Commission’s statutory mandate as interpreted by the courts, then publish that analysis for public comment. Failure to do so places any finally-adopted standard in legal peril,” Quaadman wrote. When asked about the SEC’s latest move, Quaadman said: “we will just let our letter stand without any further comment.” “This is likely to impact companies as well, said Richard Chambers, senior adviser for risk and audit at AuditBoard.

“This is a great example of the corporate sector’s hesitancy around increased regulatory expense and burden,” said Chambers, who previously served as president and chief executive officer of the Institute of Internal Auditors. “While the immediate impact would

be on the big accounting firms, there is a sense that the new requirements would also be costly and burdensome for their clients.”

Investor Support

With a threat of lawsuit hanging over the SEC, it faces a serious problem since investor advocates who wrote comment letters said they support the new QC standard as it will significantly improve upon the PCAOB’s interim standards, which the board adopted from the accounting profession when the board was established. Before Sarbanes-Oxley, the AICPA wrote the rules even for public company audits. And the PCAOB has a single mission of protecting investors. The Consumer Federation of America explained that QC systems at many firms today do not even achieve a minimally acceptable level of audit quality. Experts say that QC is foundational to audit quality. Micah Hauptman, director of investor protection at the organization, said the PCAOB inspection regularly finds deficiencies related to auditor independence and professional skepticism. “It is also disturbing how frequently weaknesses in quality control exist at the highest leadership levels of the firm,” Hauptman wrote. “Current quality control standards do not ensure that financial statements are free of material misstatements, that issuers maintain effective internal controls over financial reporting, or that firm personnel comply with applicable professional and legal standards.” Former SEC chief accountant Lynn Turner, a strong investor advocate, was critical of the opposition to the QC standard. “The firms say their audits produce” are high quality, Turner said. But “it has been found time and time and time that the auditors did not do an audit in accordance with the standards, as they said they did.” And a fundamental problem is today’s issuer-pay model. Auditors are paid by the companies they audit, creating a fundamental conflict of interests. Turner has been advocating for reform. “The

firms simply don’t want to have to produce a quality report on the financial reporting by those who pay them,” said Turner, who serves on the PCAOB’s advisory panels. “They do not want to have to produce a bad report card on the management that’s paying them, and that’s what this quality control proposal would do.”

SEC’s Next Move?

It is unclear what the SEC will do. Former PCAOB founding member Daniel Goelzer said that the CAQ and the Chamber’s comment letters raise issues, “but I assume the SEC is extremely reluctant to embarrass the PCAOB by starting disapproval proceedings on this major initiative.” “There are likely negotiations going on behind the scenes between the SEC and PCAOB staffs to explore whether the board could give guidance on the EQCF requirement or take other informal steps that would make it easier for the SEC to approve QC 1000,” Goelzer said. “The board can’t address all of the issues raised in the comments without reopening its proceeding, but it could perhaps make some minor changes or agree to informal steps, like issuing guidance or holding roundtables to assist smaller firms in complying, that would put the SEC in a better position if it has to defend an approval order in court,” he added. In Turner’s view, the QC standard is salvageable with a rather simple fix for larger firms: instead of an external ECQF, they should set up an independent board with full voting power to improve governance and transparency. This was recommended by the Treasury Department’s Advisory Committee on the Auditing Profession (ACAP) in 2008.

Unusual SEC Open Meeting

In the meantime, the SEC has scheduled an open meeting for August 20 on three noncontroversial standards the PCAOB adopted in the past few months:

• Contributory Liability

• Auditing Standard 1000, General Responsibilities of the Auditor in Conducting an Audit

• Designing and Performing Audit Procedures that Involve TechnologyAssisted Analysis of Information in Electronic Form

These standards largely did not generate opposition when the SEC put them out for comment.

Historically, the SEC has not held an open meeting to decide on individual PCAOB standard changes. It was voted behind closed doors, and an approval notice would be posted on the SEC’s website. Thus, this is a departure from normal practice.

It remains to be seen if the two Republican commissioners—Hester Peirce and Mark Uyeda—will discuss QC and other PCAOB activities that they find concerning, including its efforts to revise noncompliance with laws and regulations (NOCLAR), which is strongly opposed by auditors and public companies.

Government Grants Accounting to Get New Rules, Establishing Reporting

Guidelines for Businesses = Denise Lugo Editor, Accounting and Compliance Alert June 10, 2024

The FASB voted on June 4, 2024, to issue a proposal that aims to standardize and clarify the accounting practices for government grants, marking a significant stride towards resolving longstanding inconsistencies in financial reporting. The proposal will be issued this year with a 90-day public comment period, the board said. The move follows years of debate and calls for reform from various stakeholders in the financial community.

FASB Chair Richard Jones emphasized the importance of the coming provisions, noting that “20 years from now there will be some board sitting here if we drop this project saying ‘boy wouldn’t it be nice to have some

accounting for government grants’… let’s face it, the board was told loudly and clearly 10 years ago to add this to the agenda.” The proposal will aim to introduce a new standard for recognizing, measuring, and presenting government grants received by business entities, marking a significant milestone for US GAAP. The guidance would apply universally to all business entities, covering a range of transactions, including monetary and tangible nonmonetary assets transferred from governments to businesses, as well as forgivable loans. The proposal will leverage International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.

Botosan, Joseph to Write Alternative Views

The rules weren’t unanimously approved by the FASB: Board members Joyce Joseph and Christine Botosan expressed their intent to write an alternative view.

Joseph said the proposal would provide inadequate ongoing disclosure requirements, particularly around the fair value of asset grants, which she argues could obscure financial analysis. Botosan’s concerns lie with the proposal’s approach to cost and benefits, emphasizing that it fails to meet investors’ needs for a gross presentation and fair value measurement of non-monetary assets, among other issues. In general, the focus of the June 4 meeting was to continue on prior discussions to develop aspects of the proposals including disclosure, evaluating overall benefits against costs, and to determine whether to issue the proposal. While there is a consensus on the board that the proposal marks progress, opinions varied on whether the benefits would justify the costs. Some members argued that the proposal would fill a crucial gap in GAAP and will enhance comparability and transparency. However, others held concerns that it might not sufficiently reduce complexity or meet investors’ needs for detailed information.

“It’s a growing issue with government grants becoming more significant in investors’ minds,” FASB member Frederick Cannon said. “I can’t support an Exposure Draft that didn’t at least use the proposed disclosures by the staff, which investors said were critical.”

Key decisions from the meeting include:

• Scope of Disclosures: Limiting disclosures to grants directly related to specific projects to streamline reporting and focus on relevant transactions.

• Mandatory Fair Value Disclosures: Entities will be required to disclose the fair value of tangible non-monetary assets received as grants, aiding stakeholders in decisionmaking.

• Detailed Disclosure for Asset-Related Grants: Entities must disclose how these grants affect both the balance sheet and the income statement, particularly concerning depreciation impacts.

• Annual Disclosure Requirements. The board decided to retain the requirement for annual disclosures only, opting not to extend it to interim periods. The board concluded that existing interim reporting guidelines provide sufficient information, and additional interim disclosures would not significantly enhance transparency.

• Business Combinations: One of the more complex issues addressed was the accounting of government grantrelated assets and liabilities in business combinations. The board discussed several alternatives, ranging from applying general business combination accounting rules to providing specific exceptions or guidance. The decision was to further explore these alternatives, seeking to integrate government grants accounting into the broader framework of business combination accounting without compromising clarity or simplicity.

Internal Revenue Service Data Book 2023

Publication 55-B (April 2024).

By George W. Benson

As in the past, this year’s IRS Data Book provides some information as to tax returns (Form 1120-C) filed by Subchapter T cooperatives.

The Data Book aggregates Form 1120C returns with other Form 1120 returns in the information it provides regarding the number of returns filed for fiscal years 2022 and 2023. So, it does not reveal the number of cooperative returns filed in those years in tables showing returns filed. However, it does continue to list Form 1120-C returns separately in a series of tables showing audit rates for the returns filed for the years 2013 through 2021 for each year.

The 2021 figures above come from last year’s Data Book. There are slight unexplained differences between the number of returns reported for prior year in last year’s Data Book and this year’s Data Book for some of the years. Also, there is no explanation for the significant drop in reported returns between 2019 and 2021.

One wonders how reliable this information

George W. Benson Counsel

McDermott Will & Emery LLP 444 West Lake Street, Suite 4000 Chicago, Illinois 60606-0029 tel: (312) 984-7529 fax: (312) 984-7700

e-mail: gbenson@mwe.com

is – 0.05% of 9,000 returns is 4.5. Is the audit rate really that low? Whatever the case, the message of this year’s Data Book and prior years’ Data Books is that very few cooperative returns are audited. That is consistent with anecdotal reports of very few audits in recent years.

Whether this will continue in the future is, of course, unknown.

Recent Congresses have given the IRS billions of dollars to upgrade its capabilities, and a large portion has been earmarked for enhanced enforcement. That could result in increased audit rates for cooperatives. In fact, the recently released strategic operation plan projects an increase in the audit rate for returns for corporations with assets over $250

million from 8.8% in 2019 to 22.6% in 2026. The IRS also projected an increase in audit activity for large complex partnerships from 0.1% to 1%, over the same period. What this will mean for cooperatives is anyone’s guess.

Each year’s Data Book seems to contain less usable data for cooperatives. Data as to the actual number of returns (and amended returns) audited and to the results of the audits is, according to the footnotes, “not shown to avoid disclosure about specific taxpayers.” Prior year Data Books contained more information which indicated that cooperative audits were not particularly productive from a revenue generation perspective. That may explain the current low audit rate.

The other bit of information contained in the Data Book relates to closures of Section 521 applications during FYE 2023. It reveals that no Section 521 application was denied during the year. However, it reports that only three applications were processed during the year. It does not say whether the applications were approved or closed for other reasons (e.g., the application was incomplete, and the organization failed to respond to a request for additional information).

A District Court dismisses an attempt by an animal rights group to use the False Claims Act to challenge a farm’s PPP loans based on allegations of animal cruelty and neglect

A United States District Court in Minnesota recently dismissed a qui tam lawsuit brought by an animal rights group (the Animal Legal Defense Fund, or “ALDF”) under the federal False Claims Act (“FCA”) against a large pork producer (“Holden Farms”) alleging the producer fraudulently certified that it was “not engaged in any activity that is illegal under federal, state or local law” on a Payroll Protection Program (“PPP”) loan application. United States ex rel. Animal Legal Defense Fund v. Holden Farms, Case No. 21-2061 (May 24, 2024).

Holden Farms is a “family-owned and managed pork producer with 76 employees and a herd of 70,000 sows across various Minnesota locations.” Just before the COVID-19 pandemic, the ALDF infiltrated Holden inserting an undercover employee. The undercover employee documented “animal cruelty, neglect, and instances of ‘feedback’ feeding, in which pig corpses and byproducts were fed to live pigs,” allegedly in violation of the federal Swine Health Protection Act and Minnesota’s anti-cruelty and anti-garbage feeding laws.

Shortly after the ALDF’s investigation concluded, the COVID-19 pandemic arrived, and, among other things Congress passed the PPP program “to cope with the economic havoc caused by the pandemic, providing employees and small businesses with a lifeline.” Holden Farms applied for, received, and ultimately had forgiven a $2.57 million PPP loan.

Millions of other small businesses applied for and received PPP loan funds. Many did so fraudulently either because they were ineligible to participate in the program or did not comply with its requirements for having the loans forgiven.

The loan application required applicants to make a number of certifications. One, which received a lot of attention at the time, was that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The vagueness of this certification concerned many applicants. However, that certification was not the focus of the ALDF lawsuit. Nor were there any allegations that Holden was ineligible to participate in the program or had not satisfied requirements for loan forgiveness.

Rather the case focused on a broad certification contained in the PPP loan application, that Holden Farms was “not engaged in any activity that is illegal under federal, state or local law.”

The FCA creates civil liability to the United States for a person “who ‘(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim…’” Suits under the FCA may be brought by a private party. The Department of Justice can intervene and take over the suit, but often, as here, does not, and then the private party can then proceed on behalf of the United States.

Holden Farms brought a motion to dismiss the case, and the District Court granted the motion.

Given the posture of the case, the District Court assumed the ALDF’s allegations were correct, and that Holden Farmers’ certification was false. Notwithstanding, it concluded that the “alleged false statement was not material” and that “no FCA liability follows.” The District Court rested its analysis on a U.S. Supreme Court decision which limits the ability of private parties to bring lawsuits under the FCA based on allegedly false statements that are not material. Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016). That decision observed:

“A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable under the False Claims Act. …

The materiality standard is demanding. The false Claims Act is not ‘an all-purpose antifraud statute’ … or a vehicle for punishing garden-variety breaches of contract or regulatory violations. …

In sum, when evaluating materiality under the False Claims Act, the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. Likewise, proof of materiality can include, but is not necessarily

limited to, evidence that defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement. Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material. …

We emphasize … that the False Claims Act is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations.”

In concluding that the alleged violations by Holden Farms were immaterial and dismissing the case, the District Court focused on several things.

First, it began by considering whether the allegedly false statements went to the heart of the bargain between Holden Farms and the Government which resulted in Holden Farms being accepted into the program and receiving the PPP loan. It observed:

“… the essence of the bargain was that loans would be issued (and ultimately forgiven) in exchange for businesses using the funds to keep themselves and their employees afloat. The general certification of compliance with all laws does not reasonably insert considerations of agricultural law into the contemplated bargain. Because ALDF does not allege Holden used the PPP funds for anything other than payroll and other covered business expenses, it does not plausibly allege that Holden deprived the government of the benefit of the contemplated bargain.”

Second, it considered the conduct of the

Government in like situations – “if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.” It observed that “the SBA issued approximately 11.5 million PPP loans and forgave 10.6 million.” It then stated:

“The government must have known that some loan recipients would run afoul of their broad attestation of legal compliance, yet it still dispersed nearly $800 billion under the PPP with minimal oversight. … Under these circumstances, the government did not view as material regulatory violations that technically ran afoul of the loan certification language.”

The District Court then concluded:

“In sum, both the general tenor of this action and the totality of the circumstances indicated the alleged false claim was not material to the government’s PPP decisions. Because ALDF does not allege that Holden violated a material term of its PPP loan agreement, the Court will dismiss this action with prejudice.”

Accruing liabilities under a reward program

The IRS recently released an internal legal memorandum providing guidance with respect to the tax treatment of credit card reward programs. ILM 202417021 (April 24, 2024). This guidance, though issued in a form that is nonprecedential, provides insight as to the tax treatment of all kinds of reward programs.

The memorandum begins by observing that “many industries employ reward programs to encourage consumers to buy or use their products. Each reward program operates slightly differently based on the industry and applicable user agreement.”

The memorandum then focuses on a particular reward program – a bank credit card reward program which provides that cardholders earn rewards by accumulating points when they use their cards to make purchases. The points are redeemable at the option of the cardholder for cash, a statement credit or specified reward benefits. According to the memorandum, the bank currently claims a deduction for rewards when the rewards are redeemed. The bank would like to “adopt via an accounting method change the recurring item exception and deduct the liability for credit card reward expenses in the taxable year that the rewards are earned by its cardholders, provided the rewards are redeemed within 8-1/2 months after the end of the taxable year.”

The memorandum focuses on whether the liability for rewards under the program can be accrued at year end. Have all events occurred that establish the fact of the liability at year end? Can the amount of the liability be determined with reasonable accuracy? Has economic performance occurred?

The memorandum first analyzes whether all events have occurred that establish the fact of the liability at year end. It focuses on whether there is a “condition precedent that is not ministerial” at year end. It observes that “a requirement that a customer must make an additional purchase to redeem a reward is a condition precedent that is not a ministerial act and results in a reward liability not being fixed…”

It then concludes:

“…because the credit card rewards at issue are immediately redeemable for a predetermined amount of cash or a statement credit, there is no condition precedent, notwithstanding the fact that customers’ rewards may also be redeemed for goods or services. In contrast, reward programs that do not provide redemption

options that include cash or a statement credit but require an additional purchase to receive a partial or complete discount have a condition precedent such that the accrued reward liabilities are not fixed for purposes of the all-events test until the rewards are actually redeemed.”

The memorandum notes the IRS’s continued disagreement with the decision of the Third Circuit Court of Appeals in Giant Eagle, Inc. v. Commissioner, 822 F.3d 666 (3rd Cir. 2016), which allowed an accrual of a reward that was conditioned on making a future purchase.

The memorandum assumes that the amount of the liability can be determined with reasonable accuracy. It then focuses on whether the economic performance test has been met.

For this purpose, the memorandum first concludes that the liability is a “payment liability” since it is a rebate, refund or similar payment. See, Treas. Reg. § 1.461-4(g)(3) and (8), Example 2. It observes that while normally a rebate is a return of an amount actually paid by a customer to the person paying the rebate in a sale, and “[w]hile the rewards do not technically constitute a rebate, they are sufficiently similar to a rebate to constitute a ‘similar payment’ under Treas. Reg. § 1.461-4(g).”

For payment liabilities, normally performance does not occur until payment is made. There is, however, and important exception known as the “recurring item exception.” If applicable, this exception permits a taxpayer to deduct amounts paid within 8-1/2 months of year end (or earlier if its return is filed earlier). See, Treas. Reg. § 1.461-5. The memorandum concluded that the exception applies to the liability the bank would like to accrue with respect to its credit card program since “the liability is fixed and determinable, recurring in nature, and the accrual of the liability for that taxable year

results in a better matching of the liability with the income to which it relates.”

Individual taxpayers warned that their ability to use purchased energy credits may be limited by the passive activity rules Perhaps seeking to forestall an avalanche of questionable claims similar to those made for the employee retention credit, the IRS recently warned individual taxpayers to beware of “unscrupulous tax return preparers … misrepresenting the rules for claiming clean energy tax credits under the Inflation Reduction Act (IRA).” IR-2024-182 (July 3, 2024) (the “Notice”).

Section 6418 permits eligible taxpayers to monetize many of the new clean energy credits they may earn by selling the credits to investors. However, there are limits as to what purchasers – particularly those taxed as individuals – can do with purchased credits. Treas. Reg. § 1.6418-2(f)(3) provides that purchased credits are generally treated as attributable to a passive business for purposes of the passive activity rules of Section 469.

The Notice states:

"Individual purchasing tax credits under the IRA and subject to the passive activity rules for any purchased credits. Generally, this means they can only use purchased credits to offset income tax from a passive activity. Most taxpayers do not have passive income and a passive income tax liability. Most investment activities are not considered passive."

The IRS is concerned that unscrupulous return preparers (or taxpayers) will “file returns that have individuals improperly claiming IRA credits that offset income tax from sources such as wages, Social Security and retirement account withdrawals.”

Nonexempt Subchapter T cooperatives are permitted to use, pass through, or sell clean energy credits they earn. These options are

reviewed in a recent TAXFAX article. See, “Proposed regulations address monetization of new energy credits: what they mean for cooperatives,” The Cooperative Accountant (Fall, 2023).

The Notice makes it clear that selling clean energy credits to members who are taxed as individuals is probably not a viable option since members generally do not have passive income.

Does Section 469 similarly limit the ability of members taxed as individuals to use any clean energy credits passed through from a nonexempt cooperative? Historically the pass-through option has not been much used, but what if it is?

There is no answer to this question. However, an analogy might be drawn to the Section 469 treatment of patronage dividends from cooperatives. Dividends are generally treated as portfolio income for Section 469 purposes. However, there is an exception for patronage dividends. If a patronage dividend is related to an active business of a member (such as farming), the patronage dividend can be treated as income of that active business. See, Treas. Reg. § 1.469-2T(c)(3)(i)(A) and (ii)(F).

While the situations are not identical, perhaps there should be a similar exception for energy credits passed through to members.

A case involving the treatment of a food processor’s annual reconditioning costs is now on appeal to the Ninth Circuit

In 2020, the Tax Court decided that two tomato processing partnerships were not entitled to accrue certain costs (“reconditioning costs”) they incurred each year to restore, rebuild, recondition, and retest their manufacturing facilities. The Morning Star Packing Company, L.P. v. Commissioner, T.C. Memo. 2020-142. Recently, that case resurfaced with a report that the partnerships are pursuing an appeal

in the Ninth Circuit Court of Appeals. “Tomato Cos. Ask 9th Cir. to allow immediate cost deduction,” by Anna Scott Farrell, Law360 (April 23, 2024), and “Tomato Cos. can’t take immediate deductions, 9th Circ. told,” by Anna Scott Farrell, Law360 (June 20, 2024).

This case might be of interest to cooperatives engaged in processing the crops of their members that incur annual reconditioning costs between harvest processing periods. While they may not have the book and tax fiscal year differences that gave rise to the problem for the partnerships, they often do have to deal with which pool (and thus which patrons) should bear reconditioning costs.

Facts

The partnerships involved in the Morning Star case operate three plants in California which process about 25% of the tomatoes produced in California, producing tomato paste, diced tomatoes, and other tomato products, some of which are sold to other processors for use as ingredients and others of which are sold to consumers. In June and July each year, farmers harvest tomatoes and deliver them to the partnerships. The partnerships’ manufacturing facilities operate 24 hours a day from July to October to process the crop. The partnerships then largely sell the resulting tomato products before the next harvest (i.e., by June or July of the next year).

Each year, after processing is completed and before the next harvest, the partnerships incur significant reconditioning costs to restore their plants. Most of the reconditioning work each year is done and payments are made between January and June. The work is necessary so the plants will be able to process the next crop. The costs are significant, ranging between $16.7 million and $21.1 million during the four years at issue.

Historically, the partnerships have treated

the reconditioning costs as production costs attributable to the crop whose processing necessitated the need to recondition the plants. They have been treated as cost of the products produced and deducted as cost of goods sold (“COGS”) as the year’s processed products are sold.

Fiscal year difference

The problem that gave rise to the tax dispute likely arose because the partnerships have different fiscal years for book and tax purposes and most of the reconditioning expense is incurred between January and June. For book purposes, the partnerships used a natural business year starting July 1 and ending June 30. However, for tax purposes, the partnerships were required to use a calendar year since that was the fiscal year of the majority interest partner.

For book purposes, the partnerships treated the reconditioning costs as related to the processing occurring between July and October, to be deducted as COGS as products produced during that period were sold. This resulted in what the partnerships viewed as a proper matching of the costs to sales. To accomplish the same matching for tax, the partnerships accrued the reconditioning costs at the end of their calendar years, including an estimate of the reconditioning costs to be incurred during the first half of the next tax year. Those costs were treated as costs capitalized to the products processed during the taxable year (i.e., between July and October of the year). A portion of those costs was deducted as COGS as products processed during the tax year were sold. The remainder was capitalized into inventory at year end and deducted as the inventory was sold during the next tax year.

The partnerships have followed that approach for tax purposes since they were founded, and the approach was not previously questioned by the IRS.

The issue

In an audit of the partnerships, the IRS contended they should not be permitted to accrue an estimate of the reconditioning costs for work done after year end (which, as noted above, accounted for a substantial portion of the costs each year).

A taxpayer using the accrual method of accounting can generally accrue a liability “when all events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability.” Treas. Reg. § 1.461-1(a)(2). The IRS contended that the “all events test” was not met with respect to work to be done after year end because the fact of the liability was not established at year end. (The parties agreed that, provided the “all events test” was satisfied, the amount of the liability could be determined with reasonable accuracy and that the economic performance test was met because of the recurring item exception provided that the accrual resulted in a “more proper match against income.”)

The partnerships argued that they had an obligation to incur the reconditioning costs each year comparable to the obligation of a miner to restore strip mined land or the obligation of a driller to properly plug and clean up wells when production was completed. The argued that the obligation arose by virtue of “their credit agreements and multiyear contracts to supply customers with tomato products obligated them to incur the accrued production costs to restore, rebuild, and retest the manufacturing facilities.”

The IRS did not agree and, unfortunately for the partnerships, neither did the Tax Court, which viewed the credit agreements as resulting in “generalized obligations” and that the customer contracts as establishing obligations that occur “before and during the production run of tomato products for a given

customer” which the reconditioning costs “were for goods and services provided after the production run in each year in issue.” Because it concluded the obligation to pay for the goods and services was not fixed at year end, the Tax Court did not address whether the reconditioning costs were better matched to products whose processing resulted in the need for reconditioning or to products that could not have been produced without the reconditioning.

The current appeal to the Ninth Circuit

On appeal, the partnerships are contending that all events had occurred which determine the fact of the liability and that its method resulted in a proper matching of the reconditioning costs to the products whose production resulted in the need for reconditioning. With respect to both arguments, they emphasize their consistent treatment of the items and the IRS failure to challenge that treatment in prior audits. Of course, the Government contends that the Tax Court was correct that the “all events test” was not met.

In addition, the Government contends that the reconditioning costs should be matched against the subsequent year production run. It contends that “full reconditioning is not needed unless and until the equipment is used for another production run” and then identifies reasons why “full reconditioning” might not be needed – e.g., the plant is closed, the equipment is sold, a “short crop or a force majeure event” results in limited production. The Government then asserts:

“In those scenarios, the accrual in Year A of costs for an anticipated all-line reconditioning that never occurred would have improperly reduced their year A income. This shows that the reconditioning costs are best matched forward to the income from the run that they enable rather than backward to products already produced.”

It will be interesting to see how the Ninth Circuit eventually decides this case.

Where will cooperatives end up in the reorganization of Chief Counsel’s PSI Office?

With funding from the Inflation Reduction Act, the IRS is increasing its focus on “highincome compliance issues.” Part of that initiative is a plan to pay more attention to issues related to large or complex passthrough entities.

Last year, the IRS announced its plan to create a new work unit focused on passthrough entities in the IRS Large Business and International (LB&I) division. IR-2023176 (September 20, 2023). The new release quotes IRS Commissioner Danny Werfel as stating:

“This is another part of our effort to ensure the IRS holds the nation’s wealthiest filers accountable to pay the full amount of what they owe. We are honing-in on areas where we believe non-compliance among our wealthiest filers has proliferated over the last decade of IRS budget cuts, and passthroughs are high on our list of concerns. The new unit will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes the owe. These efforts are consistent with our broader commitment to use Inflation Reduction Act dollars to end the era of historically low [audit] rates for wealthy and large entities, while making sure middleand low-income filers continue to see no change in audit rates for years to come.”

Recently, in IR-2024-166 (June 17, 2024), the IRS announced further steps affecting the IRS Chief Counsel organization:

“As part of the increased focus on this area, IRS Chief Counsel Margie Rollinson

announced the creation of a new Associate Office that will focus exclusively on partnerships, S-corporations, trusts and estates.

‘This new Associate office will allow the Chief Counsel organization to focus more directly on this complex area of the tax law and allow more attention to legal guidance and other priorities in the partnership arena,’ Rollinson said.

The Associate Office will be drawn from the current Passthroughs and Special Industries (PSI) Office. The ‘Special Industries’ piece of Chief Counsel’s former PSI Office will form a new Associate office as well to focus on energy, credits and incentives and excise taxes, joining another office that has been focused on clean energy guidance.

The new Chief Counsel office will work in close coordination with IRS business units. This includes LBI, which earlier announced plans to establish a special work group focused on passthroughs, including complex partnerships. Although work has already started in this area, LBI plans to formally establish the new work group this fall.”

Not long after this release, the Marjorie Rollinson cast further light on the reorganization in a speech at a tax conference:

“There will be some restructuring within the IRS chief counsel’s office because PSI’s workload and responsibilities have significantly increased, also due to the 2022 law’s clean energy tax credits [Majorie Rollinson] said. The division has ‘gotten sort of, in my view, too big for itself,’ she said.

The chief counsel’s office will have a new associate division that will focus on partnership energy incentives and excise taxes and another that deals with estates, gift taxes and trusts involving partnerships, according to Rollinson.

‘My vision is these two offices grow pretty dramatically because we need to hire more partnership expertise and we certainly need to hire more credit expertise,’ she said.

“IRS Plans to Quickly Finalize Partnership Basis-Shifting Regs,” by Kat Lucero, LAW360 Tax Authority (June 28, 2024).

For years, the IRS Chief Counsel personnel who oversee Subchapter T issues have been part of Chief Counsel’s PSI Office. It will be interesting to see where cooperatives end up in the reorganization. Will they be part of the new passthroughs Associate Office or continue to be treated a “special industry” in the reorganized Associate Office focused on energy credits and incentives and excise taxes? The issues presented by Subchapter T cooperatives are quite different than those of partnerships and S corporations, so treating Subchapter T cooperatives as a “special industry” would seem more appropriate.

At one time, the IRS devoted significant resources to cooperatives. That is no longer the case. There are relatively few Subchapter T cooperatives. Cooperative audits have never produced significant revenue. For these reasons, the IRS seems to have decided to devote its resources elsewhere. Very few are being audited.

Besides the individuals in the Chief Counsel office, the Examination Division had a Cooperative Industry Specialist in LB&I, who was available as a resource for revenue agents needing assistance with cooperative issues. With the retirement of the person who had for years served as the Cooperative Industry Specialist, the Cooperative Industry Specialist position was quietly eliminated.

Similarly, Appeals had an Appeals Officer that was available to be part of (or as a resource for) a team assigned to cases with cooperative issues. Something similar seems to have happened to that position at Appeals.

As a consequence, the IRS institutional knowledge of cooperatives has suffered.

A Cost-Effective Solution for IT Risks for Small Businesses

EDITOR

INTRODUCTION

Small businesses have been susceptible to information technology (IT) risks from the beginning of the modern technology era beginning with microcomputers in the late 1970s. As early as 1985, the American Institute of Certified Public Accountants (AICPA) issued publications to address IT risks of small businesses (AICPA, 1985). Small businesses are the most vulnerable because they often do not have a sufficient body of internal controls (CPA Australia, 2008).

According to one publication, an analysis of the status of internal controls in small and medium manufacturing businesses shows the following weaknesses (Xiaofang/Huili, 2012):

• The awareness of risk management is not strong

• The construction of an internal control workflow system is ineffective

• The organization of internal controls is unreasonable

Because cooperatives tend to be smaller businesses, they will likely have similar difficulties in developing effective internal controls related to IT. That would be even more difficult for IT risks associated with cyber risks. One expert said it this way:

“I often hear from practitioners that many of their small business and startup clients lack an adequate and effective system of internal control. In fact, the Association of Certified Fraud Examiners’ recent Report of the Nations on Occupational Fraud and Abuse found that small organizations implemented anti-fraud controls much more sparingly than larger organizations.”

Barbara A. Wech, Ph.D. Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham COLLAT School of Business 710 13th St. South Department of Management, Information Systems, & Quantitative Methods Birmingham, Alabama 35233 bawech@uab.edu

GUEST WRITERS

Mark L. Lawrence, Professor Accounting Coordinator, Corporate Accounting 256.765.4332 mlawrence@una.edu 326 Keller Hall, Florence, AL 35632-0001

Tommie W. Singleton, Professor Professor of Accounting 256.765.4100 tsingleton1@una.edu

– Chuck Landes, VP, AICPA

Small business-like entities have limited knowledge and resources to combat cyberrisks to which they are exposed. Sometimes, small business-like entities are targeted

because of that fact. That is, they are an easy target for cyber criminals who assume the success rate for them is much higher in smaller entities than larger entities. There are also other IT risks to systems and technologies.

Solutions for IT risks exist, but often there is a need for multiple tools and solutions each of which can be fairly expensive, and thus difficult for smaller businesses to implement. There will be an identification of IT risks likely to impact cooperatives, potential mitigating controls, and how those controls can be used effectively. There are two controls that small business-like entities can likely afford to implement that should be effectual in mitigating certain IT and cybersecurity risks and threats.

THE IT RELATED RISKS FOR SMALL BUSINESSES

Small businesses, such as most cooperatives, arguably have the most to lose from being hit with a cyberattack. A recent report revealed that businesses with less than 500 employees lose on average $3.21 million per attack (Witts 2024). Losing this amount of money in a cyber breach can be devastating to a cooperative. According to one expert (Witts 2024), the top five biggest cybersecurity threats for small businesses are:

1. Phishing and Social Engineering

2. Ransomware and Malware

3. Weak Passwords

4. Poor Patch Management

5. Insider Threats Ransomware and malware are the most common risks for small businesses (Witts 2024). Therefore, the focus herein will just be on those two cybersecurity risks.

But there are several other IT risks that are also frequent to small businesses. They include IT

risks such as disaster recovery and business continuity,.

Disaster recovery is necessary when a natural or man-made “disaster” destroys or seriously damages the technologies, systems and associated components. Some examples are fire, flood, wind (e.g., hurricane, tornado), and similar calamities. When a disaster occurs, it usually destroys systems, technologies and associated data or at least makes them unusable. Thus, they need to be replaced with an exact duplicate of everything affected. If an entity does not plan for this particular calamity, the results can be devastating on the operations of the business.

Business continuity is a similar risk. The difference between business continuity and disaster recovery is simply the source of the disruption. For disaster recovery, it is a natural-type disaster such as a tornado destroying a building or the planes crashing into the twin towers in New York city on 9/11. A business continuity risk is associated with system failures such as a drive failing to work (1% of drives fail: BackBlaze). Figure 1 shows the various sources and percentages of occurrences from Uptime. The results are similar in that the entity cannot operate with the technologies and systems it had in place earlier. The solution, however, is less in scope and generally speaking easier to “fix” (e.g.,

FIGURE 1: Sources of System Failures

just replace the broken drive). But it too needs some thought before the disruption in services occurs.

FIGURE 2: Ransomware Attacks on Cooperatives

Swedish supermarket chain Coop

Largest ransomware attack ever https:/www.truesec.com/Cases

Crystal Valley (grain elevators)

Both of these present serious risks. For instance, FEMA says that 90% of businesses fail within a year if they are unable to get back up and running within 5 days after a disruption of disaster recovery or business continuity (Invenioit.com, 2024).

Had to revert to pen and paper

https://www.chsinc.com/news/2022/02/24/tips-preventing-cyberattack

Iowa Farming Coop

Russian hackers demanded $5.9 million https://www.washingtonpost.com/business/2021/09/21/new-cooperative-hack-ransomware/

Heritage Cooperative (agriculture)

Over 100 years old, 15,000 customers, 600 employees h # ps://ransomwarea # acks.halcyon.ai/a # acks/cyber-a # ack-on-heritage-coopera 9 ve-play-groupstrikes-with-ransomware

Malware is a broad topic that includes numerous types of cyberattacks such as phishing schemes and ransomware. One objective in malware is a data breach where the cybercriminal seeks valuable data that can be converted into money (e.g., credit card data that can be used to commit credit card fraud). According to one source, 43% of all data breaches are perpetrated on small businesses such as cooperatives (PhoenixNap, 2023).

Data disruptions are common among businesses—95% of companies have experienced a ransomware or malware attack within the last year; 80% stated they had experienced instances of data loss while 43% noted unrecoverable data (ImpactMyBiz, 2021).

experienced a ransomware or malware attack within the last year; 80% stated they had experienced instances of data loss while 43% noted unrecoverable data (ImpactMyBiz, 2021).

National Cyber Security Alliance states that 60 percent of small businesses fold within six months of a cyberattack (Inc. 2024). The article goes on to say “small and midsize firms fall victim to the vast majority of data breaches…”. The author lists four reasons why that is true.

• Lack sufficient security measures and trained personnel.

• Hold data that is valuable to hackers (e.g., credit card information).

• Neglect to use an offsite source or third-party service to back up their files or data.

Ransomware has become rampant as a risk to all businesses. Ransomware is a cyberattack that locks data using encryption and demands a “ransom” from the entity to provide the decryption key. In 2023, ransomware gangs collected a record breaking $1.1 billion in payments, nearly double the amount of the previous year (Invenioit.com, 2024). Some experts estimate that the costs will be $265 billion by 2031 (Invenioit.com, 2024). Ransomware attacks affected over 72% of organizations worldwide (Invenioit.com, 2024). An estimated 71% of ransomware attacks target small businesses. Ransomware is indeed a serious threat to cooperatives. Figure 2 is a list of some cooperatives who became victims of ransomware.

National Cyber Security Alliance states that 60 percent of small businesses fold within six months of a cyberattack (Inc. 2024). The article goes on to say “small and midsize firms fall victim to the vast majority of data breaches…”. The author lists four reasons why that is true.

• Lack sufficient security measures and trained personnel.

• Connect to the supply chain of a larger company and can be leveraged to break in to their customer (the ultimate target).

• Hold data that is valuable to hackers (e.g., credit card information).

Another key cyber risk is phishing. Phishing occurs when a cybercriminal pretends to send a trusted attachment, entices the victim recipient to click on a link with malware, which then downloads and provides the criminal with access to information, accounts, or people that lead to theft of assets.

Data disruptions are common among businesses –95% of companies have

• Neglect to use an offsite source or thirdparty service to back up their files or data.

• Connect to the supply chain of a larger company and can be leveraged to break in to their customer (the ultimate target).

Another key cyber risk is phishing. Phishing occurs when a cybercriminal pretends to send a trusted attachment, entices the victim recipient to click on a link with malware, which then downloads and provides the criminal with access to information, accounts, or people that lead to theft of assets.

In 2021, phishing attacks were responsible for more than 80% of reported security incidents (CISCO, 2021). According to CISCO’s 2021 Cybersecurity Threat Trends report, about 90% of data breaches occur due to phishing. Spear phishing is the most

common type of phishing attack, comprising 65% of all phishing attacks. More than 90% of cyberattacks infiltrate an organization via email. According to the FBI, there has been a 400% increase year-over-year in phishing attacks. Ponemon Institute’s “Ransomware Threat Report” states that 90-95% of successful cyberattacks are caused by a successful phishing attack.

There are many other risks in the arena of IT but these are the primary risks for cooperatives. For instance, someone could commit sabotage to bring down a system or delete data.

The solution to this dilemma could cover a number of tools and controls. But because cooperatives tend to be small businesses and therefore have limited resources, is there a viable but cost-effective solution to these risks? There are two that will be discussed that have the potential to mitigate the risks sufficiently in a cost-effective manner.

EFFECTIVE AND EFFICIENT SOLUTIONS

Disaster recovery has several components to a complete and reliable response. It includes a complete copy of everything from data to software instruction materials. It also requires a backup for the infrastructure in terms of building, power, equipment, computers, paper, applications and everything else involved with IT operations. The backup of data needs to be made regularly where the time between backups is related to the risk and volume of data. Also, the backup of data needs to be offsite in case the disaster destroys the building housing the IT. For example, an ice storm once caused a roof to cave in overnight and destroy all the computers and systems. If the backup device had been in the building, it too would have been destroyed. Finally, the backup needs to be fully tested at least once a fiscal year to make sure the backup can be restored successfully.

However, since cooperatives tend to be small businesses with simple systems, such factors allow for a different approach. If the computers are commercial, off the shelf

computers, and the applications are either in the cloud or commercial software, then restoring the system and network should be fairly easy to restore. Buying new computers and rebuilding the network and systems should be relatively inexpensive, or at least a necessary cost at this point. Thus, the key factor becomes the backup of data. It is quite possible that a sound backup process will suffice for disaster recovery.

In addition, the same should work for business continuity. Again, the IT components affected could probably be replaced easily and somewhat inexpensively. The only thing irreplaceable would be the data. Therefore, a sound data backup should be adequate protection for this risk associated with business continuity.

The most common and deadly cyber attack these days is ransomware. The best way to protect the business systems from ransomware is a protected, separated data backup that is certain to be able to be restored (i.e. the process has been tested for restoration). So once again, a sound data backup control process should be adequate for a ransomware attack. Businesses would need to isolate the systems from further access by the cyber criminals, and then just restore the data backup to get back up and running.

However, 97% of ransomware attacks in 2022 tried to infect both the primary system and remote backup repositories (Invenioit 2023). Therefore, cooperatives need to be sure the backup is safe from the cyber criminals who would try to migrate from the primary system over to the backup and encrypt it as well.

The second key control is related to the stats about how most cyberattacks are preceded by and predicated on a phishing attack. Based on the stats above about phishing, 80% or more of cyberattacks can be eliminated by not opening or clicking on an attachment in a phishing email. This one thing could be the most effective response for cyber crimes and costs very little to implement. All that is needed is employee

cooperation which could be reinforced with training and regular testing or training (e.g., Knowbe4 offers such testing/training). It could be put this way: if you are not expecting an email from THAT source on THAT day, do not open it.

CONCLUSIONS

Small businesses such as cooperatives generally lack a sufficient, effective body of internal controls for protecting IT systems and data. The recommendations above were based on higher likelihood combined with a high probability of substantial costs or losses for certain IT risks. Two key areas were discussed which were the top two on Witts (2024) list of top five cyber risks for small businesses.

First there was a discussion of the systems

REFERENCES:

risks of disaster recovery, business continuity and ransomware. The key response was one that actually applies to all three of those risks, which was an effective data backup and recovery process.

Second, there was a discussion about cyber risks in general and how to develop an effectual response or control. The risks being addressed were phishing and malware (including ransomware). It was suggested that there is a rather simply, cheap control which is to train and encourage employees to not click on email attachments or drive by web sites. “This one thing” can lead to avoiding at least 80% of all cyber risks.

Therefore, a cooperative can develop effective controls for these major risks associated with systems and IT and do so quite cost effectively.

American Institute of Certified Public Accountants, “Audits of small businesses; Auditing procedure study.” (1985), Guides, Handbooks, and Manuals/41.

CISCO. “2021 Cybersecurity Threat Trends Report.” (2021) CPA Australia, “Internal controls for small business.” (2008), p.5.

ImpactMyBiz, “30 Disaster Recovery Stats You Should Know.” (2021), last accessed on 07.04.2024 at https://www.impactmybiz.com/blog/disaster-recovery-stats/

Inc, “60 percent of small businesses fold within 6 months of a cyber attack.” (2018), last accessed on 07.04.2024 at https://www.inc.com/joe-galvin/60-percent-of-small-businesses-fold-within-6-months-ofa-cyber-attack-heres-how-to-protect-yourself.html.

Invenioit. “25 Disaster Recovery Statistics That Prove Every Business Needs a Plan.” (2023), last access on 07.04.2024 at https://invenioit.com/continuity/disaster-recovery-statistics/

Invenioit, “2024 Disaster Recovery Statistics That Prove You’re at Risk.” (2024), last accessed on 07.04.2024 at https://invenioit.com/continuity/business-continuity-statistics/ Landes, Chuck. “4 Critical Reasons Startups and Smaller Organizations Need Internal Control.” (2016). VP Professional Standards and Services, AICPA, Nov. 15, 2016.

PhoenixNap. “Disaster Recovery Statistics Every Business Should Know.” (2023), last accessed on 07.04.2024 at https://phoenixnap.com/blog/disaster-recovery-statistics Uptime Intelligence, “Annual Outages Analysis 2023.” (2023).

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SASAKI Accountancy Corporation

1806 W. Kettleman Lane, Suite H

Lodi, California 95242

209 / 369-3548

Fax 209 / 369-7032

INDEPENDENT AUDITORS’ REPORT

Board of Directors Audit & Finance Committee

National Society of Accountants for Cooperatives

Centerville, OH

Opinion

We have audited the accompanying financial statements of National Society of Accountants for Cooperatives (a notfor-profit organization), which comprise the statements of financial position as of December 31, 2023 and 2022, and the related statements of activities, schedules of expenses by nature and function, and cash flows for the years then ended, and the related notes to the financial statements.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Society of Accountants for Cooperatives as of December 31, 2023 and 2022, and the changes in its net assets and its cash flows for the year th en ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of National Society of Accountants for Cooperatives and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about National Society of Accountants for Cooperatives' ability to continue as a going concern within one year after the date that the financial statements are available to be issued.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with generally accepted auditing standards, we:

 Exercise professional judgment and maintain professional skepticism throughout the audit.

 Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

 Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of National Society of Accountants for Cooperatives' internal control. Accordingly, no such opinion is expressed.

 Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.

 Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about National Society of Accountants for Cooperatives' ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.

Lodi, CA

July 9, 2024

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES

STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2023 AND 2022

ASSETS

LIABILITIES AND NET ASSETS

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF ACTIVITIES FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES

SCHEDULES OF EXPENSES BY NATURE AND FUNCTION

FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022

DECEMBER 31, 2023

Program

DECEMBER 31, 2022

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2023 AND 2022

Note # 1 Nature of Organization and Summary of Significant Accounting Policies

(a) Nature of business

The National Society of Accountants for Cooperatives (NSAC) is a not-for-profit membership organization originally incorporated in Minnesota in 1936. NSAC serves the cooperative accounting community through education programs and professional publications. NSAC's principal revenue sources are its membership dues and conference fees.

(b)

Basis of presentation

The financial statements of NSAC have been prepared in accordance with U.S. generally accepted accounting principles, which require the organization to report information regarding its financial position and activities according to the following net asset classifications:

Net assets without donor restrictions: Net assets that are not subject to donor-imposed restrictions and may be expended for any purpose in performing the primary objectives of the organization. These net assets may be used at the discretion of NSAC management and the board of directors.

Net assets with donor restrictions: Net assets subject to stipulations imposed by donors and grantors. Some donor restrictions are temporary in nature; those restrictions will be met by actions of NSAC or by passage of time. Other donor restrictions are perpetual in nature, where by the donor has stipulated the funds be maintained in perpetuity.

Donor restricted contributions are reported as increases in net assets with donor restrictions. When a restriction expires, net assets are reclassified from net assets with donor restrictions to net assets without donor restrictions in the statement of activities.

(c)

Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures at the date of the financial statements and reported revenues and expenses during the reporting period. Actual results could differ from those estimates.

(d) Cash and cash equivalents and purchase of long-term certificates of deposit

For purposes of reporting cash flows, cash and cash equivalents include checking, savings, and money market accounts and any highly liquid debt instruments purchased with a maturity of three months or less.

(e) Accounts receivable and allowance for credit losses

Accounts receivable are stated at the amount management expects to collect from outstanding balances under the CECL model. Management provides for expected credit losses through a provision for credit loss expense and an adjustment to an allowance account based on its assessment of the current status of individual accounts, historical loss experience, and reasonable and supportable forecasts. Accounts receivable was $0 for the years ending December 31, 2023 and 2022.

(f) Recent accounting pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13: Financial Instruments - Credit Losses (Topic 326), which introduced a new model for measuring credit losses for most financial assets not measured at fair value collectively referred to as the Current Expected Credit Loss (CECL) Model. Under the CECL model, entities are required to estimate credit losses considering historical experience, current conditions, and reasonable and supportable forecasts. NSAC has adopted CECL as of January 1, 2023 using a modified retrospective approach. Adoption only resulted in updated disclosures.

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2023 AND 2022

Note # 1 Nature of Organization and Summary of Significant Accounting Policies (continued)

(g) Revenue recognition

Revenue from contracts with customers is derived primarily from dues income, events, and other income. Revenue is recognized upon transfer of control of the promised products or services (performance obligations) contained in the customer contract in an amount that reflects the consideration NSAC expects to receive from satisfying the performance obligations. Prior to recognizing revenue, NSAC identifies the contract, performance obligations, and transaction price, and allocates the transaction price to the underlying performance obligations.

NSAC’s revenues from contracts with customers are from performance obligations satisfied over time and at a point in time. Revenues from contracts with customers that are satisfied over time is derived from contracts with an initial expected duration of one year or less. Prices are specific to a distinct performance obligation and do not consist of multiple transactions.

Membership dues are billed to members annually on their anniversary date. Membership dues received in advance of a membership year are reported as deferred income. Deferred income also includes sponsorships and registration fees received in advance of the event.

Deferred revenues as of December 31, 2023 and 2022 were as follows:

Membership Dues

Event revenue is comprised of various fees charged for events hosted by NSAC for both members and non-members. NSAC hosts educational and social events for which attendees purchase a ticket or pay a course fee. Revenue is recognized as each performance obligation is satisfied at a point in

Other revenue is recognized over time and at a point in time as the related performance obligations are satisfied.

(h) Investments

NSAC carries investments in marketable securities with readily determinable fair values at their fair values in the Statements of Financial Position. Unrealized gains and losses are included in the change in net assets in the accompanying Statements of Activities.

(i) Income taxes

NSAC is exempt from federal income taxes under Section 501(c)(6) of the Internal Revenue Code. However, income from activities not directly related to an organization’s tax-exempt purposes is subject to taxation as unrelated business income. For the years ended December 31, 2023 and 2022, NSAC had not engaged in activities deemed unrelated to its exempt purposes.

NSAC determines the recognition of uncertain tax positions, if applicable, that may subject the organization to unrelated business income tax by applying a more-likely-than-not recognition threshold and determines the measurement of uncertain tax positions considering the amounts and probabilities of the outcomes that could be realized upon ultimate settlement with taxing authorities.

Currently, the tax years ended December 31, 2022, 2021, and 2020 are open and subject to examination by taxing authorities. time.

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2023 AND 2022

Note # 1 Nature of Organization and Summary of Significant Accounting Policies (continued)

(j) Expense allocation

The costs of providing various programs and other activities have been summarized on a functional basis in the Statements of Activities. Expenses that can be identified with a specific program or supporting service are charged directly to that program or supporting service. Costs common to multiple functions have been allocated based upon management's estimate of how the resource has been consumed.

(k) RDU seminar deposits

RDU Seminar Deposits represents cash held by the Organization on behalf of an unrelated entity. These funds will be returned to the entity upon their request.

Note # 2 Concentration of Credit Risk

NSAC maintains cash balances with Fifth Third Bank, which is insured by the Federal Deposit Insurance Corporation up to $250,000. At December 31, 2023 and 2022, the uninsured balances totaled $17,262 and $0, respectively. NSAC also maintains investments and money market funds at Vanguard Investment Company. These funds are insured under the Securities Investor Protection Corporation which protects the investor only in the event of fraudulent broker activity. At December 31, 2023 and 2022, uninsured investment and money market balances totaled $1,631,524 and $1,467,497, respectively.

Note # 3 Investments

Investment values as of December 31, 2023 and 2022 were as follows:

The following schedule summarizes the investment income in the Statements of Activities for the years ended December 31, 2023 and 2022:

Note

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2023 AND 2022

# 4 Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset in the principal or most advantageous market and assets in an orderly transaction between market participants on the measurement date. Fair value should be based on the assumptions market participants would use when pricing an asset. The modified cash basis of accounting establishes a fair value hierarchy that prioritizes investments based on those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets (observable inputs) and the lowest priority to an entity’s assumptions (unobservable inputs). NSAC groups assets at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 inputs are unadjusted quoted market prices for identical assets or liabilities in active markets as of the measurement date.

Level 2 inputs are other observable inputs, either directly or indirectly, including quoted prices for similar assets/liabilities in active markets; quoted prices for identical or similar assets in non-active markets; inputs other than quoted prices that are observable for the asset/liability; and, inputs that are derived principally from or corroborated by other observable market data.

Level 3 are unobservable inputs that cannot be corroborated by observable market data.

NSAC has determined that the only material financial assets or liabilities that are measured at fair value on a recurring basis and categorized using the fair value hierarchy are investments. For such investments, fair value measurement is based upon quoted prices. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, the U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. All investments at December 31, 2023 and 2022 are measured at Level 1 inputs.

Note # 5 Availability and Liquidity

The following represents the Organization’s financial assets at December 31, 2023 and 2022: 2023 2022 Financial Assets at year-end: Cash & Cash Equivalents 1,050,506 $ 1,173,708 $ Investments 848,280 539,742 Total Financial Assets 1,898,786 $ 1,713,450 $

Less amounts not available to be used within one year: Net assets with donor restrictions -Less net assets with purpose restrictions to be met within less than a year -Financial assets available to meet general expenditures less than a year

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2023 AND 2022

Note # 6 Related Party Transactions and Management Contract

A management services company, Advanced Management Concepts, Inc. (AMC), serves NSAC under a formal management agreement which was in effect through March 31, 2013. The agreement now automatically renews annually unless terminated by either party. Management fees were $125,560 and $122,060 for the years ended December 31, 2023 and 2022, respectively.

NSAC also reimburses AMC on a monthly basis for administrative costs such as postage, telephone, printing and reproduction. The Executive Director of NSAC is an employee and part owner of AMC. As of December 31, 2023 and 2022, NSAC owed AMC $11,922 and $0, respectively.

NSAC has nine affiliate chapters consisting of eight local and one national. NSAC collects dues and event deposits on behalf of its chapters and periodically remits the funds. NSAC will also occasionally pay event deposits or expenses on behalf of chapters to be reimbursed. Amounts owed from its chapters and amounts owed to its chapters are included in Receivable from Chapters and Chapter Dues Payable, respectively, on the Statements of Financial Position.

NSAC also holds the funds for its national affiliate Electric Co-op Chapter and are disclosed as ECC Funds Held for Chapter on the Statements of Financial Position.

Note # 7 Subsequent Events

Management has evaluated subsequent events through July 9, 2024, the date on which the financial statements were available to be issued.