Spring 2020 | The Cooperative Accountant
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CONTENTS
82 ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS –––––––––––––
FEATURES 3 From the Editor By Frank M. Messina, DBA, CPA
4 Utility Cooperative Forum: The Aging Workforce in the Electric Industry: Old Problem, New Solutions By Peggy Maranan, Ph.D.
10 ACCTFAX Bulletin Board By Phil Miller, CPA; Greg Taylor, CPA, CVA, MBA; Bill Erlenbush, CPA
20 TAXFAX By George W. Benson; David F. Antoni, CPA; Ashley Marx; Daniel S. Welytok; Sandra E. Hofmann, CPA
26 From an Auditor’s Perspective By Nick Meuting, CPA, Shareholder, Lindburg Vogel Pierce Faris, Chartered
27 The Leader’s Guide to Managing COVID-19 Panic 30 Small Business Forum: Leading a Team to High Performance By Barbara A. Wech, Ph.D.; Joseph G. Van Matre, Ph.D., Professor; Randeall W. Kornegay
PRESIDENT: *William Miller, CPA Electric Co-op Chapter Bolinger, Segars, Gilbert & Moss, LLP 8215 Nashville Avenue Lubbock, TX 79423
EXECUTIVE COMMITTEE VICE PRESIDENT: *Nick Mueting (620) 227-3522 Mid-West Chapter nickm@.lvpf-cpa.com Lindburg, Vogel, Pierce, Faris, Chartered P.O. Box 1512 Dodge City, KS 67801
President Nick Mueting, CPA Lindburg, Vogel, Pierce, Faris, Chartered
SECRETARY-TREASURER: *Dave Antoni Capitol Chapter KPMG, LLP 1601 Market St. Philadelphia, PA 19103
Vice President David Antoni, CPA KPMG, LLP
(267) 256-1627 dantoni@kpmg.com
Secretary-Treasurer Eric Krienert, CPA Moss Adams LLP
IMMEDIATE PAST PRESIDENT: *Jeff Brandenburg, CPA, CFE (608) 662-8600 Great Lakes Chapter jeff.brandenburg@cliftonlarson ClifftonLarsonAllen LLP 8215 Greenway Boulevard, Suite 600 82 ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS ––––––––––––– Middleton, WI 53562 PRESIDENT: *Indicates Executive Committee Member *William Miller, CPA (806) 747-3806 NATIONAL OFFICE Electric Co-op Chapter bmiller@bsgm.com Bolinger, Kim Fantaci, Executive DirectorSegars, Gilbert & Moss, LLP136 S. Keowee Street 8215Executive Nashville Avenue Jeff Roberts, Association Dayton, Ohio 45402 Lubbock, TX 79423 Tina Schneider, Chief Administrative Officer info@nsacoop.org
Immediate Past President William Miller, CPA Bolinger, Segars, Gilbert & Moss, LLP
Krista Saul, Client Accounting Manager Bill Erlenbush, Director of Education VICE PRESIDENT: *Nick Mueting (620) 227-3522 Phil Miller, Assistant Director of Education Mid-West Chapter nickm@.lvpf-cpa.com THE COOPERATIVE ACCOUNTANT Winter 2018 Lindburg, Vogel, Pierce, Faris, Chartered P.O. Box 1512 Dodge City, KS 67801
At Large Erik Gillam, CPA Aldrich CPAs +Advisors
NATIONAL DIRECTORS
At Large Kent Erhardt CoBank, ACB
SECRETARY-TREASURER: *Dave Antoni Kent Chapter Erhardt Capitol KPMG, LLP Director 1601 Market St. CoBank, ACB Philadelphia, PA 19103
(267) 256-1627 dantoni@kpmg.com
IMMEDIATE PAST PRESIDENT: *Jeff Brandenburg, CPA, CFE (608) 662-8600 Great Lakes Chapter jeff.brandenburg@cliftonlarson ClifftonLarsonAllen LLP 8215 Greenway Boulevard, Suite 600 Jo Ann WI Fuller Middleton, 53562
For a complete listing of NSAC’s National Board of Directors and Director Committees, visit Alabama Farmers *Indicates Executive Committee Member
Mark Feldm Director Crowe LLP
Jeff Krejdl Director Ag Valley
Cooperative, Inc.
www.nsacoop.org NATIONAL OFFICE
Kim Fantaci, Executive Director
136 S. Keowee Street
Jeff Roberts, Association Executive
Dayton, Ohio 45402
Tina Schneider, Chief Administrative Officer
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(806) 747-3806 bmiller@bsgm.com
info@nsacoop.org
Krista Saul, Client Accounting Manager Bill Erlenbush, Director of Education Spring 2020
| The Cooperative Accountant
Eric Krienert, CPA Director THE COOPERATIVE ACCOUNTANT
Phil Miller, Assistant Director of Education
Winter 2018
Tucker Lem Director
From the
Editor
Frank M. Messina, DBA, CPA Alumni & Friends Endowed Professor of Accounting UAB Department of Accounting & Finance Collat School of Business
Not such positive news for farmers. According to federal court data, Reuters has reported that U.S. farm Chapter 12 bankruptcies hit an eight-year high. This even after a projected 1/3 of U.S. farm income came from government aid and taxpayer subsidized commodity insurance payments from the Department of Agriculture. The blame seems to be pointed in many directions. It is time for our government to work together regardless of party lines to help out the farming community. As a late update, the Covid-19 virus has created an unprecedented impact on the daily routine of millions of people in the U.S. and around the world. With closings at all levels of business, schools, churches, factories, government, the travel industry and more and the new normal of social distancing has made it’s way into all our lives. Please stay aware, informed and keep you and your loved ones safe. As I always say – Cooperation is the key! Remember, we too are always looking for you to share your knowledge (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 Dayton, Ohio 45402. Second-class postage paid at Dayton, Ohio and at additional mail offices. 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 at university libraries, government agencies and other libraries (where there is already a current member) at a rate of $130.00 a year. International subscriptions are $150 a year. Land Grant colleges may receive a complimentary copy. Single copies are available at a rate of $25.00 an issue. Postmaster: send address changes to National Society of Accountants for Cooperatives, 136 South Keowee Street, Dayton, Ohio, 45402.
Spring 2020 | The Cooperative Accountant
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Editor & Guest Writer Peggy Maranan, Ph.D (formerly Boldissar) Manager, Financial Accounting LCEC (Lee County Electric Cooperative, Inc.) PO Box 3455 North Fort Myers, FL 33918-3455 Phone (239) 656-2117 peggy.maranan@lcec.net
Old Problem A 2019 Black & Veatch survey of almost 900 electric industry stakeholders asked “From your perspective, what are the most challenging issues facing the electric industry today?” (p. 37). Almost twenty-nine percent of survey respondents named aging workforce as one of the most challenging issues, ranked second only to aging infrastructure as the top response at almost forty-four percent. McDonald (2019), writing for the publication T&DWorld, views “workforce attraction and retention challenges as an existential, business continuity challenge for utilities and related organizations” (para. 6). This challenge of an aging workforce is not isolated to the electric industry, but will influence the workforce across the nation. The United States Senate (2017) published a report on aging in the United States. The report noted that “the number of Americans over age 55 in the labor force is projected to increase from 35.7 million in 2016 to 42.1 million in 2026, and, by 2026, aging workers will make up nearly one quarter of the labor force” (p. 3). Another key finding in this report was that the number of older workers is growing at a rate that outpaces the overall growth of the labor force. Many workers in the electric utility industry have been retiring over the last several years, or will become eligible for retirement in 4
the next several years. The entire electric utility industry has also been experiencing a shrinking pool of highly skilled labor, as not enough young workers are entering into the industry. In some instances, this is leading to high salary demands, especially for those skill sets needed in the workforce that are more limited in supply but high in demand. Riley (2018), published in DailyEnergyInsider, cites the DOE as stating the following: The aging workforce of the electricity sector is not unique in the U.S. economy, yet its specific skills requirements and the importance of the industry to national security and economic prosperity elevate the importance of its workforce management, DOE reported, noting that more than 1.9 million people are employed in jobs related to electric power generation and fuels, and another 2.2 million people work in industries directly or partially related to energy efficiency. (para. 5) Some of the jobs that are unique to the electric industry include lineman, power plant operators, technicians (transmission and distribution), technicians (generation), pipefitters/pipelayers (generation), power engineers, and other engineers. Other engineers include those that focus on nonSpring 2020 | The Cooperative Accountant
UTILITY COOPERATIVE FORUM electrical power systems involved in electric energy service and delivery. For instance, it involves those in planning, research, design, development, construction, installation, operation of equipment, facilities, and those that support systems that provide delivery and control of electricity. Many of these positions may require certifications and years of training and/ or experience. For example, initial training to become a fully educated line worker is between 4.5 and 7 years (DOE, Workforce trends, 2006, p. 7). In addition to these unique industry positions, the electric industry also employs thousands of corporate services employees that fill jobs in customer service, finance, management, and human relations. The skills needed for these latter positions mentioned are more often transferable between industries and may require less specialized electric industry training, although may still require some industry-specific training. The U.S. Department of Energy (DOE) was required to report on workforce trends in the power and energy industries since the time the Energy Policy Act of 2005 was passed. The DOE notes in its January 2017 report “Quadrennial Energy Review Second Installment: Transforming the Nations’ Electricity System” that 25 percent of employees in the electric and natural gas utilities will be ready to retire in less than five years (Chapter 5, p. 11). The DOE has also found over the last decade that hiring qualified engineers would remain a challenge due to fewer universitylevel electrical power-engineering programs offered. Additionally, competition from internet, social media, and electronics-related industries have attracted engineering talent away from the electric industry. Atkinson (2016) notes that “there is a need to develop technical talent to manage all of the changes that will affect the industry: smart grid, smart meter, commercially viable renewable energy, cybersecurity, new demand-side management tools, data gathering and analytics tools and more” (para. 5). Workforce attraction and retention challenges require consistent and ongoing involvement from top management levels within the organization, including the CEO. McDonald recommends four areas for CEO engagement in addressing this challenge: 1. Understand your organization’s evolving needs. New utility business models will drive new business processes. New technology is being introduced and new skill sets are required. Spring 2020 | The Cooperative Accountant
The time is ripe for a holistic approach that addresses all these needs in a unified manner. 2. Assess and adopt a knowledge management platform to formalize processes and procedures for retaining, curating, and transferring knowledge. Both the art and science of managing a utility’s engineering and economic challenges need to be captured now, before generational retirements occur. 3. Put people face-to-face to achieve knowledge transfer. A knowledge management platform supports but does not replace face-to-face mentoring and, equally important, reverse mentoring. The latter brings the most recent education — often in useful software and social media applications — from new graduates to veteran engineers. 4. CEOs and their recruiters must understand millennials’ oft-stated need for socially and environmentally beneficial career roles. Millennials seek a clear career path and advancement commensurate with their abilities. Our industry must build interest in energy-related careers by noting their role in environmental and social responsibility. (para. 6) Atkinson additionally offered some suggestions for electric utilities in addressing workforce challenges: First, they should consider revamping compensation structures and their corporate images to attract and retain technical talent. Second, utilities must reach out to potential employees even earlier than they currently do. For example, PowerPathway, a San Franciscobased Pacific Gas and Electric Co. program, is a collaboration among local colleges, the public workforce development system and IBEW Local No. 1245, designed to enlarge the talent pool of qualified candidates for entrylevel opportunities. (para. 9) The National Association of State Energy Officials (2019) published “The 2019 U.S. Energy & Employment Report” with a key finding noted that hiring difficulty was an ever-present reality in the energy industry. The report stated that “over 75% of employers report difficulty recruiting qualified workers, most often attributed to lack of experience, training, or technical skills” (p. 5). This finding was based upon a survey completed from these five sectors of the economy: Fuels, Electric Power Generation, 5
UTILITY COOPERATIVE FORUM Transmission, Distribution and Storage, Energy Efficiency, and Motor Vehicles. The survey data was from the fourth quarter of 2018, and included approximately 30,000 employers from the databases of the U.S. Bureau of Labor Statistics (BLS) who are required to report quarterly wages information for workers covered by unemployment insurance at the state or federal level. For more specific industry information, the data is further classified into subsectors and according to each firm’s primary business focus under the North American Industrial Classification System (NAICS). For instance, the Electric Power Generation, Transmission and Distribution code is NAICS 2211. Subsector information is available on the website of the U.S. Census Bureau and the Bureau of Labor Statistics. Interestingly, for the utility subsector Transmission, Distribution and Storage (TDS), utilities reported difficulty in hiring as 12% very difficult, 44% somewhat difficult, and 44% not at all difficult (p. 110). So, for the utility subsector TDS as compared to other subsectors, less difficulty overall in hiring was reported. The reasons listed in the utility subsector for hiring difficulties included: ● Lack of experience, training, or technical skills (36%) ● Location (28%) ● Insufficient qualifications, certifications, education (21%) (p. 111) With these challenges, electric companies need to take a solutions-oriented approach, and continue to deploy plans that proactively address the challenge. While some have been working towards addressing this challenge for several years now, it is worth re-visiting some current solutions being deployed by others where they are finding some success in meeting workforce needs. New Solutions Electric cooperatives are advised to identify and analyze workforce needs specific to their organization, and develop a plan of action to ensure workforce needs are met. As part of the plan, an organization may be able to tap into federal, state, local, or industry-specific organizations or resources to assist in meeting plan goals. Some of the avenues that may be available will be discussed, but management is encouraged to research further information in order to learn more about options that may be available to assist with their specific needs. Two important resources for the industry 6
include the DOE and the Center for Energy Workforce Development (CEWD). The DOE offers federal programs to assist in addressing workforce needs for the energy and utility industry through the Jobs Strategy Council (JSC). The role of the Jobs Strategy Council (JSC) is to address skills and training gaps in energy workforce development. Some of the programs available through the JSC consist of the following: ● DOE Workforce Training Programs Summary ● Energy and Advanced Manufacturing
Workforce Initiative
● Utility Industry Workforce Initiative
m Veterans in Energy
● National Lab Directors Group ● Interagency Skills Working Group ● Interagency Working Group on Career
Pathways
● STEM-e ● Place-Based Initiatives ● Promise Zone Workforce Initiatives
More information about these programs and initiatives can be found on the DOE website: https://www.energy.gov/jobstrategycouncil/ energy-jobs-strategy-council-ejsc The CEWD, formed in 2006, is a non-profit organization that consists of a consortium of electric, natural gas, and nuclear utilities related organizations. Some of these include the Edison Electric Institute, American Gas Association, American Public Power Association, Nuclear Energy Institute, National Rural Electric Cooperative Association, and Distribution Contractors Association. The CEWD’s purpose is to help develop solutions to workforce shortages in the utility industry. The CEWD identifies critical workforce needs and measures the success of workforce development initiatives. It also builds career awareness for highly skilled positions in the energy industry. The CEWD works to develop educational and developmental pipelines for companies and workers alike through a multitude of programs. Some of the specific benefits of becoming involved with this group include these listed on their website: ● Communicate solutions and resources to expand and improve Diversity & Inclusion (D&I) initiatives with particular focus on talent development, recruiting, and hiring from local communities. ● Provide support for the creation and sustaining of State Energy Workforce Consortia through Spring 2020 | The Cooperative Accountant
UTILITY COOPERATIVE FORUM state strategic planning and implementation of workforce initiatives. ● Review guidelines for State Energy Workforce Consortia model. ● Provide support for contractor members and promote solutions and partnerships for their unique workforce issues. ● Provide consultation and support to members to support their workforce development implementation efforts and increase participation among member companies. ● Conduct and expand member forums including the CEWD Communities of Practice, the 2019 Annual Summit, National Forum, NEEN Convenings, and Regional Meetings. ● Create mutually beneficial alliances with organizations that support and advance CEWD initiatives. (Strategies & Initiatives: 2020 Strategic Goals section, para. 4) CEWD has also helped launch more than 30 state consortia. These state initiatives provide a more specific focus on meeting the needs for the energy industry workforce specifically in those states. More information about the CEWD and the varying state initiatives can be found on the CEWD website: https://cewd.org/. Besides the state initiatives mentioned above, electric cooperatives are encouraged to seek out other state and local programs that may be available in their specific area to aid in meeting workforce requirements. Some state organizations that may provide helpful support or information include the state’s public service commission, regulatory bodies, or state governmental agencies. The DOE also offers the following suggestions and encourages companies to think out of the box in developing programs of outreach and partnership: In addition to government programs, private partnerships with nonprofit organizations are also focused on increasing the inclusiveness of the energy sector workforce. GRID Alternatives, together with SunEdison, created the Realizing an Inclusive Solar Economy Initiative, which focuses on recruiting members of underrepresented communities for jobs in the solar industry—providing solar installation training, working with the solar industry to identify needed skills for the trainings, linking trained candidates with available employers, and ensuring the retention of a diverse workforce in the industry. Additional targeted Spring 2020 | The Cooperative Accountant
initiatives include the Utility Industry Workforce Initiative, where CEWD joined with the Departments of Energy, Labor, Defense, and Veterans Affairs; the International Brotherhood of Electrical Workers; and the Utility Workers Union of America to increase hiring rates of veterans in the industry. Helmets to Hardhats, run by the North American Building Trades Unions, also trains veterans for the construction and utility industries. (Transforming the nation’s electricity sector, 5-27) With the recent proliferation of renewable energy technologies, there may also be initiatives available at the national, state or local level to help prepare the industry for the influx of new technologies and markets that are emerging. There are many new and developing programs available in the renewable energy space, and these can be helpful depending upon the extent of renewable energy activity within a company’s specific territory. In addition to federal, state, and local initiatives, electric companies are advised to tap into industry resources. For instance, the Institute of Electrical and Electronics Engineers (IEEE) Power & Energy Society’s Scholarship Plus initiative provides financial assistance, recognition, and industry exposure to students worldwide who choose to focus on power and energy within the electrical engineering field. The IEEE PES Careers for Employers online program helps employers meet their workforce needs by connecting them with electrical engineering students with a demonstrated interest in the field. Other industry organizations include those as previously listed in the consortium of CEWD groups. Individually, these industry organizations also serve as resources to assist in varying ways to help companies within the industry attract and maintain talent. For electric cooperatives, they would also be encouraged to work with their statewide or regional cooperative groups to ask about other avenues of information or support available for assistance. In researching some of the specific ways that companies have attempted to meet workforce needs, a list has been provided below of recently implemented initiatives across the utility industry that are solutions-focused. While this list is not exhaustive of all solutions implemented, it is being offered in order to provide some examples that may be helpful or trigger further discussion within an organization of potential initiatives 7
UTILITY COOPERATIVE FORUM to consider adopting. Some of the solutions included: ● Offering apprenticeship programs, on-the-job learning programs, student internships ● Establishing relationships with vocational training programs ● Outreach through YouTube Channels, other social media ● Designation of a skills ambassador to address students ● Providing scholarships or sponsoring contents for high school and college students that promote industry jobs ● Donating time or electrical equipment to educational programs ● Participating in job fairs, career day events (some used interactive activities during these events to draw further participant interest) ● Reaching out to midlife students who want to change careers or start a new career ● Taking advantage of programs designed to bring returning military veterans into the energy industry ● Working with Diversity & Inclusion (D&I) programs to identify job candidates ● Participating in programs to attract talent from other countries ● Deploying educational campaigns ● Re-visiting compensation programs for both hiring and retention ● Sponsoring and encouraging company management to serve on boards or committees at colleges, universities, trade schools, high schools (participate in addressing curricula designed to meet the needs of the industry, and help build pipeline for future qualified workforce needs) ● Actively participating and promoting STEMrelated education in the schools ● Promoting financial assistance, workforce recognition, and industry exposure of workforce needs ● Approaching unions to work together in meeting workforce needs ● Considering joining membership in varying organizations designed to address and promote workforce needs of industry ● Seeking out public, private, or industry jobs programs where partnering opportunities may exist Besides having a solid company plan and goals to address the aging workforce strategies, the company’s Human Resource (HR) department 8
can also play a vital role in helping to meet aging workforce needs. Some of the recent initiatives undertaken by HR departments included revamping and reinvigorating the talent management process, driving succession planning two layers deep, establishing targeted development programs, identifying and anticipating skill set needs, and re-visiting recruitment and hiring processes. Many have been implementing formal company programs focusing on key areas such as workforce planning, talent management, knowledge transfer, and college/high school/trade school partnerships. Some electric companies are not filling every position made available from retirement, but instead are implementing a workforce plan that more specifically defines what the business needs now and in the future, and are making hiring decisions accordingly. Conclusion The current workforce trends for electric utilities includes a continuing focus on the challenges of the aging workforce, along with the challenges brought by new technology. Cooperative leadership is continuing to deploy programs to capture, manage, and transfer the knowledge base from retiring and experienced workers to current workers. Additionally, many activities to attract and retain new talent with skill sets needed have been deployed and continue with high priority. While the aging workforce presents one challenge in being able to keep ample supply of skilled workers, the new expanding workforce in the renewables and information technology industries is also competing for similar resources. This is adding more pressure to companies that have already been trying to attract and retain positions for its traditional core business activities. New technologies such as distributed generation, battery storage, and smart home devices have led to many new jobs and employment opportunities in these areas. The electric industry will continue to experience the need for a cross-disciplinary power grid workforce that can understand, design, and manage both cyber and physical systems in increasingly modernized grid infrastructures. There will be a need for increasingly sophisticated skill sets, all this while competing against workforce demands of other emerging energy and technology industry job opportunities. This does present some unique challenges to electric cooperatives. Spring 2020 | The Cooperative Accountant
UTILITY COOPERATIVE FORUM Scott Madden (n.d.), a consultant in the energy industry, recently interviewed Maria Smedley of Arkansas Electric Cooperative Cooperation (AECC) regarding the impacts of the aging workforce. Ms. Smedley is vice president of human resources and strategy for (AECC), in Little Rock, AR, and she shared her thoughts and experiences on the topic. She noted that this industry has historically been known for attracting and retaining long-term employees due to the pay and benefits, and the expertise needed and acquired by long-term employees. Due to this, there were periods of years where there was not a lot of hiring taking place. This caused a gap in maintaining a pipeline of up and coming talent in development behind the longer-tenured employees. This trend has been partially adding to the challenges of meeting current workforce needs. However, Ms. Smedley noted that by 2025 she believes that retirements within the
cooperative utility industry will be on the decline. She stated: We will be doing a lot of hiring and looking for new talent. We’ll probably have to get a lot of that talent from other industries. I think we’re going to look and operate differently, because we are going to have such a diverse new mix of employees bringing new ideas and new ways of doing things. Also, technology will continue to drive how we operate our business as well. (para. 16) Even if retirements are expected to begin to decline within the next five years or so, the landscape and fabric of the workforce will continue to change fairly dramatically leaving the electric utility workforce forever changed moving forward. Continued attention to proper planning and deployment of programs designed to address workforce needs will remain a key area of risk and focus of management for years to come.
References Atkinson, W. (Aug. 2016). Maintaining The Electric Utility Workforce. Electrical Contractor Magazine. Retrieved February 18, 2020 from the following website: https://www.ecmag.com/section/your-business/maintainingelectric-utility-workforce Black & Veatch. (2019). 2019 Black & Veatch Strategic Directions: Electric Report. Retrieved February 18, 2020 from the following website: https://www.bv.com/resources/2019-strategic-directions-electric-report Center for Energy Workforce Development (CEWD). (n.d.). Strategies & Initiatives: 2020 Strategic Goals, Retrieved February 18, 2020 from the following website: https://cewd.org/about/strategies-initiatives/ McDonald, J. D. (Sept. 10, 2019). Meeting the Utility Workforce Challenge. Retrieved February 18, 2020 from the following website: https://www.tdworld.com/safety-and-training/article/20973078/meeting-the-utilityworkforce-challenge The National Association of State Energy Officials. (2019). The 2019 U.S. Energy & Employment Report. Retrieved February 18, 2020 from the following website: https://www.naseo.org/data/sites/1/documents/ publications/USEER-2019-US-Energy-Employment-Report1.pdf Riley, K. (April 12, 2018). NARUC task force directs utilities, regulators toward workforce reinforcements. Retrieved February 18, 2020 from the following website: https://dailyenergyinsider.com/reports/11816-naructask-force-directs-utilities-regulators-toward-workforce-reinforcements/ ScottMadden.com. (n.d.). Mitigating Repercussions of an Aging Workforce. Retrieved February 18, 2020 from the following website: https://www.scottmadden.com/insight/mitigating-repercussions-of-an-aging-workforce/ United States Department of Energy (DOE). (January, 2017). Quadrennial Energy Review Second Installment: Transforming the Nations’ Electricity System. Retrieved February 18, 2020 from the following website: https:// www.energy.gov/sites/prod/files/2017/02/f34/Chapter%20V--Electricity%20Workforce%20of%20the%2021stCentury--Changing%20Needs%20and%20New%20Opportunities.pdf Department of Energy (DOE). (August, 2006). Workforce Trends in the Electric Utility Industry – A Report to the United States Congress Pursuant to Section 1101 of the Energy Policy Act of 2005. Retrieved February 18, 2020 from the following website: https://www.energy.gov/oe/downloads/workforce-trends-electric-utility-industry United States Senate. (December, 2017). America’s Aging Workforce: Opportunities and Challenges, Special Committee on Aging. Retrieved February 18, 2020 from the following website: https://www.aging.senate.gov/ imo/media/doc/Aging%20Workforce%20Report%20FINAL.pdf Spring 2020 | The Cooperative Accountant
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GENERAL EDITOR Philip W. Miller, CPA Assistant Education Director NSAC 18 Tow Path Lane South Richmond, VA 23221 (804) 339-9577 pwm01@comcast.net ASSISTANT EDITORS Greg Taylor, CPA, CVA, MBA Shareholder Williams & Company (806) 785-5982 gregt@dwilliams.net
By Phil Miller, NSAC Assistant Education Director
FASB PROPOSES CLARIFICATIONS TO CERTAIN AREAS OF THE DERIVATIVES AND HEDGING STANDARD On November 12, 2019, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) to clarify certain sections of its 2017 hedge accounting standard. Stakeholders were asked to review and comment on the proposed ASU by January 13, 2020. The proposed ASU primarily addresses the change in hedged risk in a cash flow hedge. The 2017 guidance allowed the risk causing variability in cash flows of the forecasted transaction to change (for example, from one variable interest rate to another variable interest rate or from one commodity index to a different index for the same commodity) if certain criteria are met. The proposed ASU would clarify whether that change can happen both prospectively (that is, before the forecasted transaction occurs) and retrospectively (that is, after the forecasted transaction occurs) and, if so, how hedge accounting guidance should be applied in those instances. The proposed ASU, as well as a FASB In Focus is available at www.fasb.org. FASB ISSUES NARROW-SCOPE IMPROVEMENTS TO CREDIT LOSSES STANDARD On November 26, 2019, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that addresses issues raised by stakeholders during the implementation of Accounting Standards Update No. 2016-13, 10
Bill Erlenbush, CPA NSAC Education Director (309) 530-7500 nsacdired@gmail.com
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. “After issuing the current expected credit losses standard – also known as CECL – in 2016, the FASB received questions about certain confusing areas of the guidance,” explained FASB Chairman Russell G. Golden. “The new ASU clarifies these areas of the guidance to ensure all companies and organizations can make a smoother transition to the standard.” Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset – but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-forsale debt securities. The ASU is available at www.fasb.org. FASB ISSUES STANDARD TO IMPROVE ACCOUNTING FOR INCOME TAXES On December 18, 2019, the Financial Accounting Spring 2020 | The Cooperative Accountant
ACCTFAX Standards Board (FASB) issued an Accounting Standards Update (ASU) expected to reduce cost and complexity related to accounting for income taxes. The ASU removes specific exceptions to the general principles in Topic 740 – Income Taxes in Generally Accepted Accounting Principles (GAAP). It eliminates the need for an organization to analyze whether the following apply in a given period: ● Exception to the incremental approach for intraperiod tax allocation ● Exceptions to accounting for basis differences when there are ownership changes in foreign investments, and ● Exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: ● Franchise taxes that are partially based on income ● Transactions with a government that result in a step up in the tax basis of goodwill ● Separate financial statements of legal entities that are not subject to tax, and ● Enacted changes in tax laws in interim periods. The ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. The ASU is available at www.fasb.org. RICHARD R. JONES APPOINTED CHAIR OF THE FINANCIAL ACCOUNTING STANDARDS BOARD On December 19, 2019, the Board of Trustees of the Financial Accounting Foundation (FAF) announced that it has appointed Richard R. Jones as the next chair of the Financial Accounting Standards Board (FASB). Mr. Jones succeeds Russell G. Golden, and his appointment is effective July 1, 2020. Mr. Jones is expected to join the organization in early 2020 in order to enable a smooth, orderly leadership transition for the FASB. Mr. Jones is chief accountant and partner at Ernst & Young LLP (EY), leading a large and diverse team of EY professional colleagues in the firm’s national office. Mr. Jones has spent his entire career at EY, joining in 1987 following his graduation with a BS in accounting from the Spring 2020 | The Cooperative Accountant
State University of New York, Binghamton. Mr. Jones held the title of assurance staff and senior manager from 1987–2000 and was promoted to assurance partner in 2000. In 2008, he was named director, consultations, and he was appointed to his current post in 2014. As EY’s chief accountant, Mr. Jones leads the effort to help the firm’s clients and engagement teams understand accounting requirements, develop the firm’s views on proposed accounting standards, and oversee EY’s accounting publication efforts across all sectors: public companies, private companies, not-for-profit organizations, employee benefit plans, and government entities. He is also the author of numerous EY technical publications. Mr. Jones previously served on the Financial Accounting Standards Advisory Council (FASAC) from 2016 to 2018. He was also a member of the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA) from 2003–2008. FASB CLARIFIES THE INTERACTION BETWEEN THE ACCOUNTING FOR EQUITY SECURITIES, EQUITY METHOD INVESTMENTS, AND CERTAIN DERIVATIVE INSTRUMENTS On January 16, 2020, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that clarifies the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives. The ASU is based on a consensus of the FASB’s Emerging Issues Task Force (EITF). In 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which added Topic 321, Investments – Equity Securities, and made targeted improvements to address certain aspects of accounting for financial instruments. Among other changes, the ASU provided a company with the ability to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs (the measurement alternative). Stakeholders asked the FASB to clarify how this guidance should interact with equity method investments. The new ASU clarifies that a company should consider observable transactions that require a company to either apply or discontinue the 11
ACCTFAX equity method of accounting under Topic 323, Investments – Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The changes in Update 2016-01 also prompted stakeholders to ask whether certain forward contracts and purchased options should be accounted for in accordance with Topic 321, Topic 323, or Topic 815, Derivatives and Hedging. The new ASU clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The ASU is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. It is available at www.fasb.org. SEC PROPOSES TO MODERNIZE AUDITOR INDEPENDENCE RULES On Dec. 30, 2019, the Securities and Exchange Commission announced that it is proposing amendments to codify certain staff consultations and modernize certain aspects of its auditor independence framework. The proposed amendments would update select aspects of the nearly two-decade-old auditor independence rule set to more effectively structure the independence rules and analysis so that relationships and services that would not pose threats to an auditor’s objectivity and impartiality do not trigger non-substantive rule breaches or potentially time consuming audit committee review of nonsubstantive matters. Since the initial adoption of the auditor independence framework in 2000 and revisions in 2003, there have been significant changes in the capital markets and those who participate in them. The proposed amendments primarily focus on fact patterns presented to Commission staff through consultations that involve a relationship with, or services provided to, an entity that has little or no relationship with the entity under audit, and no relationship to the engagement team conducting the audit. In these scenarios the staff regularly observes that the audit firm is objective and impartial and, as a result, does not object to their continuing the audit relationship with the audit client. 12
The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register. SEC PROPOSES TO MODERNIZE AND ENHANCE FINANCIAL DISCLOSURES On Jan. 30, 2020, the Securities and Exchange Commission announced that it has voted to propose amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. The proposed amendments would eliminate duplicative disclosures and modernize and enhance Management’s Discussion and Analysis disclosures for the benefit of investors, while simplifying compliance efforts for companies. The Commission also announced that it is providing guidance on key performance indicators and metrics in Management’s Discussion and Analysis. Background These proposals are part of a comprehensive evaluation of the Commission’s disclosure requirements that was recommended in the staff’s Report on Review of Disclosure Requirements in Regulation S-K (“S-K Study”). The report was mandated by Section 108 of the Jumpstart Our Business Startups Act. Based on the S-K Study’s recommendation, the staff initiated an evaluation of the information the SEC rules require companies to disclose, how this information is presented, where this information is disclosed, and how they can better leverage technology as part of these efforts (collectively, the “Disclosure Effectiveness Initiative”). The overall objective of the Disclosure Effectiveness Initiative is to improve the disclosure regime for both investors and companies. Highlights The proposed amendments would eliminate Item 301 (selected financial data) and Item 302 (supplementary financial data) and amend Item 303 (management’s discussion and analysis). The proposed amendments are intended to modernize, simplify, and enhance the financial disclosure requirements by reducing duplicative disclosure and focusing on material information in order to improve these disclosures for investors and simplify compliance efforts for registrants. Among other things, the proposed amendments to Item 303 would: ●
Add a new Item 303(a), Objective, to state the principal objectives of MD&A. Spring 2020 | The Cooperative Accountant
ACCTFAX ●
Replace Item 303(a)(4), Off-balance sheet arrangements, with a principles-based instruction to prompt registrants to discuss off-balance sheet arrangements in the broader context of MD&A. ● Eliminate Item 303(a)(5), Tabular disclosure of contractual obligations given the overlap with information required in the financial statements and to promote the principles-based nature of MD&A. ● Add a new disclosure requirement to Item 303, Critical accounting estimates, to clarify and codify existing Commission guidance in this area; and ● Revise the interim MD&A requirement in Item 303(b) to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter. ● The proposal also includes certain conforming amendments, including to Forms 20-F and 40F, as appropriate. The guidance provides that, where companies disclose metrics, they should consider whether additional disclosures are necessary and gives examples of such disclosures. The guidance also reminds companies of the requirements in Exchange Act Rules 13a-15 and 15d-15 to maintain disclosure controls and procedures and that companies should consider these requirements when disclosing metrics. The comment period for the proposal will remain open for 60 days following publication in the Federal Register. The guidance will be effective upon publication in the Federal Register. IASB PROPOSES NEW STANDARD ON GENERAL PRESENTATION AND DISCLOSURES IN FINANCIAL STATEMENTS On Dec. 17, 2019, the International Accounting Standards Board (IASB) published the exposure draft of a new standard ‘General Presentation and Disclosures’ that is intended to replace IAS 1 ‘Presentation of Financial Statements’. Comments are requested by June 30, 2020. Background The Agenda consultation 2015 revealed that respondents wanted the Board to prioritize projects that are important to users of financial statements, including the disclosure initiative and the primary financial statements project. The Spring 2020 | The Cooperative Accountant
Board took up discussions in the project in April 2016. The Board decided to focus on four main areas: ● Introduction of defined subtotals and categories in the statement of profit or loss ● Introduction of requirements to improve aggregation and disaggregation ● Introduction of Management Performance Measures (MPMs) and accompanying disclosures in financial statements ● Introduction of targeted improvements to the statement of cash flows In May 2019, the Board also decided that a discussion paper is not required and that as a next project step, the Board will develop an exposure draft for a new standard replacing IAS 1 Presentation of Financial Statements. The related requirements in IAS 1 will be brought forward to the new standard with limited wording changes. Other requirements of IAS 1 will be moved to IAS 8 (which would be renamed to Basis of Preparation, Accounting Policies, Changes in Accounting Estimates and Errors) and IFRS 7. Key proposals On the four above mentioned areas, ED/2019/7 General Presentation and Disclosures proposes the following: ● The introduction of defined subtotals and categories in the statement of profit or loss aims at additional relevant information and a P&L structure that is more comparable between entities. ● Require entities to present separately ‘integral’ and ‘non-integral’ associates and joint ventures in statements of financial performance and cash flows. ● The introduction of requirements to improve aggregation and disaggregation aims at additional relevant information and ensuring that material information not being obscured. ● Require the entities to identify assets, liabilities, equity, income and expenses that arise from individual transactions or other events and classify them into groups based on shared characteristics. ● Define unusual income and expenses as income and expenses with limited predictive value when it is reasonable to expect that income or expenses that are similar in type and amount will not arise for several future annual reporting periods. ● The introduction of Management Performance Measures (MPMs) and accompanying 13
ACCTFAX disclosures in the financial statements aims at transparency and discipline in the use of such measures and disclosures in a single location. MPMs can be non-financial performance measures or financial performance measures. Comments on the proposals are requested by June 30, 2020. The ED does not contain a proposed effective date, as the IASB will decide on the effective date only upon completion of its re-deliberations. The expectation is currently that the standard will become effective approximately 18-24 months after being published in its finalized form. The standard would be applied retrospectively, and early adoption would be permitted. IASB FINALIZES AMENDMENTS TO IAS 1 TO CLARIFY THE CLASSIFICATION OF LIABILITIES On January 23, 2020, the International Accounting Standards Board (IASB) issued ‘Classification of Liabilities as Current or Non-Current (Amendments to IAS 1)’ providing a more general approach to the classification of liabilities under IAS 1 based on the contractual arrangements in place at the reporting date. Background The issue was originally addressed as part of the annual improvements project 2010 -2012 cycle. Exposure Draft ED/2012/1 Annual Improvements to IFRSs (2010 – 2012 Cycle), published in May 2012, proposed amendments to IAS 1.73 to clarify that a liability is classified as non-current if an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility with the same lender, on the same or similar terms. During 2013, however, the IASB decided not to finalize the amendment, but instead pursue a narrow-scope project to refine the existing guidance in IAS 1 on when liabilities should be classified as current. Amendments The amendments in Classification of Liabilities as Current or Non-Current (Amendments to IAS 1) affect only the presentation of liabilities in the statement of financial position – not the amount or timing of recognition of any asset, liability income or expenses, or the information that entities disclose about those items. They: ● Clarify that the classification of liabilities as current or non-current should be based on 14
rights that are in existence at the end of the reporting period and align the wording in all affected paragraphs to refer to the “right” to defer settlement by at least twelve months and make explicit that only rights in place “at the end of the reporting period” should affect the classification of a liability; ● Clarify that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability; and make clear that settlement refers to the transfer to the counterparty of cash, equity instruments, other assets or services. The amendments are effective for annual reporting periods beginning on or after January 1, 2022 and are to be applied retrospectively. Earlier application is permitted. Resources: Deloitte IASPLUS (February 2020). News. Retrieved from https://www.iasplus.com. IFRS (February 2020). Latest News. Retrieved from https://ifrs.org. FASB (February 2020). In The News… Retrieved from https://fasb.org. SEC (February 2020). Press Releases. Retrieved from https://www.sec.gov. FASB UPDATE Editor’s Note: The following is a summary of FASB updates presented in August 2019 at the TFACC in Denver, and a very recent CLN (webinar). Both were presented by Jeff Gabello, FASB Supervising Project Manager. The information included here includes my references to the material presented by Mr. Gabello in the two presentations. I supplemented Jeff’s material with material derived from FASB’s website. Official positions of the FASB on accounting matters are reached only after extensive due process and deliberations. The material was presented in three segments: one, an introduction to FASB and their process; two, a new standards/implementations segment; and three, a segment on current/ongoing projects. The new standards/implementations discussed were: Leases, Credit Losses, Hedge Accounting, Cloud Computing, and Nonemployee Share-Based Payments. The current projects discussed were: Income Tax Projects, Market Transition from LIBOR, Segment Reporting, Distinguishing Liabilities from Equity, Simplifying the Balance Sheet Classification of Debt, and Private Company Council Issues. Spring 2020 | The Cooperative Accountant
ACCTFAX FASB Board Members FASB board members are appointed to five-year terms and each can serve a second five-year term. Currently, the Board consists of seven members” Russ Golden (Chairman), Jim Kroeker (ViceChairman), Christine Botosan, Gary Buesser, Sue Casper, Marsha Hunt, and Hal Schroeder. [1] [2] Diversity of Views… The FASB’s approach to developing and implementing new standards always includes gathering information and viewpoints from a diverse group of stakeholders. Advisory groups available to FASB include the Financial Standards Advisory Council, the Small Business Advisory Committee, the Investor Advisory Committee, and the Not-for-Profit Advisory Committee. Input on proposals is gathered by way of Technical Inquiries, Comment Letters, and Liaison Meetings. Fasb’s outreach to investors includes Roundtables, Roadshows and calls to individual investors and groups of investors. They consult with the Private Company Council, the Emerging Issues Task Force and other project working groups. New standards always include extensive post-implementation reviews. [1] [2] FASB Technical Staff As you would expect, the FASB employs an impressive technical staff. The current Acting Technical Director is Shayne Kuhaneck who was appointed to that position in May of 2019. Shayne is directly supported by 6 Assistant Directors. Permanent staff consists of approximately 20 Project Managers. Jeff Cabello is one of this group, serving as a Supervising Project Manager. Standards setting activities are further supported by approximately 6 Practice Fellows from audit firms and industry – serving on a 2-year rotation. Further support comes from 13 Postgraduate Technical Assistants who serve 1-year appointments. Together the FASB, the Financial Accounting Foundation (FAF), and the Governmental Accounting Standards Board (GASB) have approximately 160 employees. [1] [2] Developing an ASU Issues that may eventually become updates to the Codification are raised through various sources. These can include research related to active projects, outreach with stakeholders, from Board meetings and Board decisions. These issues can lead to Proposed ASUs (Exposure Drafts), followed by extensive analysis of Comment letters and reSpring 2020 | The Cooperative Accountant
deliberations. This will lead to issuance of a final ASU, followed by post-implementation activities. [1] [2] FASB Implementation Web Portal An important part of the FASB’s mission of developing high-quality standards is monitoring implementation. The FASB accomplishes this by assisting preparers and other practitioners in their understanding and ability to consistently apply new standards. Last month the FASB launched a new implementation web portal that acts as a “one-stop-shop” for educational materials and implementation guidance for FASB’s major standards. [3] Currently, the portal contains links to implementation guidance for the following: ● Revenue Recognition ● Leases ● Credit Losses ● Not-for-Profit Financial Reporting ● Hedging ● Other standards. The educational resources section for each of the above topics also includes an easy-access link to the FASB Technical Inquiry Service, a service provided by FASB staff to answer questions submitted by stakeholders about various standards. Questions submitted through the portal also help staff members identify ways to make accounting standards easier to use and understand. Other resources include links to FASB In Focus and Understanding Costs and Benefits documents, videos and investor podcasts, and Taxonomy implementation information. For standards with Transition Resource Groups (TRGs) – Revenue Recognition and Credit Losses – the portal contains links to all TRG materials. These include meeting minutes that contain solutions to commonly expressed stakeholder questions. For the Leases and other standards that do not have TRGs, other materials are highlighted. For example, the Leases portal includes links to four educational videos, including three specifically focused on implementation: ● Putting Leases on the Balance Sheet ● Leases: A Quick Example of the Display Approach ● A Wolfe Research “Accounting for Leases” Primer featuring FASB Member Marc Siegel. The Leases and other portals will be updated with new educational resources as they become 15
ACCTFAX available. To launch the new portal, the FASB also produced a video that provides an overview of how the FASB supports implementation of all its standards. [3] Leases – Standard Setting Activities On February 25, 2016, the FASB issued an Accounting Standards Update (ASU) intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets – referred to as “lessees” – to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP – which requires only capital leases to be recognized on the balance sheet – the new ASU will require both types of leases to be recognized on the balance sheet. For public companies, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Thus, for a calendar- year company, it would be effective January 1, 2019. For all other organizations, the ASU is effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all organizations. Additional Leases standard setting related activities include: ● Land easements ASU (Issued January 2018 Update 2018-01) ● Technical corrections ASU (Issued July 2018 Update 2018-10) ● Targeted Improvements ASU (Issued July 2018 - Update 2018-11) ● Narrow-Scope Improvements for Lessors (Issued December 2018 - Update 2018-20) ● Proposed ASU – Codification Improvements for Lessors (Issued March 2019 - Update 2019-01) [1] [2] Current Expected Credit Losses (CECL) On June 16, 2016, the FASB issued an Accounting 16
Standards Update (ASU) that improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. The ASU on credit losses will take effect for U.S. Securities and Exchange Commission (SEC) filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other organizations, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The scope of CECL includes: ● Debt instruments (amortized cost) ● Trade receivables ● Reinsurance receivables ● Loan commitments ● Financial guarantees ● Net investment in leases ● AFS debt securities (AFS Credit Loss Model) CECL does not apply to: ● Billed operating lease receivables ● Defined contribution employee benefit plan loans ● Policy loan receivables of insurance entity ● Promises to give (pledges receivable) of NFPs ● Related party loans between entities under common control Spring 2020 | The Cooperative Accountant
ACCTFAX Customer’s Accounting for a Cloud Computing Arrangement That Is Considered a Service Contract (EITF Issue) On August 29, 2018 the FASB issued an Accounting Standards Update (ASU) that reduces complexity for the accounting for costs of implementing a cloud computing service arrangement. The ASU is based on a consensus of the FASB’s Emerging Issues Task Force (EITF) (Issue No. 17-A). The ASU aligns the following requirements for capitalizing implementation costs: ● Those incurred in a hosting arrangement that is a service contract ● Those incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ● Implementation costs of CCAs that are service contracts would be accounted for in accordance with the guidance in Subtopic 350-40 on internal-use software ● The amortization period of the capitalized implementation costs would include periods covered by renewal options of the CCA that are reasonably certain to be exercised The ASU includes new presentation criteria: ● The amortization of the capitalized costs would be recorded in the same line item on the income statement as the hosting fees ● The capitalized implementation costs would be presented on the balance sheet in the same line item as a prepayment of the hosting fees ● Cash flow classification would be the same as the hosting fees For calendar-year public companies, the changes will be effective for annual periods, including interim periods within those annual periods, in 2020. For all other calendar-year companies and organizations, the changes will be effective for annual periods in 2021, and interim periods in 2022. [1][2] Nonemployee Share-Based Payments On June 20, 2018, the FASB issued an Accounting Standards Update (ASU) intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments. The ASU expands the scope of Topic 718, Compensation – Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Spring 2020 | The Cooperative Accountant
Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity – Equity-Based Payments to NonEmployees. The amendments in this ASU were effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other companies, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption was permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. On March 4, 2019, the FASB issued a proposed Accounting Standards Update (ASU) intended to increase stakeholder awareness of the amendments in Update 2018-07 and to expedite the improvements process. The amendments in this proposed Update would require entities to measure and classify share-based payments to a customer by applying the guidance in Topic 718. The amount that would be recorded as a reduction in revenue would be measured on the basis of the grant-date fair value of the share-based payment in accordance with Topic 718. The grant date is the date at which a grantor (supplier) and a grantee (customer) reach a mutual understanding of the key terms and conditions of a share-based payment award. The classification and subsequent measurement of the award would be subject to Topic 718 unless the share-based payment award is subsequently modified and the grantee is no longer a customer. A final Update is expected in Q4 2019. [1][2] Current – Ongoing Projects Effective Dates The FASB is considering a potential change in Effective Date philosophy. A major standard that takes effect for an SEC filer (large publicly traded company) would take effect two years later for smaller public and private organizations. Here are examples of how this change would current effective dates: Hedging: SEC filers – January 2019; all other public business entities – January 2019; private and all others would change from January 2020 to January 2021. Leases: SEC filers – January 2019; all other public business entities – January 2019; private and all others would change from January 2020 to January 2021. 17
ACCTFAX CECL: SEC filers – January 2020; all other public business entities - would change from January 2021 to January 2023; private and all others would change from January 2021 to January 2023. [1][2] Income Tax Projects – Codification Topic 740 The objective of this project is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes, and by clarifying and amending guidance that already exists within generally accepted accounting principles (GAAP). The Board has heard from stakeholders that accounting for income taxes is unnecessarily complex. Stakeholders submitted an agenda request with certain suggestions for simplifications to the accounting for income taxes, and other practitioners provided additional suggestions for simplifications during the staff’s outreach. On May 14, 2019, the Board issued a proposed Accounting Standards Update, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The due date for comment letters was June 28, 2019. [4] Market Transition from LIBOR On September 5, 2019, the FASB issued a proposed Accounting Standards Update (ASU) that would provide temporary optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. Stakeholders are asked to review and provide comment on the proposed ASU by October 7, 2019. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make shortterm loans to each other. With global capital markets expected to move away from LIBOR and other interbank offered rates toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition. The Proposed ASU would provide optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships affected by reference rate reform. The guidance would apply only to contracts or hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. 18
The guidance is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, the guidance would be in effect for a limited time. That is, the guidance would be effective upon issuance of final guidance and would not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. [4] Segment Reporting The objective of this project is to undertake improvements to the segment aggregation criteria and disclosures to provide users with more decision-useful information about the reportable segments of a public entity. In May 2017, the Board discussed potential ways to improve the segment aggregation criteria and disclosure requirements and directed the staff to perform outreach with users, preparers, and accounting firms to assess the effect and viability of potential alternatives. In September 2017, the Board considered a summary of the outreach and decided to add a project on segment reporting to the technical agenda. [4] Distinguishing Liabilities from Equity The objective of this project is to improve understandability and reduce complexity (without loss of information for users) of the accounting for instruments with characteristics of liabilities and equity (including convertible debt). At the June 6, 2018 Board meeting, the Board decided that convertible instruments with embedded conversion features would be accounted for as a single unit of account based on the model for traditional convertible debt or traditional convertible preferred shares. This means that convertible debt would be recognized in the balance sheet as a single liability, measured at amortized cost. There no longer would be bifurcation of the conversion feature and the debt host. Similarly, convertible preferred shares would be recognized in the balance sheet as a single equity element. Convertible instruments with embedded conversion features that meet the definition of a derivative and are ineligible for the derivative scope exception are outside the scope of the project (and the embedded conversion option will continue to be bifurcated and measured initially and subsequently at fair value). On July 31, 2019, the Board issued a proposed Accounting Standards Update, Debt – Debt with Conversion and Other Options Spring 2020 | The Cooperative Accountant
ACCTFAX (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 81540): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The due date for comment letters was October 14, 2019. [4] Simplifying the Balance Sheet Classification of Debt The objective of this project is to provide guidance that will reduce the cost and complexity of determining the current versus noncurrent balance sheet classification of debt. This project is part of the Board’s Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information required to be reported by an entity. On September 12, 2019, the FASB issued a revised proposed Accounting Standards Update, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent). The due date for comment letters was October 28, 2019. [4] Private Company Council {PCC} Issues The Private Company Council (PCC) is the primary advisory body to the FASB on private company matters. The PCC uses the Private Company Decision-Making Framework to advise the FASB on the appropriate accounting treatment for private companies for items under active consideration on the FASB’s technical agenda. The PCC also advises the FASB on possible alternatives within GAAP to address the needs of users of private company financial statements. Any proposed changes to GAAP are subject to endorsement by the FASB. At its most recent meeting on September 11, 2019, the PCC discussed the following issues, organized by topic: ● Share-Based Payments (SBP): Participants discussed the view that the nature of SBP awards often depends on the stage of the company and the level of the employee. The discussion indicated that there is a continued trend towards issuance of restricted stock units and management incentive units rather than traditional stock options. Participants noted that an Internal Revenue Code Section 409A compliant valuation is not overly costly to obtain and suggested that absent current Spring 2020 | The Cooperative Accountant
requirements, they would generally rely on the Section 409A valuation to determine current price. ● Effective Date: Participants expressed support for the proposed effective date philosophy and highlighted the importance of providing private companies with the opportunity to learn from public companies. ● Leases: While only one participant (whose firm invests in a company licensing lease accounting software) indicated that they have completed implementation of the lease standard, several participants noted that their leases typically are not voluminous or complex. ● Credit Losses: Participants indicated that they would not be largely affected by the new credit losses standard because they already use key elements of an expected loss model for their trade receivables. ● Software Capitalization: Participants discussed complexities associated with determining technological feasibility. ● Financial Performance Reporting: Due to concerns about a lack of consistency among reporting entities, participants suggested that the Board consider defining the terms cost of goods sold and selling, general, and administrative. When the project scope was explained to the participants, they were supportive of the project to disaggregate cost of goods sold and selling general administrative expenses. [4] FOOTNOTES [1] Jeff Gabello, “FASB Update” Accessed August 2019. Presentation at NSAC sponsored Tax, Finance, & Accounting Conference for Cooperatives, Denver, CO. [2] [1] Jeff Gabello, “FASB Update” Accessed October 2019. Presentation at NSAC Cooperative Learning Network Webinar. [3] FASB. FASB Implementation Web Portal, Accessed October 2019. https://fasb.org. [4] FASB. Projects / Technical Agenda, / Private Company Council, Accessed October 2019. https://fasb.org. 19
TAXFAX
TAXFAX EDITOR George W. Benson Counsel McDermott Will & Emery LLP 444 West Lake Street Suite 4000 Chicago, IL 60606 (312) 984-7529 gbenson@mwe.com
US TAX COURT: COOPERATIVE PAYMENT RULING SUMMARY By Ashley Marx and David Antoni, CPA The domestic production activities deduction (“DPAD”) under section 1991 is in the spotlight of the Tax Court. In the last quarter of 2019, the Tax Court issued two opinions, Ag Processing Inc a cooperative and Subsidiaries v. Commissioner2, (“Ag Processing”) and GROWMARK, Inc. & Subsidiaries v. Commissioner3, (“GROWMARK”) to nonexempt cooperatives subject to sections 1381 through 1388 (subchapter T) related to computations of DPAD under section 199. Both taxpayers were specified agricultural or horticultural cooperatives as defined in section 199(d)(3)(F). Ag Processing In Ag Processing, the Tax Court concluded that soybean and grain payments the taxpayer made to its patrons, and similar payments the taxpayer received as a member of another cooperative, constituted “per-unit retain allocations paid in money,” commonly referred to as “PURPIMs” for purposes of sections
1382(b)(3) GUEST WRITERS and 1388(f), David F. Antoni, CPA & Ashley Marx and had to be KPMG, LLP treated as such 1600 Market Street for purposes Philadelphia, PA 19103-7222 of computing tel: (267) 256-1627 DPAD under fax: (267) 604-0310 e-mail: dantoni@kpmg.com section 199. The Tax Court Daniel S. Welytok held that von Briesen & Roper, S.C. section 199(d)(3) 411 E. Wisconsin Ave, Ste. 1000 did not require Milwaukee, WI 53202 tel: (414) 287-1408 the taxpayer fax: (414) 238-6555 to calculate separate DPAD e-mail: dwelytok@vonbriesen.com amounts for its Sandra E. Hofmann, CPA patronage and Crowe LLP nonpatronage 9910 Dupont Circle E., Suite 230 Fort Wayne, IN 46825 activities, and tel: (260) 487-2312 once DPAD fax: (260) 487-2300 was calculated e-mail: sandy.hofmann@crowe.com it was required to be allocated under the rules of subchapter T between the taxpayer’s patronage and nonpatronage accounts. Further, the Tax Court held that the
Note that section 199 was repealed pursuant to P.L. 115-97, section 13305; however, section 199A(g) provides a replacement deduction for domestic production activities of specified agricultural or horticultural cooperatives pursuant to P.L. 115-141, Division T, section 101.
1
2
Ag Processing Inc a cooperative and Subsidiaries v. Commissioner, 153 T.C. No. 3 (October 16, 2019).
3
GROWMARK, Inc. & Subsidiaries v. Commissioner, T.C. Memo. 2019-161 (December 11, 2019).
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TAXFAX taxpayer’s DPAD could not create or increase a net operating loss. Ag Processing case summary The taxpayer, AG Processing, Inc. (“AGP”), was a member-owned agricultural cooperative including over 170 local farmer-owned cooperatives, along with other regional cooperatives. AGP conducted business with its members on a patronage basis, and members were eligible to receive patronage dividends paid by AGP. AGP also conducted business with nonmembers on a nonpatronage basis. AGP purchased soybeans at a fixed price under a contract that had the same terms for members and nonmembers. The contract did not reference the use of a per-unit retain allocation system and did not characterize the tax treatment of the contract. AGP prepared Schedule G using the percentage of soybeans purchased from members and nonmembers to allocate between patronage and nonpatronage income and deductions. AGP allocated the entire DPAD under section 199 to nonpatronage on its Schedule G. In 2009, AGP received a private letter ruling, PLR 2009460214, the Service ruled that soybean payments AGP made to its members constituted PURPIMs for purposes of section 1382(b)(3). Following the ruling, AGP amended its 2006 to 2007 U.S. federal income tax returns to report the soybean payments to members as PURPIMs (as well as reporting consistently on its 2008 and 2009 original returns) and added back those amounts in computing its qualified productions activities income (“QPAI”) and taxable income in determining its DPAD. Such payments were previously included in cost of goods sold. Under section 199(d)(3), AGP determined its taxable income without regard to any deduction allowable under section 1382(b) or 1382(c). Commissioner argued that the payments made between the cooperative and its members at issue in Ag Processing were not 5
PURPIMs because an “agreement,” referenced in the definition of per unit retain allocation in section 1388(f), did not exist between the parties to use a per-unit retain allocation system. The Tax Court rejected this argument, applying a strict construction of the subchapter T provisions, and held that all payments that meet the definition of PURPIMs are PURPIMs under subchapter T. The Tax Court next considered whether a cooperative must compute its DPAD separately for patronage and nonpatronage activities, and if a cooperative must allocate its DPAD between its patronage and nonpatronage accounts. The Tax Court, relying on Farm Service5, concluded that a cooperative did not need to compute separate DPADs for patronage and nonpatronage activities. Instead, after the DPAD is computed, the cooperative must allocate its DPAD between its patronage and nonpatronage accounts on Schedule G. The Tax Court explained that cooperatives are required to distinguish between patronage and nonpatronage activities to ensure that patronage dividends are not paid out of earnings from business done with nonpatrons. Finally, the Tax Court considered whether AGP’s expanded affiliated group (“EAG”)6 may have a net operating loss if its DPAD, after allocating to its patronage and nonpatronage accounts, exceeds its taxable income. The Tax Court found that Treasury Regulation section 1.199-7(c)(2) did not apply to a situation where an EAG consists only of members of a U.S. consolidated group. A U.S. consolidated group was required to compute its DPAD using the entire group’s consolidated taxable income or loss7. Thus, the Tax Court held that AGP must follow section 172(d)(7), which disallows a cooperative’s DPAD to be used to create or increase a net operating loss. GROWMARK Given the similarities of the taxpayers, the GROWMARK decision relies heavily on the
Farm Service Cooperative v. Commissioner, 619 F.2d 718 (8th Cir. 1980).
Former section 199(d)(4)(B) provided the definition of EAG. Section 199(d)(4) provided a special rule for an EAG’s DPAD computation and allocation among members of an EAG.
6
7
Section 1.199-7(d)(4)(ii).
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TAXFAX conclusions in Ag Processing, which was decided less than two months earlier by the Tax Court. In GROWMARK, the Tax Court concluded, explicitly relying on the holdings in Ag Processing that the taxpayer was not required to calculate separate DPAD amounts for its patronage and nonpatronage activities, and once DPAD is calculated it must be allocated under the rules of subchapter T between the taxpayer’s patronage and nonpatronage accounts. Additionally, the Tax Court clarified in its holdings that subchapter T cooperatives must allocate DPAD between patronage and nonpatronage utilizing Schedule G and using the same method as other Schedule G allocations because the Schedule G is completed pursuant to subchapter T. GROWMARK case summary The taxpayer, GROWMARK, Inc. (“GROWMARK”), was a member-owned agricultural cooperative that included farmerowned cooperative and individual farmers. Similar to the taxpayer in Ag Processing, GROWMARK was an affiliated group of corporations with multiple subsidiaries. GROWMARK conducted business on a patronage basis with patrons and a nonpatronage basis with nonpatrons. GROWMARK filed its Form 1120-C, U.S. Income Tax Return for Cooperative Associations, including its Schedule G, in 2009 without splitting its business operations on the basis of its patronage and nonpatronage activities, but rather GROWMARK allocated items to the patronage and nonpatronage columns based on the volume of business done with each member or nonmember. GROWMARK did not separate patronage and nonpatronage amounts when computing its 2009 DPAD. GROWMARK allocated the total DPAD amount on Schedule G between patronage and nonpatronage columns based on QPAI. In computing its 2010 DPAD, GROWMARK again performed a single calculation aggregating all amounts from the members of the EAG and then allocated
the DPAD between the patronage and nonpatronage columns on Schedule G on the basis of its QPAI. Commissioner argued that QPAI is an improper method to allocate DPAD and that DPAD should be computed separately for patronage and nonpatronage activities. The Tax Court agreed with GROWMARK that section 199(d)(4) required the initial allocation of DPAD based on QPAI; however, the Tax Court cited its recent decision in Ag Processing to conclude that GROWMARK was not required to compute separate DPAD amounts for its patronage and nonpatronage activities and that GROWMARK should allocate the aggregate DPAD on its Schedule G using the same method it used for other Schedule G allocations because the Schedule G allocation is done pursuant to subchapter T, not section 1998. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP. YEAR-END APPROPRIATIONS BILL INCLUDES PROVISIONS OF INTEREST TO COOPERATIVES By Sandra E. Hofmann, CPA On Dec. 20, 2019, President Donald Trump signed into law a massive fiscal 2020 government spending bill totaling $1.4 trillion, preventing another year-end government shutdown (with only an hour and a half to spare). Among other things, the bill includes extenders for several expired tax provisions, repeals certain healthcare taxes, and includes favorable provisions for cooperatives. See P.L. 116-94 (H.R. 1865), the Further Consolidated Appropriations Act, 2020. Among the items included in the spending bill that are particularly favorable to cooperatives are some extenders and technical corrections to the following:
The Tax Court provided that Growmark’s cost of goods sold calculation would be the subject of a separate opinion.
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TAXFAX Biodiesel tax credit. The $1 per gallon subsidy has been extended through 2022 and is retroactive to when it expired at the end of 2017 due to congressional inaction. The credit originated in 2005 to help farmers and producers and to reduce petroleum imports by supporting biofuels. Blenders that have produced and sold or used the qualified biodiesel mixture as a fuel in their trade or business are eligible for the tax credit. Pension insurance premiums savings. The Pension Benefit Guaranty Corporation (PBGC) is a federal agency funded by employers that pay premiums to the PBGC to insure their workers’ pensions. The agency guarantees that workers will receive their retirement benefits in the event the employer defaults on the pension payments. The spending bill adjusts the formula that determines what certain cooperatives and other nonprofits pay to the PBGC with respect to plans that qualify as cooperative and small charity pension plans. This change would save electric cooperatives more than $30 million annually on their premiums, according to the National Rural Electric Cooperative Association (NRECA). According to the National Council of Farmer Cooperatives, more than 350 farmerowned cooperatives that participate in multipleemployer pension plans also will benefit from the change. Protection of tax-exempt status when accepting government grants. To maintain their tax exempt-status, electric cooperatives cannot receive more than 15% of their income from nonmember sources. Historically, government grants were considered contributions to capital rather than income. But the Tax Cuts and Jobs Act of 2017 (TCJA) amended Section 118 to make many government grants taxable. Since the grants are from nonmembers, exempt rural cooperatives were concerned that this change could push many of them over the 15% threshold. The bill provides that an 85%-member income test will be applied without taking into account such grants. The change is retroactive to the 2018 tax year. Additional items in the bill that are favorable Spring 2020 | The Cooperative Accountant
to both cooperatives and other taxpayers include the following: Repeal of healthcare taxes. Three different taxes that were enacted to fund the healthcare reform known as the Affordable Care Act now have been repealed. The repealed taxes are the excise tax on certain high-cost employer health plans (also known as the “Cadillac tax”), the medical device excise tax, and the annual fee on health insurance providers. Repeal of the “parking lot tax.” The bill repeals the Section 512(a)(7) tax that was enacted as part of the TCJA. That provision required tax-exempt employers that provided qualified transportation fringe benefits or parking to employees to pay unrelated business income tax on any excess amounts. Retirement plan changes. To encourage retirement plan savings, the bill increases the age after which minimum distributions from certain retirement accounts are required to age 72 from age 70 1/2. It also modifies requirements for multiple-employer plans to make it easier for small businesses to offer such plans to their employees. Additionally, the bill allows penalty-free distributions from IRAs and other qualified retirement plans for births and adoptions and removes the maximum age to make IRA contributions (currently 70 1/2). Extenders. The bill extends many expiring tax provisions. Among those extended through 2020 are: ● The exclusion from gross income of discharge of qualified principal residence indebtedness ● Treatment of mortgage insurance premiums as qualified residence interest, which permits taxpayers whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance ● The 7.5% (instead of 10%) adjusted-grossincome floor for medical expense deductions ● An above-the-line deduction for qualified tuition and related expenses ● Energy Efficient Commercial Buildings 23
TAXFAX Deduction and Energy Efficient Homes credit ● Second Generation Biofuel Producer credit and Alternative Fuel Refueling Property credit ● New Markets tax credit and Work Opportunity tax credit ● Empowerment Zone tax incentives ● The Employer credit for Paid Family and Medical Leave Finally, the bill also provides additional funding for agriculture, in part designed to help producers and cooperatives affected by disasters such as freezes, floods, wildfires, and hurricanes. The new funding allots an additional $1.5 billion for disaster relief and provides compensation payments for quality and yield losses to crops due to weather damage. PRIVATE LETTER RULING ADDRESSES EFFECT OF PATRONAGE DIVIDENDS ON A REAL ESTATE INVESTMENT TRUST By Daniel S. Welytok Private letter ruling (“PLR”) 201928013, released on July 12, 2019, sets out the analysis under which a real estate investment trust (“REIT”) can exclude patronage dividends received from a cooperative bank and still retain its tax status as a REIT. Specifically, the PLR addresses a taxpayer’s request for a ruling that certain the patronage dividends do not constitute gross income for purposes of Internal Revenue Code (“Code”) §§ 856(c)(2) and (3). Background. As background for the ruling request, Taxpayer is a State A limited liability company electing to be taxed as a corporation. On Date 1, Taxpayer was formed by its parent, a publicly traded REIT which owns and manages timberland properties, in order to acquire all of the interests in LP 2 on Date 2. LP 2 is a limited partnership which owns timberlands and other assets. On Date 3, Taxpayer made an election to be taxed as a REIT under Code §§ 856 through 859. Taxpayer’s acquisition of LP 2 was partially funded by a seven-year term loan pursuant to a credit agreement (the “Agreement”) that 24
Taxpayer and certain of its subsidiaries entered into with Bank and other lenders in order to purchase LP 2. Bank is subchapter T farm cooperative regulated by the Farm Credit Administration. Taxpayer is an equity holder in Bank, and the Credit Agreement entitles Taxpayer to receive annual § 1388(a) patronage dividends based on the amount of interest Taxpayer paid in the preceding year and include them in its gross income in the year of receipt pursuant to § 1385. However, for financial reporting purposes, Taxpayer will reduce its interest expense for the prior year by the amount of patronage dividends it anticipates it will receive. Analysis. The Internal Revenue Service (“Service”) frames its analysis of the request from the standpoint of whether the exclusion of patronage dividends from Taxpayer’s gross income for purposes of certain REIT qualification tests will interfere with the purposes of those tests. The Service first looks to Code § 856(c)(2), which generally provides that in order to qualify as a REIT, at least 95% of a corporation’s gross income must be derived from dividends, interest, rents from real property, and gain from the disposition of stock, securities, and real property, and other specified passive income activities. Likewise, Code § 856(c)(3) generally provides that in order to qualify as a REIT, at least 75% of a corporation’s gross income must be derived from rents from real property, interest on obligations secured by mortgages on (or interests in) real property, gain from the disposition of real property, and other specified passive income activities. These tests do not specifically list patronage dividends as an item of qualified income. However, under Code § 856(c)(5)(J)(i), the Secretary can determine whether any item of income or gain which does not qualify as one of the kinds of qualified income listed under §§ 856(c)(2) or (3) should be considered “as not constituting gross income for purposes of §§ 856(c)(2) or (3)” (i.e., should be excluded from the computations for purposes of the tests). The Service next focuses on the concept of Spring 2020 | The Cooperative Accountant
TAXFAX dividends, noting that Code § 301 generally provides that a distribution of a dividend by a corporation to a shareholder shall be included in gross income. Under § 316(a), the term “dividend” generally means any distribution of property made by a corporation to its shareholders out of its accumulated earnings and profits, or out of its earnings and profits of the taxable year. Code § 316(a) further provides that every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits, and that to the extent that any distribution is treated as a distribution of property to which § 301 applies, such distribution is treated as a distribution of property for purposes of § 316(a). Under Code § 1388(a), the term “patronage dividend” means an amount paid to a patron by an organization (1) on the basis of quantity or value of business done with or for such patron, (2) under an obligation of such organization to pay such amount, which obligation existed before the organization received the amount so paid, and (3) which is determined by reference to the net earnings of the organization from business done with or for its patrons. The term “patronage dividend” does not include any amount paid to a patron to the extent that (A) such amount is out of earnings other than from business done with or for patrons, or (B) such amount is out of earnings from business done with or for other patrons to whom no (or smaller) amounts are paid, with respect to substantially identical transactions. For purposes of § 1388(a)(3), net earnings are not reduced by amounts paid during the year as dividends on capital stock or other proprietary capital interests of the organization to the extent that the articles of incorporation or bylaws of such organization or other contract with patrons provide that such dividends are in addition to amounts otherwise payable to patrons which are derived from business done with or for patrons during the taxable year. Code § 1385(a)(1) generally provides that each person shall include in gross income the amount of any patronage dividend which is Spring 2020 | The Cooperative Accountant
received by him during the taxable year from an organization described in § 1381(a). Following the review of dividends, the Service next turns to the legislative history of REITs, which indicates that a central concern behind the gross income restrictions is that a REIT’s gross income should largely be composed of passive income. On this point the Service refers to H.R. Rep. No. 2020, 86th Cong., 2d Sess. 4 (1960) at 6, 1960-2 C.B. 819, at 822-23 which states, “[o]ne of the principal purposes of your committee in imposing restrictions on types of income of a qualifying real estate investment trust is to be sure the bulk of its income is from passive income sources and not from the active conduct of a trade or business.” Conclusion. To summarize its analysis, the Service explains that patronage dividends paid by a subchapter T cooperative are a return of earnings to its cooperative patrons based on the amount of business that the patron transacts with the cooperative. The patronage dividends paid by Bank, a subchapter T financing cooperative, effectively reduce the costs that its patrons incur to borrow funds from the cooperative. The amounts paid by Bank as patronage dividends represent earnings that it is able to refund to Taxpayer based on the average amounts that Taxpayer borrowed from Bank during the prior year. Thus, while Taxpayer must include these patronage dividends in its gross income under § 1385(a) (1), these patronage dividends effectively reduce Taxpayer’s interest expense paid during the prior year. Under the facts of the instant case, exclusion of these patronage dividends from gross income for purposes of §§ 856(c)(2) and (3) does not interfere with Congressional policy objectives in enacting the REIT income tests under those provisions. In conclusion, the Service finds that pursuant to § 856(c)(5)(J)(i), the patronage dividends received from Bank under the Credit Agreement and included in Taxpayer’s gross income under § 1385 are excluded from Taxpayer’s gross income for purposes of applying the REIT qualification tests of §§ 856(c)(2) and (3). 25
By Barbara A. Wech dreams I could have never In my wildest predicted what we would be going through with COVID-19. As an organization NSAC is doing our best to continue to follow our By Nick Meuting, CPA, Shareholder, Lindburg Vogel Pierce Faris, Chartered mission of providing education, resources, and connections during these unprecedented times. Some chapter annual meetings might be postponed till further notice, stay tuned to any notices for your chapter that might include a notice for a virtual chapter meeting. Through the Cooperative Learning Network (CLN) we will continue to provide educational opportunities for members even when we are unable to travel. As always CLN’s are complementary for all members, and you can receive CPE credits for live presentations. Prior CLN’s can also be accessed by members for no fee on the nsac.coop website, and although these are a great resource, they do not qualify for CPE credits. In addition to CLN’s, the new NSAC Connect (connect.nsacoop.org) allows members the opportunity to ask questions, post discussions and library items and interact with members throughout the cooperative accounting industry like never before. If you have questions and would like to ask some of the foremost experts in the cooperative finance industry, NSAC Connect is a great place to interact. I encourage you to take a look at the Latest News and Connect for the latest news from our Education Director, Bill Erlenbush. NSAC has also been uploading TCA’s to the searchable library, going back to 1980, and few beyond that. This too serves as a great resource for members and the search capability has been expanded in recent weeks. I know none of this will replace the benefits of meeting face-to-face, and I have hope that we will still be able to resume our normal summer meeting schedule, including the national meeting Tax, Finance & Accounting Conference for Cooperatives in Portland, Oregon August 2nd – 5th. Today is a good day to contemplate our blessings, be thankful for our love ones, and hopeful for the future. I hope to see you all soon!
From an Auditor’s Perspective
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TAXFAX
While it’s not yet clear the extent to which COVID-19 will take its toll on our collective epidemiological, social, and economic health, it’s becoming very clear that people are frightened and businesses are preparing for down-side scenarios. If you are a business leader asking the tough questions about how resilient your business is, I suggest we start with a more foundationally important question: How resilient are your people? For anyone managing people, this new business climate entails navigating much more than the actual impacts on the workforce, supply chain, and customer experience – it means keeping people focused, agile, and able to manage through fast-changing and adverse situations. Clearly, keeping your workforce resilient in this climate is going to be a challenge, but also an opportunity. The opportunity starts with trust and the role employers and business leaders currently play in driving social consciousness. Public trust in employers is at an all-time high, compared to trust in media and the government, according to Edelman research, which has been publishing an annual barometer of trust in institutions for over 12 years. Also, globally 92% of employees agree that it’s critically important for the CEO to respond to challenging times and crises. So this is the time for leaders to step up and help people manage their own fears and panic, and thrive as best as they can. People are uncertain about the future, and that means they aren’t focused on being their best and perhaps doing their best. Resilient leaders may be the last defense in holding the line on business goals as well as the safety and well-being of their employees. Spring 2020 | The Cooperative Accountant
In terms of the challenge, COVID-19 isn’t just hype, although the media frenzy may be amping up our fears, which can impact business decision-making both top-down and bottom-up. Every employee plays a part in the business ecosystem and when people begin to make decisions based on emotional reactions, everything from highlevel goals to operating practices can be at risk. According to Professor Steven Miller, at Rutgers University’s Journalism and Media Studies Department, “It’s just amazing how quickly word about this [coronavirus] has spread, the intensity of the coverage. The advent of social media [brings out] people’s need for instantaneous information,” he says. “It’s called feeding the beast.” Beyond the panic and anxiety, increasing disruption from travel bans and work from home mandates, supply chain disruptions, deferral of non-strategic investments and a general recession-like climate will impact our day-to-day business-as-usual. When people are dispersed, it is harder to check in with them, harder to manage cultural implications and potentially harder to stay agile and adaptive. In times of pressure, however, staying agile and adaptive are more important than ever. The bottom line for leaders: Recognize employees are wired to ”go negative.” It’s human nature to be afraid of spiders, tigers and the dark. Negativity tends to snowball, derail people and cascade into catastrophizing. Therefore it’s critical right now to practice and enforce realistic positivity so that even if we cannot control the situation, we can control our response to it. (Source: AICPA – CPA Letter Daily – Forbes – March 6, 2020) 27
SMALL BUSINESS COOPERATIVE FORUM TAXFAX
Beyond the content of a document itself, its design also plays a crucial role in how readers process and understand the material presented. This paper is divided into two major sections: text and visuals. The term “text” will encompass the formatting, layout, and style of text within a business report, while the term “visuals” will encompass graphs and charts meant to illustrate and enhance the overall content of a business report. Our focus in this paper will be to employ current principles of text and visual design to improve the clarity, consistency and readability of business reports. INTRODUCTION The purpose of this paper is to show how current principles of text and visual design can improve the effectiveness of business reports. This paper is divided into two major sections: text and visuals. For the purposes of this paper, the term “text” will encompass the formatting, layout, and style of text within a business report, while the term “visuals” will encompass graphs and charts meant to illustrate and enhance the overall content of a business report. Our focus in this paper will be to employ current principles of design to serve the interests of overall document clarity, consistency and readability. Beyond the content of a document itself, its design also plays a crucial role in how readers process and understand the material presented. Specifically, “[e]ffectively designed documents help readers locate the 28
EDITOR Barbara A. Wech, Ph.D. Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham Collat School of Business bawech@uab.edu GUEST WRITERS Joseph G. Van Matre, Ph.D., Professor Randall W. Kornegay, Instructor Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham Collat School of Business 710 13th Street South Birmingham AL 35294-1460 205.934.0982
information they need and grasp how the parts of the document fit together” (Oliu, Brusaw, Alred, 2020, p. 153). IMPROVING THE DESIGN OF TEXT When making decisions related to text design in business reports, the writer should consider how the overall look of a document contributes to its clarity, consistency, and readability. Design not only affects how a document communicates with readers directly but also how it psychologically influences them as well. As Bovee and Thill state: “Thoughtful reader-focused design makes messages easier to read, whereas poorly chosen design elements can act as a barrier to impede communication” (p. 114). But beyond the obvious, design choices also affect how readers psychologically processes a document. By sending non-verbal cues to readers, a Spring 2020 | The Cooperative Accountant
TCA SMALL BUSINESS FORUM document “influenc[es] their perceptions of the communication before they read a single word” (Bovee and Thill, 2016, p. 114). Therefore, business writers would be wise to carefully consider aspects of document design. In terms of text, this can be organized into considerations of style, formatting and layout, which would include subcategories such as (1.) typefaces, (2.) headings, (3.) lists, (4.) type styles (bold, italics, etc.), and (5.) spacing. Before examining the various points of style, layout, and formatting, it is important to establish some overarching guidelines for document design. A careful business writer should embrace the concepts of simplicity and consistency when designing business reports. Simplicity in document design serves to improve clarity and readability, while consistency ensures the polish and professionalism of the document. Readers favor business reports that are clear and uncluttered and show disfavor toward reports that are messy, hard to read quickly, and lack consistency in their attention to details concerning typeface, headings, type styles, and spacing. (1.) Typeface – relates to “the physical design of letters, numbers, and text characters” (Bovee and Thill, 2016, p. 117). Typeface influences the tone of messages, or the writer’s perceived attitudes toward the audience as well as the subject matter. Typefaces range from more formal and professional to more informal and friendly. However, the range of appropriate typefaces narrows for business writing applications, and “many of the fonts available on your computer are not appropriate for business use” (Bovee and Thill, 2016, p. 117). For example, while typefaces such as Times New Roman and Arial are suitable for business writing applications, typefaces such as Bauhaus, Edwardian Script, and Old English are not, as one can plainly see: Bauhaus, Edwardian Script, Old English. Typefaces can be broken down into those with serifs and those without, or sans serif. A serif is just a small mark at the ends of letter lines. You can see the exaggerated serif marks in the Edwardian and Old English script illustrated above. In this case, a picture really is worth a thousand words. See the serifs underlined on the capital letter “A” in Times New Roman font: If you do choose to use a serif typeface, though, pick one that is both more conservative and legible for your business documents. By far, the most common serif typeface for business Spring 2020 | The Cooperative Accountant
writing applications is Times New Roman, seen above, which is most suited to body text for your business documents in a 12-point size (Bailey, 2011). For body text, regardless of font, use 1012 point size. Any body text smaller than 10 is difficult to read clearly, and any size larger than 12 looks cartoonish for body text. Save the use of font larger than 12 for titles and headings, and do so within reason. For your headings, a sans serif typeface is often preferable because it provides a clean, uncluttered look and differentiates your headings from the body text of your business documents; this is particularly true if you plan to use bold type for your headings, as serif typefaces can look cluttered when bolded (Bailey, 2011). Finally, the mode of production for a document should also be considered when deciding on a typeface. Generally speaking, serif typefaces help to connect letters and improve the readability and visual interest of printed documents, while sans serif typefaces lend themselves to electronic documents because they appear uncluttered on a screen and increase white space on the page to improve readability (Rentz and Lentz, 2018). (2.) Headings – help readers follow the progression of a document and greatly increase coherence, particularly in documents over one page, though headings can be effective in onepage documents as well (Bailey, 2011). Headings should be used to label and differentiate the parts of your longer business documents, such as memos and reports. As Covey advises, “Headings can be centered, flush left, or flush right. Using uppercase and lowercase letters makes headings easier to read. The larger the point size, the higher the level of heading” (Covey, 2012. P. 211). Headings should always number at least two or more for any document; otherwise, a title would be more appropriate. Bailey clarifies, “[a] heading isn’t a title. It’s a label for one of several parts. If you have only one part, skip the heading and…use a title” (Bailey, 2011, p. 39). Headings should also be descriptive of the content that follows, or as Hynes argues, “Write headings with the reader in mind. They should be descriptive of the content that follows but relatively short” (Hynes, 2016, p. 224). Headings should generally be limited to a handful of precise words that prepare the reader for the content that is to come and allow busy readers the option to quickly skim the body of longer business documents as their time constraints allow (Guffey and Loewy, 2008). Headings can also increase the coherence 29
TCA SMALL BUSINESS FORUM of business documents by “group[ing] similar material together. Headings help the reader separate major ideas from details” (Guffey and Loewy, 2008, p. 90). The effective use of headings as place-markers and signposts within longer reports often make the difference between a document that is just satisfactory and one that truly engages and informs the reader in an efficient manner. Lists – help readers follow the progression of your ideas and greatly increase readability and concision. If you happen to have more than one point to make, think carefully about using an indented list, which can either be bulleted or numbered. As a business writer, “if you have two or more…reasons, examples, recommendations, conclusions, steps…” consider using an indented list (Bailey, 2011, p. 42). When using any type of indented list, “you should provide context…with an introductory sentence followed by a colon (or no punctuation for an incomplete sentence)” (Alred, Brusaw, Oliu, 2019, p. 319). For bulleted lists, most current business writing style guides suggest a simple, straightforward style. As such, bullets should be consistently formatted (Using the default bullet options in Word is a good start.) and parallel in structure. Follow the guidelines below to create simple and consistent lists: ● Parallel structure (i.e. verbs within the same bullet list in the same tense) allows the bullets to flow better and improves clarity. ● If your bullet is a complete sentence, use a period at the end of it, and if it is a fragment, omit the period. ● The use of commas between bullets is now generally discouraged as well as the use of “and” before the last bullet. ● Do not mix sentences and fragments within the same bullet list for the sake of consistency. ● Use one style of bullet symbol for your documents; this generally means using the actual bullet symbol, and not the asterisk or hyphen as bullet symbols (Bailey, 2011). ● When describing the steps of a process or action items, consider using a numbered bullet list. This helps the reader follow the logical sequencing of a process or the takeaways if the numbered bullets are action items; again, these should be logically ordered. In summary, the use of bulleted and numbered lists saves time for readers and free up space on the page, making a document more inviting and easier to skim quickly. 30
Type styles – relate to the use of contrasting typographical elements to improve emphasis and contrast within a document. The term contrast, as it pertains to document design, “means that you use conventions of typography, layout, color, or other visual elements to ensure that your most important content is readily accessible to the reader” (Rentz and Lentz, 2018, p. 64). Given the typographical devices available in just Microsoft Word, for example, the choices may seem overwhelming – bold, italics, colors, etc. However, when thinking about contrast in document design, the careful business writer should always remember to exercise restraint and keep things as simple as possible. As Bovee and Thill advise: “Don’t clutter your message with too many design elements, too many colors, or too many decorative touches” (Bovee and Thill, 2016, p. 114). Generally, the most useful type styles for increasing emphasis within text are bold, underscore, italics, and color (Bailey, 2011; Guffey and Loewy, 2013; Oliu, Brusaw, and Alred, 2020; Rentz and Lentz, 2018). All can be used effectively to increase emphasis and contrast within a document, given a few caveats. Rentz and Lentz also offer some valuable advice in this regard: “[T]he secret to effective formatting is simplicity…if you bold or italicize too many items, your page becomes visually messy, and nothing stands out to the reader” (p. 64). Of the example type styles listed above, bold type shows the most contrast on the page and provides the most emphasis. Bold type jumps off the page or computer screen and can be seen from several feet away (Bailey, 2011). Bold type is an aggressive choice for emphasis and should be used sparingly and strategically, if at all. Bold type can be used effectively for emphasizing headings, titles, and words and phrases within the text of longer documents (Bailey, 2011; Guffey and Loewy, 2013). However, Bailey cautions that within paragraphs: “Bold [often] stands out too much” and within paragraphs, italics can highlight an important word or phrase and “stands out as you read it” (Bailey, 2011, p. 37). Underscore is another option when looking for something that stands out but doesn’t jump off the page quite as dramatically as bold type. Italics can also be used to slow the reading of a sentence or paragraph and is useful for showing caution or highlighting warnings (Guffey and Loewy, 2013). Finally, color opens a wide variety of options and can be used to improve contrast Spring 2020 | The Cooperative Accountant
TCA SMALL BUSINESS FORUM and emphasis within a business document. Again, careful business writers must maintain restraint when using color for emphasis, while also considering their method of document production. Obviously, color-coded type becomes a problem when a document is to be produced in a black-and-white hardcopy, and as such, should be avoided in this situation. However, for both hardcopy and electronic documents that can be produced in color, contrasting, or color-coded, type can be used strategically and consistently to add emphasis to important words, phrases, and sentences (Covey, 2012; Oliu, Brusaw, and Alred, 2020; Rentz and Lentz, 2018; Reynolds, 2010). The extent of color theory is beyond the scope of this paper; however, be aware that readers process colors differently, both psychologically as well as physically. Colors can have different psychological connotations for readers, and color blindness can cause physical limitations for readers when processing colors visually. As a result, choose color contrasts and combinations carefully or default to the use of bold, italics, and shading to increase contrast and emphasis within the text of your documents. Spacing – relates to both how text is organized on the page (line and paragraph spacing) as well as the open, empty space on the page itself, also called white space. The purpose of text design is to make each page of your document inviting and easier to read, and proper spacing is paramount to these goals. First, let us examine current principles of line and paragraph spacing. For simple documents, or those without headings, lists, charts, illustrations, etc., indenting the first line of each paragraph may be perfectly acceptable, and is still generally the formatting style for academic writing. However, the prevailing practice in business writing is to use block paragraphing, which eliminates first line indentations for paragraphs. In block paragraphing, the paragraphs themselves are single-spaced, rather than double-spaced, with a line break between paragraphs to differentiate one paragraph from the next. The reason for this, as Bailey argues, is simple: “More and more business documents use headings, lists, and illustrations or all sorts. So much is happening on the left margin that indenting first lines adds confusion – making the page look disorganized” (Bailey, 2011, p. 37). A clean, left-aligned margin also allows for readers to skim a document more Spring 2020 | The Cooperative Accountant
quickly, as headings stand out more, and the text itself appears more organized on the page (Bailey, 2011; Covey, 2012; Oliu, Brusaw, and Alred, 2020; Rentz and Lentz, 2018). For overall margin dimensions, most business documents “usually have side margins of 1 to 1.5 inches” (Guffey and Loewy, 2013, p. 88). The “Normal” margin setting in Microsoft Word, which is the default and uses margins of 1 inch, would be satisfactory for most business documents. In terms of overall spacing, the layout and formatting of text is the most obvious. However, there is another pressing concern that many business writers often overlook. The successful use of open, empty white space on the page is just as crucial to improving readability, and furthermore, can directly affect whether readers take the time to read your document at all. Bovee and Thill clarify: “Any space free of text or artwork is considered white space… These unused areas provide visual contrast and important resting points for your readers” (Bovee and Thill, 2016, p. 116). Many of the design considerations we’ve already addressed in this paper naturally add open space on the page. Headings, lists, paragraph spacing, and appropriate margins open up each page and avoid the overwhelming feeling of a wall of text as readers delve into longer business documents. As Covey succinctly puts it, [w]riters often cram too much writing onto a page” (Covey, 2012, p. 289). White space also divides information into manageable “chunks” for the reader, promoting shorter sentences and paragraphs, and it allows readers to differentiate individual paragraphs as well as the sections of longer documents (Guffey and Loewy, 2013; Oliu, Brusaw, and Alred, 2020). In summary, both the spacing of text as well as the inclusion of empty white space between and around text greatly affects the readability of a document. Reports that successfully employ clever design principles are not only easier to read but are also more compelling and enticing in the first place. IMPROVING THE DESIGN OF GRAPHS/ CHARTS Although text will usually form the majority of a report, the inclusion of data is often useful, if not required to further inform and persuade the reader. A few values, say an average and/or a total, should be directly incorporated into the text, but many values require they be separated 31
TCA SMALL BUSINESS FORUM and presented as a table or graph. The major advantage of a table is that numerical values can be expressed exactly; however, this is not usually required. Graphs can easily display more values, reveal patterns and trends obscured in a table and greatly facilitate comparisons between different years, products, locales…. While tables certainly have their place, the remainder of this paper will focus on graphics. First, an example of when not to use a graph. In 2018 the staff of a $40 billion organization presented several documents to the board concerning national healthcare expenses, one page of which included the graph shown below. This specimen, a line chart, was created using the diabetes expense for two different years; it was a poor choice. A graph should not be used to display just two values; it is a waste of space. This information could better be incorporated in the text. For example, “Nationally diabetes costs have increased from $245 billion in 2012 to $327 billion in 2018, a compound growth rate of 4.9% per year.” Further, concerns the data, one can ask why 2018 (the latest year) is compared to 2012 versus 2010 or 2000? Why are values between 2012 and 2018 omitted? The reader is left to assume the growth is linear. Including the intervening years would have been informative and the additional data would have justified portraying the data graphically. Managers today, unless fairly recent college graduates, have had little formal training in the use of graphs. Nevertheless, with Excel the creation of a graph is just a point and click away; unfortunately, such a graph is just the beginning of creating an effective graph. To paraphrase Knaflic: There is a story in your data, but Excel doesn’t know it. (Knaflic p.3). There is an opportunity to add value for the reader by enhancing the “bare”
Excel graph with a title, labeling axes, appropriate annotation, the use of color and/or bold-face type….The text material is useful for putting the graph in context, but an effective graph should require little explanation; the visual is the story. These ideas will be later demonstrated in a before and after graph. Some background on the development of graphs might prove interesting before proceeding to the specifics of a graph creation. Graphs were first created by William Playfair around 1800; he invented the bar chart (normally used with categorical data), the line chart (usually for time series data, see Figure 1), and the pie chart. The latter is now in disfavor because research has shown the bar chart is consistently read more accurately than the pie chart. “I have a welldocumented disdain for pie charts.” (Knaflic, p. 61) and “I don’t use pie charts.” (Few, p. 60). Perhaps the most significant graph is the scatter plot, referred to as “the most generally useful invention in the history of statistical graphics. ” (Friendly and Denis p. 103). This chart is illustrated in the next example. There is some uncertainty about the creator of the scatter plot, though it was not a product of Playfair. What is known is that these graphs became popular after Galton began using them to study relationships between two variables and developed the statistical concepts of correlation and regression. The creation of graphs suitable for presentation to an audience remained the province of graphic designers and draftsmen using specialized software and plotters until the 1980s. Then, the personal computer (PC) became popular. The first software to produce quality graphics on a PC was Chart-Master in 1981; it came on two floppy disks. Soon, graphics became part of the spreadsheet’s capabilities, and the inclusion of charts in business reports became ubiquitous.
Figure 1: Graph Showing National Costs Related to Diabetes 32
EXAMPLE Employers have a vested interest in the health and well-being of all employees. Some firms provide health fairs where employees can receive free, basic health screenings. The employee is given a written report of all results with some useful interpretation/guidance. The employer may also be provided with the results, though often Spring 2020 | The Cooperative Accountant
TCA SMALL BUSINESS FORUM without employee identification. The data used here were the result of the systolic and diastolic blood pressure readings. High blood pressure can be an indicator of or a precursor to significant health issues. When, as here the analysis is dealing with two numerical (i.e. quantitative) measurements on the same object (employee), the scatter diagram is the appropriate chart to portray both variables simultaneously on one graph. A frequent use of this chart is to determine if the two variables are related; however that is not a primary goal of the current analysis. Figure 2 is the product of a spreadsheet’s graphing capabilities; the only information provided to the software was the numerical values for the two variables. There is opportunity for much improvement in this graph. The user knows what data were used to create the graph, and the scatter diagram fulfills its usual goal of depicting association between the two variables: systolic and diastolic pressures tend to move up and down together. However, the data are being analyzed to determine if there are health issues regarding high blood pressures among the firm’s employees. The graph also needs a title and axis labels, but these will not be very useful in learning if employees are in a danger zone. Note that the software made decisions about scaling and then plotted the data. The scaling was a poor choice as three-fourths of the graph is white-space, unused and empty. It is not unusual for the software to include zero on the axis, but here it is inappropriate. The user must direct the software to use new minimum values for both axes, choosing “user friendly” numbers (90
and 50). Choosing minimums of 96 and 58 for the X-Y axes respectively would slightly decrease the white space, but create some of the poor choices for tick marks. There are levels of blood pressure above which an individual is considered to be hypertensive and at risk of cardiac disease or stroke. One definition of hypertension is when the systolic measure is above 145 and/or the diastolic exceeds 90. The final graph (Figure 3) includes reference lines that identify employees that are high on both measures, and the axis titles include these benchmarks. Finally, the data obtained at the event also identified the employees’ sex. This third variable can be displayed on the graph by using different plotting symbols for males and females. Ideally, the symbols will differ with regard to shape and color. Not all copy machines will reproduce color, so if multiple copies can only be made in black and white, review the final draft with this in mind. Similarly, if the written report is to be presented to a group using a projector and PowerPoint, the slides must be reviewed on the screen. Many slides of tables, charts, or narratives may look fine on a monitor, but become illegible when projected. This is a common mistake, so take precaution examining a chart in the format that is to be distributed and/or viewed. The foremost authority on data visualization is Edward R. Tufte. Two principles of Tufte are useful guides in the preparation of all charts. One, “The deep, fundamental question in statistical analysis is Compared with what”. (Tufte, p. 8). For example, the line chart is used to compare one year’s (or other period) result with that of other years. The visualization helps identify trends and/or unusual values (aka outliers) that would be difficult if the data were given in a table. In Figure 3, the desired comparison is not between individual employees, but employees’ results compared against the two benchmarks. The graph facilitates this comparison for the Figure 2: The Initial Scatter Diagram Produced by a Spreadsheet viewer. Consider a
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TCA SMALL BUSINESS FORUM CONCLUSION The preparation of business reports has long been an endeavor of the manager. Many early design principles are still valid, but new principles have evolved over time that enhance the effectiveness and readability of a document. Technology, of course, has played a role in these developments, particularly as concerns the now ubiquitous graph, a phenomenon of the late twentieth century. Technology has Figure 3: The Scatter Diagram in a More Informative Portrayal also affected text design and enabled the use of scatter diagram of turnover rate (X) and profit boldface, various font margins (Y) prepared by an organization, say styles, and color in the routine production of VizCorp, for all the firms competing within its documents. These technological advances have industry. The graph will inform of any relationship increased readers’ visual expectations, and between the two variables, but the major interest a document failing to employ current design is to see how VizCorp compares against its principles creates an unappealing overall competitors. To best portray these comparisons, impression. This paper has reviewed many of VizCorp must be identified on the graph either these current developments and provided design through a unique symbol or annotation. The principles to guide their use in order to deliver annotation would be the name VizCorp added to documents that are professional and visually the graph with an arrow painting to the symbol engaging from first glance to last. for its results. It is sometimes useful to identify, by name, a few other firms, e.g. the major REFERENCES competitor or the firm with the highest profit Alred, Gerald; Brusaw, Charles; and Oliu, Walter. margin. These comparisons will be of interest to The Business Writer’s Handbook. Boston, MA: the reader and should be facilitated. Bedford/St. Martin’s, 2019. downloaded from A graph should be self-explanatory, but it must https://epdf.pub/the-business-writers-handbooknot stand alone: the narrative of the report must ninth-edition.html provide context, relevance, and integrate the graph with the report’s theme. The graph should Averbach, Brad. “Edward Tufte-Beautiful Evhave a business-like professional appearance and idence and Visual Explanation.” Forbes, Febbe free of clutter and chart junk. The second of ruary 9, 2016. downloaded from https://www. Tufte’s dictums is “Chartjunk indicates statistical forbes.com/sites/bradauerbach/2016/02/09/edstupidity.” (Tufte, p.26) Annotation should be ward-r-tufte-beautiful-evidence-and-visual-explanations/#4eb90a7231ba judiciously and sparingly used, and icons and other pictorials usually subtract from the chart’s Bailey, Edward. Writing & Speaking at Work: message. On a related note, many spreadsheets A Practical Guide to Business Communication. allow the addition of a false third dimension to Boston, MA: Prentice Hall, 2011. downloaded pie, bar and line charts. The third dimension from https://www.amazon.com/Writing-Speakis basically a visual trick, and one should not ing-Work-Edward-Bailey-ebook/dp/B01ABTS13M’ deceive the viewer. 34
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TCA SMALL BUSINESS FORUM Berinato, Scott. “Data Science and the Art of Persuasion.” Harvard Business Review, Jan/Feb 2019. downloaded from https://hbr.org/2019/01/ data-science-and-the-art-of-persuasion Berinato, Scott. “Visualizations That Really Work.” Harvard Business Review, June 2016. downloaded from https://hbr.org/2016/06/visualizations-that-really-work Bovee, Courtland and Thill, John. Business Communications Essentials: A Skills Based Approach. Boston, MA: Pearson, 2016. downloaded from https://www.pearson.com/us/higher-education/ product/Bovee-Business-Communication-Essentials-7th-Edition/9780133896787.html Cleveland, William S. The Elements of Graphing Data. Monterey, CA: Wadsworth, Inc., 1985. downloaded from https://www.abebooks.com/ book-search/title/elements-graphing-data/author/ cleveland-william/ Covey, Stephen. Style Guide: For Business and Technical Communication. Salt Lake City, UT: FranklinCovey, Co, 2012. downloaded from http://ptgmedia.pearsoncmg. com/images/9780133090390/samplepages/9780133090390.pdf Duarte, Nancy. “The Quick and Dirty on Data Visualization.“ Harvard Business Review, published on-line @ HBR.ORG, April 16, 2014. downloaded from https://hbr.org/2014/04/the-quick-and-dirtyon-data-visualization Few, Stephen C. Show Me the Numbers. Oakland, CA: Analytics Press, 2004. downloaded from https://www.amazon.com/Show-Me-Numbers-Designing-Enlighten/dp/0970601999 Flatley, Marie; Rentz, Kathryn; and Lentz, Paula. Business Communication. New York, NY: McGraw-Hill Irwin, 2012. downloaded from https:// www.amazon.com/Business-Communication-Flatley-McGraw-Hill-Paperback/dp/B00DU896FE Friendly, Michael and Denis, Daniel. “The Early Origins and Development of the Scatterplot.” Journal of the History of Behavioral Sciences. Vol. 41. No. 2 (Spring 2005), pp. 103 – 130. downloaded from http://datavis.ca/papers/friendly-scat.pdf Spring 2020 | The Cooperative Accountant
Guffey, Mary Ellen and Loewy, Dana. Essentials of Business Communication. Mason, OH: South-Western, Cengage Learning, 2013. downloaded from http://dl.booktolearn.com/ebooks2/ management/9781111821227_essentials_of_business_communication_f6f7.pdf Hynes, Geraldine. Managerial Communication: Strategies and Applications. Los Angeles, CA: Sage, 2016. downloaded from https://books. google.com/books?hl=en&lr=&id=seBH DwAAQBAJ&oi=fnd&pg=PP1&dq=Hynes+ Geraldine+Managerial+Communication:+ Strategies+and+Applications,+Los+Angeles, +CA,+Sage+2016&ots=wXdVjOHCZl&sig= VjUIRXmBWZl-0aB7-AYqBOBxLSQ#v=one page&q&f=false Knalfic, Cole Nussbaumer. Storytelling with Data. Hoboken, N.J.: John Wiley & Sons, 2015. downloaded from http://www.bdbanalytics.ir/ media/1123/storytelling-with-data-cole-nussbaumer-knaflic.pdf Oliu, Walter; Brusaw, Charles; and Alred, Gerald. Writing That Works: Communicating Effectively on the Job. Boston, MA: Bedford/St. Martin’s, 2020. downloaded from https://www.amazon. com/Writing-That-Works-Communicating-Effectively/dp/131901948X Rentz, Kathryn and Lentz, Paula. Business Communication: A Problem-Solving Approach. New York, NY: McGraw-Hill, 2018. downloaded from https://www.amazon.com/Business-Communication-Problem-Solving-Approach-Loose-Leaf/ dp/1259565874 Reynolds, Garr. Presentation Zen Design. Berkeley, CA: New Riders, 2010. downloaded from http://buildingpublicunderstanding.org/assets/ files/presentationzen.pdf Tufte, Edward R. Visual and Statistical Thinking: Displays of Evidence for Making Decisions, Cheshire, CT: Graphics Press, 1997. downloaded from https://kathep.com/site/assets/files/3456/ tufte_1997_visual_and_statistical_thinking.pdf WinWorld, “Chart-Master 6.1.” downloaded from https://winworldpc.com/product/chart-master/6.1, June 10, 2019. 35
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