The Cooperative Accountant - Spring 2021

Spring 2021 | 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: Starting or Jump-Starting an Internal Audit Department?

By Peggy Maranan, CPA, MBA, Ph.D.

10 ACCTFAX Bulletin Board

By Phil Miller, CPA; Greg Taylor, MBA, CPA, CVA; Bill Erlenbush, CPA

16 TAXFAX

By George W. Benson; David Antoni, CPA; Darice Henritze, CPA; Brett Wainger; Daniel S. Welytok; Sandra E. Hofmann, CPA

28 Small Business Forum: Cooperatives and Covid: Managing for Safety

By Barbara A. Wech, Ph.D.; Joseph G. Van Matre, Ph.D.; James D. Byrd, Jr. Ph.D., CPA, CHFP

PRESIDENT: *William Miller, CPA Electric Co-op Chapter Bolinger, Segars, Gilbert & Moss, LLP 8215 Nashville Avenue Lubbock, TX 79423

(806) 747-3806 bmiller@bsgm.com

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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info@nsacoop.org

Krista Saul, Client Accounting Manager Bill Erlenbush, Director of Education Spring 2021

| 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 CSB 319, 710 13th Street South Birmingham, AL 35294-1460 • (205) 934-8827 fmessina@uab.edu

As our business worlds continue to change, I am happy to report that the Cooperative Structure is alive and well. My University as with many others continue boosting their efforts for entrepreneurs to take their ideas to the marketplace. I recently met with one of our entrepreneurial students who approached me and noted that everyone should learn about the cooperative structure opportunities for new businesses. The student was adamant that more business students should be made aware of the benefits of cooperatives. I could not agree more.

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

Sharing knowledge is a wonderful thing for all!!! Knowledge can change our world!

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

Positively Yours, Frank M. Messina, DBA, CPA

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

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

Spring 2021 | The Cooperative Accountant

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Editor & Guest Writer Peggy Maranan, Ph.D. DEMCO Director, Finance 16262 Wax Road Greenwell Springs, LA 70739 Phone 225.262.3026 Cell: 239.887.0131 peggym@DEMCO.ORG

Overview of Internal Audit Department function Organizations will deploy many layers of defense to ensure there are sufficient controls in place to manage risk, avoid setbacks, and aid in achieving company objectives.

The Institute of Internal Auditors (IIA) is an industry authority on internal auditing, along with other functions related to the internal auditing function.

From the IIA website (n.d.), “About the IIA” section: Established in 1941, The Institute of Internal Auditors (IIA) is an international professional association with global headquarters in Lake Mary, Florida, USA. The IIA is the internal audit profession’s global voice, recognized authority, acknowledged leader, chief advocate, and principal educator. Generally, members work in internal auditing, risk management, governance, internal control, information technology audit, education, and security. (para. 1) They recommend the following best practices in regards to effectively managing risk: ● Risk and control processes should be 4

structured in accordance with the Three Lines of Defense model. ● Each line of defense should be supported by appropriate policies and role definitions. ● There should be proper coordination among the separate lines of defense to foster efficiency and effectiveness. ● Risk and control functions operating at the different lines should appropriately share knowledge and information to assist all functions in better accomplishing their roles in an efficient manner. ● Lines of defense should not be combined or coordinated in a manner that compromises their effectiveness. ● In situations where functions at different lines are combined, the governing body should be advised of the structure and its impact.

For organizations that have not established an internal audit activity, management and/ or the governing body should be required to explain and disclose to their stakeholders that they have considered how adequate assurance on the effectiveness of the organization’s governance, risk management, and control structure will be obtained. (IIA, 2013, p. 7)

Zaman (2016) describes the lines of defense in the IIA’s Three Lines of Defense model: The first layer of defense is the operational Spring 2021 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM Table 1: IIA’s Lines of Defense described First Line of Defense

Second Line of Defense

Third Line of Defense

Risk Owners/Managers

Risk Control and Compliance

Risk Assurance

• Operating Management • Limited Independence

• Reports Primarily to

Management

• Internal Audit • Greater Independence • Reports to Governing Body

(IIA, 2013, para. 6) management (process owner). The second layer of defense is the control function such as internal control, risk management, and compliance. The third layer of defense is the internal and external audit function. (para. 2) These lines of defense are further described by the IIA in Table 1 above.

(IIA, 2013, p. 6) The IIA Three Lines of Defense Model is provided below in Table 2.

The IIA recommends that “all three lines should exist in some form at every

organization, regardless of size or complexity” for strongest risk management practices (p. 7). They also note that “because every organization is unique and specific situations vary, there is no one “right” way to coordinate the Three Lines of Defense” (p. 6). They recommend that every company establish risk management practices that are applicable and effective to their specific organization. Brasseur (2020) notes that “the model encourages management and internal audit to coordinate response” (para. 3).

Table 2: The IIA Three Lines of Defense Model

(IIA, 2020, para. 2)

(IIA, 2020, para. 2) Spring 2021 | The Cooperative Accountant

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UTILITY COOPERATIVE FORUM How to establish an Internal Audit Department Watson (2020) suggests identifying your specific needs in designing an internal audit department. The three scenarios she describes include: Scenario 1 — Setting up a brand new department Scenario 2 — Switching from an outsourced team to in-house department Scenario 3 — Taking over an existing department (para. 5-7) Depending upon the scenario, the approach and effort to starting or jumpstarting the department could vary.

Additionally, Watson offers a methodical approach by providing the following highlevel roadmap steps: 1. Develop Relationships and Establish Expectations 2. Understand the Business Strategy and Associated Risks 3. Evaluate, Train, and Allocate Your Resources (para. 10-12)

Zaman (2018) offers “How to establish the Internal Audit Department in 8 simple

steps?”. The steps are outlined in Table 3 below.

Model templates from the IIA are provided in Table 4 for Audit Committee and Internal Audit Charters. These can be used as a starting place in developing charters for your organization. They also can be compared to existing charters within your organization for possible update or improvements.

There are many risk assessment models and tools available, and you should select what works best for your organization after doing some research and becoming familiar with this topic. Table 5 includes some of Zaman’s articles offering step-by-step instructions in how to approach the annual risk assessment and audit planning processes.

These could aid in either getting you started or refining current assessment processes.

Summary Cynthia Watson summarizes her article “How to Start a Successful Internal Audit Department” beautifully: There’s no one-size-fits-all approach to setting up an internal audit department.

Table 3: How to establish the Internal Audit Department in 8 simple steps?

Step

Step Description

Step 1: Tone at The Top

It is the most vital component before establishing any function especially internal audit. Internal auditors need the utmost support of the top management and the Board in the establishment of the Internal Audit Department. Once have it [sic], it will be easy to approve the framework and reporting structure, which will allow internal auditors to maintain their independence and objectivity.

Step 2: Business Understanding

It is very much important to be acquainted with the culture and business acumen of the company. It gives a general idea of the company risk maturity and control environment; accordingly, an internal auditor can determine their approach to pitch the Internal Audit Department framework.

Step 3:

The structure of the Internal Audit Department is very crucial. Some of the important questions to ponder upon are where does the Internal Audit Department will [sic] fall within the organization structure, to whom they will report? who will have the decision to hire or fire internal auditors, etc.? In order to maintain independence, Internal Audit Department shall report to the Audit Committee or directly to the Board.

Structure

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Spring 2021 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM Table 3: How to establish the Internal Audit Department in 8 simple steps?

(Continued) Step

Step Description

Step 4: Audit Committee Charter

Once the reporting line is defined, an Audit Committee Charter shall be developed to define the role and responsibilities of the Committee. The Charter shall be approved by the Board.

Step 5: Internal Audit Charter

The second governing document after the Audit Committee Charter is the Internal Audit Charter, which define the role and responsibilities of the Internal Audit Department. The Internal Audit Charter shall be approved by the Audit Committee.

Step 6: Policies and Procedures

As per the IPPF [IIA’s International Professional Practices Framework], the Head of Internal Audit must develop internal audit policies and procedures to regulate, standardize and document the audit activities.

The policies shall cover the following process but not limited to; annual audit plan, approval process, engagement plan, audit execution, audit reporting, follow-up, reporting to different stakeholders, quality assurance etc. The policies and procedures shall be approved by the Audit Committee.

Step 7: Budget

The Audit Committee shall approve the budget of the Internal Audit Department, sufficient enough to attract good talent and provide resources for the Internal Audit Department to carry out functional activities.

Step 8: Liaison with Management and Other Departments

Internal Audit Department shall meet with the Management and the other Departmental Heads to develop business and operational understanding. All another [sic] department especially the second line of defense will enable the Internal Audit Department to work together by leveraging their expertise to bridge silos within the organization.

This interaction may also help in developing the Audit Universe and carry out Risk Assessment.

Table 4: Institute of Internal Auditors (IIA) model templates IIA Model Template name/ (Zaman Step reference)

URL

Model Audit Committee Charter/ Step 4

https://na.theiia.org/standards-guidance/Public%20 Documents/Model-Audit-Committee-Charter.pdf

Model Internal Audit Charter/ (Step 5)

https://na.theiia.org/standards-guidance/Public%20 Documents/Model%20Internal%20Audit%20Activity%20 Charter.pdf

From the IIA website https://na.theiia.org/Pages/IIAHome.aspx Spring 2021 | The Cooperative Accountant

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UTILITY COOPERATIVE FORUM You must meet your organization where it is. Each organization will have different needs, risk appetites, and a different maturity level — and you must create or change the department to support the organization while still establishing a high standard.

Don’t be afraid to be open to new ideas — change is here to stay, and being innovative helps audit teams provide value and be more effective. Understanding stakeholder expectations, fully comprehending the business strategy and associated risks, and evaluating your resources to determine if you have what’s needed to deliver value to your organization are essential steps in setting up a successful internal audit team. (para. 19)

The important thing to remember is to just start somewhere, and try not to be intimidated by the process. Also, if you already have an internal audit department in place, take the time periodically to revisit the framework and procedures to ensure that they are keeping up with changes in the business and are continuing to help mitigate risks to your organization.

Note: Some additional reading information has been cited below, including some articles related to internal auditing trends, risks in the energy and utilities industry, along with an article related to COVID-19 risks.

References Brasseur, k. (July 20, 2020). IIA’s ‘Three Lines of Defense’ updated to stress collaboration.

Retrieved February 21, 2021 from the following website: https://www.complianceweek.com/ risk-management/iias-three-lines-of-defense-updated-to-stress-collaboration/29212.article Institute of Internal Auditors (IIA). (January 2013). IIA Position Paper: The Three Lines of Defense in Effective Risk Management and Control. Retrieved February 21, 2021 from the following website: https://na.theiia.org/standards-guidance/Public%20Documents/PP%20 The%20Three%20Lines%20of%20Defense%20in%20Effective%20Risk%20Management%20 and%20Control.pdf Institute of Internal Auditors (IIA). (July 20, 2020). IIA Issues Important Update to Three Lines Model. Retrieved February 21, 2021 from the following website: https://na.theiia.org/ news/Pages/IIA-Issues-Important-Update-to-Three-Lines-Model.aspx Institute of Internal Auditors (IIA). (n.d.). About the IIA section. Retrieved February 21, 2021 from the following website: https://na.theiia.org/about-us/Pages/About-The-Institute-ofInternal-Auditors.aspx Watson, C. (September 2, 2020). How to start a successful internal audit department.

Retrieved February 21, 2021 from the following website: https://www.auditboard.com/blog/ start-successful-internal-audit-department/ Zaman, A. (December 24, 2016). Difference between the role of Internal Control, Compliance, Risk Management and Audit? Retrieved February 21, 2021 from the following website: https://www.linkedin.com/pulse/difference-between-role-internal-controlcompliance-arif-zaman-acca-/ 8

Spring 2021 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM Zaman, A. (September 14, 2018). How to establish the Internal Audit Department in 8 simple steps? Retrieved February 21, 2021 from the following website: https://www. linkedin.com/pulse/how-establish-internal-audit-department-8-simple-steps-arif-zaman Additional Reading: BDO. (October 2015). Establishing an Effective Internal Audit Function [PowerPoint slides].

Retrieved February 21, 2021 from the following website: https://www.bdo.com/BDO/media/ Webinar-Handouts/Establishing-an-Effective-Internal-Audit-Function-Presenters.pdf Focal Point Insights. (January 14, 2020). The Future of Internal Audit: 10 Audit Trends to Prepare for in 2020. Retrieved February 21, 2021 from the following website: https://blog.focal-point.com/the-future-of-internal-audit10-audit-trends-to-prepare-forin-2020 Frank, Rimerman and Co. LLP. (August 7, 2009). Achieving Objectives Through Internal Audit. Retrieved February 21, 2021 from the following website: https://www.frankrimerman.com/resources/achieving-objectives-through-internal-audit/ IS Partners, LLC. (April 26, 2019). How Do Internal Audits Work? Retrieved February 21, 2021 from the following website: https://www.ispartnersllc.com/blog/how-do-internalaudits-work/ KPMG. (March 20, 2020). Plugged In: Perspectives from U.S. utilities on potential COVID-19 impacts. Retrieved February 21, 2021 from the following website: https://home.kpmg/us/ en/home/insights/2020/03/perspectives-on-potential-covid-19-impacts.html Protiviti. (2009). Guide to Internal Audit, Frequently Asked Questions about Developing and Maintaining an Effective Internal Audit Function. Second edition. Retrieved February 21, 2021 from the following website: https://www.protiviti.com/sites/default/files/singapore/insights/guide_to_internal_audit.pdf Protiviti. (2019). Illuminating top global risks in 2020: Regulatory Changes and Resistance to Change are Top Concerns for Energy and Utilities Organizations. Retrieved February 21, 2021 from the following website: https://www.protiviti.com/sites/default/files/2020-toprisks-survey-energy-utilities-industry-group-protiviti_0.pdf PWC. (n.d.). COVID-19: What it means for the power and utilities industry. Retrieved February 21, 2021 from the following website: https://www.pwc.com/us/en/library/covid-19/how-covid-19-is-impacting-power-and-utilities. html Spring 2021 | The Cooperative Accountant

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GENERAL EDITOR Philip W. Miller, CPA NSAC Assistant Education Director 18 Tow Path Lane South Richmond, VA 23221 (804) 339-9577 pwm01@comcast.net

ACCTFAX

ASSISTANT EDITORS Greg Taylor, CPA, CVA, MBA Shareholder Williams & Company (806) 785-5982 gregt@dwilliams.net

By Phil Miller, NSAC Assistant Education Director

RECENT ACTIVITIES OF THE PRIVATE COMPANY COUNCIL The Private Company Council (PCC) met on Thursday, December 3, 2020. Below is a brief summary of issues addressed by the PCC at the meeting: PCC Issue No. 2018-01, Practical Expedient to Measure Grant-Date Fair Value of Equity-Classified Share-Based Awards: FASB staff gave an overview of the feedback received from comment letters in response to the proposed Accounting Standards Update—Compensation—Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Option Awards.

PCC members discussed the comment letter feedback on the areas associated with the proposed practical expedient. At a future meeting, the PCC will consider expanding the scope of the practical expedient, clarifying the basis of application, and expanding the references to Section 409A. Current Issues in Financial Reporting: FASB staff highlighted that a FASB Staff Educational Paper on Topic 470 (Debt): Borrower’s Accounting for Debt Modifications was recently made available on the FASB website.

FASB staff briefly reviewed the Goodwill— Triggering Event Assessment Alternative for Private Companies and Not-For-Profit Entities 10

Bill Erlenbush, CPA NSAC Education Director (309) 530-7500 nsacdired@gmail.com

project, which was added to the Board’s technical agenda in response to feedback received from the PCC and the AICPA’s Technical Issues Committee (TIC), and for which the Board has instructed the staff to proceed with a proposed Update. Given the proximity to year-end, PCC members concurred with the 30-day comment period decided by the Board. PCC members discussed which entities should be included in the scope of the accounting alternative.

FASB staff expects the proposed Update to be issued for public comment in midDecember.

Identifiable Intangible Assets and Subsequent Accounting for Goodwill: FASB staff provided the PCC with an update on this project, focusing on recent Board discussions. FASB staff gave an overview of the approaches being considered by the Board for amortization periods, including default amortization periods, managementdetermined amortization periods, and approaches with elements of both. PCC members provided their views on the length of a default amortization period, management deviations from a default amortization period, and whether there should be an imposed cap or floor on an amortization period. PCC members mostly supported a 10-year default amortization period. Some PCC members Spring 2021 | The Cooperative Accountant

ACCTFAX expressed the need for a floor to be imposed on the amortization period, others did not think a floor would be necessary, and still others preferred that a cap be imposed on the amortization period.

Profits Interests and Their Interrelationship with Partnership Accounting: FASB staff briefly summarized the PCC’s prior discussion about profits interests and partnership accounting. FASB staff noted that a working group was formed in August comprising three PCC members and a member of the AICPA’s TIC. The working group currently is conducting outreach with specialists to better understand legal, tax, and valuation issues associated with profits interests. Based on the initial outreach conducted, FASB staff described common valuation methodologies used to measure awards of profits interests and some of the factors that contribute to complexity in practice. FASB staff reiterated that its outreach was in the early stages and would be supplemented by additional outreach and research going forward.

Implementation Issues—Revenue: FASB staff provided the PCC with an update of the Revenue Recognition—Practical Expedient for Private Company Franchisors project and the proposed Accounting Standards Update, Franchisors—Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient, whose comment period ended in early November. The project seeks to address certain difficulties private company franchisors experience in applying Topic 606, Revenue from Contracts with Customers.

FASB staff briefly summarized the comment letter feedback received and asked PCC members for feedback. Generally, PCC members supported the Board’s efforts to reduce the cost of applying the revenue guidance for private company franchisors.

Implementation Issues—Leases: FASB staff provided the PCC with an update on the post-implementation review process and summarized the Board’s discussion at Spring 2021 | The Cooperative Accountant

the December 2, 2020 Board meeting. At that meeting, the Board directed the staff to conduct additional research on the practical expedient that allows nonpublic lessees to use the risk-free rate as the lease discount rate. Specifically, the Board requested additional information on the appropriateness of the risk-free rate and whether the practical expedient should be applied at the underlying-class-of-asset level rather than at an entity-wide level. PCC members were supportive of refining the practical expedient and provided feedback on the appropriateness of replacing the risk-free rate with an alternative rate (for example, an A or BBB rate).

Disclosure Review—Share-Based Payments: FASB staff provided an overview of this research project and highlighted private company considerations raised during research. PCC members noted that the current required disclosures for private companies generally are not difficult to prepare and those disclosures provide relevant information to users of private company financial statements. Some PCC members indicated that there could be some opportunity to improve certain disclosures required for private companies.

The next PCC meeting is scheduled for Monday, April 19 and Tuesday, April 20, 2021.

FASB PROPOSES IMPROVEMENTS TO ACCOUNTING FOR ACQUIRED REVENUE CONTRACTS WITH CUSTOMERS IN A BUSINESS COMBINATION On December 15, 2020, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) intended to address inconsistency and diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination. Stakeholders are encouraged to review and share input on the proposed ASU by March 15, 2021.

Current GAAP provides guidance on when 11

ACCTFAX to recognize and how to measure assets and liabilities in a business combination but does not provide guidance specific to contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with Topic 606, Revenue from Contracts with Customers.

Some stakeholders indicated that it is unclear how an acquirer should evaluate whether to recognize a contract liability from a revenue contract with a customer acquired in a business combination after Topic 606 is adopted. Furthermore, it was identified that under current practice, the timing of payment (payment terms) of a revenue contract may subsequently affect the post-acquisition revenue recognized by the acquirer.

The proposed ASU would address these issues by providing guidance in Topic 805, Business Combinations, that would require an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. Generally, this would result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements before the acquisition. The proposed ASU would not affect the accounting for other assets or liabilities that may arise from revenue contracts from customers in a business combination, such as customer-related intangible assets and contract-based intangible assets.

The proposed ASU is available at www. fasb.org.

FASB PROPOSES ACCOUNTING ALTERNATIVE TO THE GOODWILL TRIGGERING EVENT ASSESSMENT FOR CERTAIN PRIVATE COMPANIES AND ORGANIZATIONS On December 21, 2020, the Financial Accounting Standards Board (FASB) issued 12

a proposed Accounting Standards Update (ASU) intended to provide an accounting alternative that would reduce the complexity for certain private companies and notfor-profit organizations when performing the goodwill triggering event evaluation.

Stakeholders were encouraged to review and provide comment on the proposed ASU by January 20, 2021.

Under current GAAP, goodwill must be tested for impairment when a triggering event occurs that indicates that it is more likely than not that the fair value of the reporting unit is below its carrying value.

Companies and organizations are required to monitor for and evaluate goodwill triggering events as they occur throughout the year.

Some stakeholders raised questions about the value of evaluating a triggering event at an interim date when certain private companies and not-for-profit organizations only issue GAAP-compliant financial statements on an annual basis. They noted the cost and complexity of preparing interim balance sheets and projecting cash flows that, according to those stakeholders, may not be relevant at the annual reporting date when financial statements are issued.

To address this, the proposed ASU would introduce an accounting alternative that would allow private companies and notfor-profit organizations that only report goodwill (or accounts that would be affected by a goodwill impairment such as retained earnings and net income) on an annual basis to perform a goodwill triggering event assessment, and any resulting test for goodwill impairment, on the annual reporting date only. It would eliminate the requirement for companies and organizations that elect this alternative to perform this assessment during interim reporting periods, limiting it to the annual reporting date only.

The scope of the proposed alternative would be limited to goodwill that is tested for impairment in accordance with Subtopic 350-20, Intangibles—Goodwill and Other— Spring 2021 | The Cooperative Accountant

ACCTFAX Goodwill. The guidance would not be limited to a specified time period but would be available on an ongoing basis. No additional disclosures would be required.

The proposed ASU is available at www. fasb.org.

FASB CLARIFIES SCOPE OF RECENT REFERENCE RATE REFORM GUIDANCE On January 7, 2021, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that clarifies the scope of the FASB’s recent reference rate reform guidance.

In March 2020, the FASB issued guidance aimed at easing the potential accounting burden expected when global capital markets move away from the London Interbank Offered Rate (LIBOR), the benchmark interest rate banks use to make short-term loans to each other. That guidance, known as Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provided temporary, optional expedients and exceptions for applying accounting guidance to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

Some stakeholders have questioned whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. These stakeholders indicated that the modification, commonly referred to as the “discounting transition,” may have accounting implications, and raised concerns about the potential need to reassess previous accounting determinations related to those derivatives and about the possible hedge accounting consequences of the discounting transition.

The amendments in the new ASU Spring 2021 | The Cooperative Accountant

clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

The ASU is available at www.fasb.org.

FASB SIMPLIFIES HOW PRIVATE COMPANY FRANCHISORS EVALUATE CERTAIN PERFORMANCE OBLIGATIONS On January 28, 2021, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that provides a practical expedient that simplifies how private company franchisors analyze certain activities when determining their performance obligations in a franchise agreement.

When a business owner (the franchisee) opens a new branch of a franchise, the franchise agreement generally stipulates that the franchisor will support certain preopening activities to support the new branch.

Those activities may include services such as training or site selection. The practical expedient permits certain pre-opening services listed within the guidance to be accounted for as distinct from the franchise license.

The ASU, including effective date information, is available at www.fasb.org.

SEC ADOPTS RULES TO FACILITATE ELECTRONIC SUBMISSION OF DOCUMENTS TO THE AGENCY On Nov. 17, 2020, the Securities and Exchange Commission voted to adopt rules and rule amendments that will provide additional flexibility in connection with documents filed with the Commission by permitting the use of electronic signatures in authentication documents, and 13

ACCTFAX facilitate electronic service and filing in the Commission’s administrative proceedings.

These new rules and amendments are part of a series of initiatives designed to modernize and strengthen the agency’s operations.

In the first action, the Commission adopted rule amendments to permit the use of electronic signatures when executing authentication documents in connection with many documents filed with the Commission.

Rule 302(b) of Regulation S-T currently requires that each signatory to an electronic filing manually sign a signature page or other document (“authentication document”) before or at the time of the electronic filing to authenticate the signature that appears in typed form within the electronic filing.

These amendments permit a signatory to an electronic filing who follows certain procedures to sign an authentication document through an electronic signature that meets certain requirements specified in the EDGAR Filer Manual. In addition, the Commission amended certain rules and forms under the Securities Act, Exchange Act, and Investment Company Act to allow the use of electronic signatures in authentication documents in connection with certain other filings when these filings contain typed, rather than manual, signatures. These amendments recognize the widespread use of electronic signatures and technological developments in the authentication and security of electronic signatures, as well as the continuing need to support remote workforces, and follow a rulemaking petition joined by nearly 100 public companies. The rule amendments will be effective upon publication of the adopting release in the Federal Register.

In the second action, the Commission adopted rule amendments to require electronic filing and service of documents in administrative proceedings. These rule amendments also require redaction of sensitive personal information from many of these documents before filing with the 14

Commission. These amendments will become effective 30 days after publication of the adopting release in the Federal Register.

However, compliance will not be required until April 12, 2021, and there will be an initial 90-day phase-in period following the compliance date.

SEC ADOPTS AMENDMENTS TO MODERNIZE AND ENHANCE MANAGEMENT’S DISCUSSION AND ANALYSIS AND OTHER FINANCIAL DISCLOSURE On Nov. 19, 2020, the Securities and Exchange Commission announced that it has voted to adopt amendments that will modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K. The amendments are intended to enhance the focus of financial disclosures on material information for the benefit of investors, while simplifying compliance efforts for registrants.

“Today’s rules will improve the quality and accessibility of the disclosure that companies provide their investors, including, importantly giving investors greater insight into the information management uses to monitor and manage the business,” said SEC Chairman Jay Clayton. “The improved approach to these disclosures reflects the broad diversity of issuers in our public markets and will allow investors to make better capital allocation decisions, while reducing compliance burdens and costs and maintaining strong investor protection.”

The amendments reflect the Commission’s long-standing commitment to a principlesbased, registrant-specific approach to disclosure. This approach, as applied to Management’s Discussion and Analysis, should yield material information relevant to an assessment of the financial condition and results of operations of the registrant, and allow investors to view the registrant from management’s perspective. The amendments Spring 2021 | The Cooperative Accountant

ACCTFAX are also intended to improve disclosure by enhancing its readability, discouraging repetition and eliminating information that is not material.

The Commission voted to adopt amendments to modernize, simplify and enhance certain financial disclosures called for by Regulation S-K, and related rules and forms, in a manner that reduces the costs and burdens on registrants while continuing to provide material information to investors. The amendments are also designed to improve the readability and navigability of disclosure documents, and discourage repetition and disclosure of immaterial information.

Background The Commission proposed the amendments on Jan. 30, 2020 as part of its ongoing, comprehensive evaluation of disclosure requirements intended to improve the existing disclosure regime for both investors and companies. The amendments reflect the Commission’s consideration of comment letters received in response to the proposal, as well as the staff’s experience with Regulation S-K arising from the Division of Corporation Finance’s disclosure review program and changes in the regulatory and business landscape since the adoption of Regulation S-K. Highlights The changes to Items 301, 302, and 303 of Regulation S-K sharpen the focus on material information by: ● Eliminating Item 301 (Selected Financial Data); and ● Modernizing, simplifying and streamlining Item 302(a) (Supplementary Financial Information) and Item 303 (MD&A).

Specifically, these amendments: ● Revise Item 302(a) to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes; ● Add a new Item 303(a), Objective, to state the principal objectives of MD&A; Spring 2021 | The Cooperative Accountant

● Amend

current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources; ● Amend current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations; ● Add a new Item 303(b)(3), Critical accounting estimates, to clarify and codify Commission guidance on critical accounting estimates; ● Replace current Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A; ● Eliminate current Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and certain overlap with information required in the financial statements; and ● Amend current Item 303(b), Interim periods (amended Item 303(c)) to modernize, clarify and streamline the item and allow for flexibility in the comparison of interim periods What’s Next?

The amendments will become effective 30 days after they are published in the Federal Register. Registrants are required to comply with the rule beginning with the first fiscal year ending on or after the date that is 210 days after publication in the Federal Register (the “mandatory compliance date”). Registrants will be required to apply the amended rules in a registration statement and prospectus that on its initial filing date is required to contain financial statements for a period on or after the mandatory compliance date.

Although registrants will not be required to apply the amended rules until their mandatory compliance date, they may comply with the final amendments any time after the effective date, so long as they provide disclosure responsive to an amended item in its entirety.

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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

Updates to the PPP Loan Program and Cooperatives

By Daniel S. Welytok Under the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) enacted in April of 2020, Congress announced the Paycheck Protection Program (“PPP”) to help small businesses weather the negative economic impact caused by the COVID pandemic. Loans under the PPP are 100% guaranteed by the Small Business Administration (“SBA”), and the full principal amount of the loans and any accrued interest may qualify for loan forgiveness.

The SBA, in consultation with the Department of Treasury, has intermittently published a list of “Paycheck Protection Program Loans Frequently Asked Questions” and in the April 24, 2020 version of that document, question #35 asked whether agricultural and other forms of cooperatives are eligible to receive PPP loans. The answer is yes – as long as other PPP eligibility requirements are met, small agricultural cooperatives and other cooperatives may receive PPP loans.

In response to questions from the electric cooperative community, the SBA issued an interim rule on May 19, 2020, stating that for purposes of the PPP, an electric cooperative that is exempt from Federal income taxation under section 501(c) (12) of the Code will be considered to be ‘‘a business entity organized for profit’’ under 13 CFR 121.105(a)(1). The result is that electric cooperatives are eligible PPP borrowers, as long as other eligibility requirements are met.

As cooperatives and other small businesses availed themselves to the PPP, questions arose as to the deductibility of expenses paid with loan proceeds in the event the loan was ultimately forgiven. In response, the IRS issued Notice 2020-32 16

GUEST WRITERS David F. Antoni, CPA Partner KPMG, LLP 1600 Market Street Philadelphia, PA 19103-7222 (267) 256-1627 dantoni@kpmg.com Darice Henritze, CPA Partner KPMG LLP International Tax (Denver, CO Office) dhenritze@kpmg.com (303) 382-7019 Brett Wainger, Senior Manager KPMG LLP International Tax (Denver, CO Office) Daniel S. Welytok von Briesen & Roper, S.C. 411 East Wisconsin Avenue, Suite 1000 Milwaukee, WI 53202 (414) 287-1408 e-mail: dwelytok@vonbriesen.com Sandra E. Hofmann, CPA Crowe LLP 9910 Dupont Circle E., Suite 230 Fort Wayne, IN 46825 (260) 487-2312 sandy.hofmann@crowe.com

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TAXFAX on April 30, 2020 which squarely addressed the deductibility for Federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a PPP loan. The notice clarified that no deduction is allowed under the Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan pursuant to section 1106(b) of the CARES Act, and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act. On November 18, 2020, the IRS issued further guidance to amplify Notice 2020-32, in the form of Rev. Rul. 2020-27 and Rev. Proc.

2020-51.

In Rev. Rul. 2020-27, the IRS addressed whether a taxpayer that received a PPP loan and paid or incurred certain otherwise deductible expenses allowed by the CARES Act can deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the PPP loan based on the otherwise deductible expenses. The revenue ruling held that if a taxpayer received a PPP loan and paid or incurred certain otherwise deductible expenses allowed by the CARES Act, the taxpayer may not deduct those expenses in the taxable year in which the expenses were paid or incurred at the end of such taxable year, if the taxpayer reasonably expects to receive forgiveness of the PPP loan on the basis of the expenses it paid or accrued during the applicable period, even if the taxpayer has not submitted an application for forgiveness of the PPP loan by the end of such taxable year.

In the same vein, Rev. Proc. 2020-51, issued along with Rev. Rul. 2020-27, provided a safe harbor allowing a taxpayer to claim a deduction in the taxpayer’s taxable year beginning or ending in 2020 for certain otherwise deductible eligible expenses, if: (1) the eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year; Spring 2021 | The Cooperative Accountant

(2) the taxpayer receives a PPP loan at the end of the taxpayer’s 2020 taxable year and the taxpayer expects it to be forgiven in a subsequent taxable year; and (3) in a subsequent taxable year, the taxpayer’s request for forgiveness of the PPP loan is denied, or the taxpayer decides never to request forgiveness of the PPP loan. Section 4.01 of the Rev. Proc. provided that a qualifying taxpayer may deduct non-deducted eligible expenses on the taxpayer’s original income tax or information return the 2020 taxable year, or on an amended return for the 2020 taxable year. Section 4.02 provided a qualifying taxpayer may deduct non-deducted eligible expenses in the year that the loan forgiveness is denied under general tax principles, assuming that the taxpayer does not elect to use the safe harbor in Section 4.01 of Rev. Proc. 2020-51. The deduction, of course, is limited to an amount no greater than the principal amount of the original PPP loan. In addition to the other qualification requirements in the Rev. Proc., the taxpayer must attach a statement to the return on which the taxpayer deducts non-deducted eligible expenses titled “Revenue Procedure 2020-51 Statement,” and must include: (1) the taxpayer’s name, address, and E.I.N.; (2) a statement affirming that the taxpayer is an eligible taxpayer under the Rev. Proc.; (3) a statement that the taxpayer is applying section 4.01 or section 4.02 of the Rev. Proc.; (4) the amount and date of disbursement of the taxpayer’s PPP loan; (5) the total amount of PPP loan forgiveness that the taxpayer was denied or decided to no longer seek; (6) the date the taxpayer was denied or decided not to seek PPP loan forgiveness; and (7) the total amount of eligible expenses and nondeducted eligible expenses that are reported on the return.

The rationale of the U.S. Treasury Department and the IRS for issuing this guidance was that since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. The result is neither a tax benefit nor tax burden since the taxpayer has not paid anything out of 17

TAXFAX its own funds. In other words, if a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. However, in the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses.

On December 27, 2020, the president signed the $900 billion, 5,600 page Consolidated Appropriations Act, 2021 (“CAA”), which extends authority to make PPP loans through March 31, 2021, and allows housing cooperatives to be eligible for PPP loans. Division N, Title III of the CAA, known as the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” includes significant revisions to the eligibility and administration of PPP loans.

Under the initial version of the CARES, there was no provision for housing cooperatives.

Passive businesses owned by developers and landlords were deemed ineligible, and apartment complexes were also excluded.

The CAA also provides that deductible ordinary and necessary business expenditures that provide for the forgiveness of a PPP loan are deductible by the PPP loan borrower, reversing existing IRS guidance. On January 7, 2021, the IRS issued Rev. Rul. 2021-2, which obsoletes Notice 2020-32 and Rev. Rul. 2020-27, and provides that no amount shall be included in the gross income of an eligible recipient by reason of forgiveness of indebtedness of a PPP loan, and no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of an exclusion from gross income provided by the PPP. Commentators advise that cooperative bylaws and other governing documents be reviewed to ensure that there are no restrictions on the cooperative’s authority to borrow money by applying for a PPP loan.

And if a cooperative has an outstanding mortgage or other secured financing, the existing loan documentation should be checked to see if the consent of the current lender is be required.

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The full scope of the CAA is well beyond the scope of this review, and cooperatives interesting in participating should consult with their primary lenders to determine their eligibility and the availability of a PPP loan.

Interim final rules and additional guidance will be provided during the life of the PPP loan program, and practitioners accordingly should monitor guidance updates to ensure compliance.

Treasury Department and IRS issue final regulations regarding like-kind exchanges of real property

By Sandra E. Hofman, CPA In early December, the Treasury and Internal Revenue Service published final regulations providing guidance for like-kind exchanges under section 1031 of the Internal Revenue Code. T.D. 9935, 85 Fed. Reg. 77365 (December 2, 2020). These final regulations add a definition of real property, and provide a rule addressing receipt of personal property that is incidental to real property a taxpayer receives in an otherwise qualifying like-kind exchange. The final regulations affect taxpayers that exchange business or investment property for other business or investment property and apply to exchanges beginning after December 2, 2020.

As background, the 2017 Tax Cuts and Jobs Act (TCJA) amended section 1031 to limit its application to exchanges of real property. Specifically, section 1031 after amendment provides that no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment if the real property is exchanged solely for real property of a like kind that is to be held either for productive use in a trade or business or for investment. As of January 1, 2018, exchanges of personal or intangible property such as vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify for nonrecognition of gain as like-kind exchanges. To implement these statutory changes, the final regulations limit the Spring 2021 | The Cooperative Accountant

TAXFAX application of the like-kind exchange rules to exchanges of real property, add a definition of real property, and adapt an existing incidental property exception to apply to a taxpayer’s receipt of personal property that is incidental to real property the taxpayer receives in the exchange.

Real property includes land and generally anything permanently built on or attached to the land, such as a building, fence, parking lot, and other inherently permanent structure that is a distinct asset. In addition, the final regulations provide that property is real property for purposes of section 1031 if, on the date it is transferred in an exchange, that property is classified as real property under the law of the State or local jurisdiction in which that property is located.

Items treated as real property specifically mentioned in the final regulations include: ● Grain storage bins and silos. ● Unsevered natural products of land (such as growing crops, plants and timber) – however, once harvested, they become personal property. ● Stock of mutual ditch (irrigation) companies exempt under section 501(c)(12) “if, at the time of the exchange, the shares have been recognized by the highest court of the State in which the company was organized, or by a State statute, as constituting or representing real property or an interest in real property.” (This follows prior law.) ● Stock held by a tenant-stockholder of a cooperative housing corporation.

The final regulations also revise the proposed definition of real property to eliminate any consideration of whether the particular property contributes to the production of income unrelated to the use or occupancy of space (referred to as the ‘‘purpose or use test’’). With regard to tangible property, if such property is permanently affixed to real property and will ordinarily remain affixed for an indefinite period of time, the property generally is an inherently permanent structure and thus real property for section 1031 purposes, Spring 2021 | The Cooperative Accountant

irrespective of the purpose or use of the property or whether it contributes to the production of income.

Regarding personal property, the final regulations retain the rule relating to personal property in an exchange that is incidental to the real property exchange. Under this rule personal property is incidental to real property acquired in an exchange if, in standard commercial transactions, the personal property typically is transferred together with the real property, and the aggregate fair market value of the incidental personal property transferred with the real property does not exceed 15 percent of the aggregate fair market value of the replacement real property. This incidental property rule in the proposed regulations is based on an existing rule in the regulations under section 1031, which provides that certain incidental property is ignored in determining whether a taxpayer has properly identified replacement property. Note, however, while the presence of incidental person property will not spoil an exchange of real property, the personal property will be treated as boot.

In summary, real property eligible for likekind exchange treatment under the law in effect prior to enactment of the TCJA will continue to be eligible for like-kind exchange treatment after enactment of the TCJA and the final regulations, and property ineligible for like-kind exchange treatment prior to enactment of the TCJA remains ineligible, including real property that was excluded from the application of section 1031.

Iowa Court Concludes Feed Mill Ingredient Bins Are Exempt “Machinery” for Property Tax Purposes

By George W. Benson The Court of Appeals of Iowa recently decided a dispute between a cooperative and local taxing authorities over the extent to which a feed manufacturing facility was subject to property tax. See, StateLine Cooperative v. Iowa Property Assessment Appeal Board, Case No. 190674 (November 19

TAXFAX 4, 2020).

A portion of the decision deals with procedural and run-of-the-mill valuation issues, and that part will not be discussed here. More interesting is the Court’s analysis of whether several ingredient receiving and storage bins and a finished product storage bin qualified as “manufacturing machinery.”

The analysis in the opinion begins with the language of the Iowa Code, which exempts “machinery used in manufacturing establishments” from property taxation.

The Court noted that a prior Iowa Supreme Court decision had concluded that the term “machinery” should be broadly construed, and that it included “all machinery, attached or unattached, fixtures or movable items.”

The Court also observed that what qualifies as machinery is inherently factual and “must logically be made based on the circumstances on a case-by-case basis.”

The Court noted that the parties agreed that the cooperative was engaged in “manufacturing” at its feed mill. The dispute was over whether exempt ingredient and load-out bins qualified for the “machinery” exemption.

Finding no Iowa authority on point, the Court reviewed decisions of courts in other states considering such things as silos at a concrete-manufacturing facility, oil storage tanks, blast furnace stock bins, railroad track used to transfer work-in-process from one processing facility to another, ammonia tanks used principally to store ammonia, and machinery used by distilleries in bottling whisky. In particular, the Court focused on a series of Pennsylvania decisions. The Court observed that other courts have focused on how storage facilities are used and how they relate to the manufacturing process.

Facilities that predominately serve a storage function do not qualify. Those that hold products temporarily and which feed into a manufacturing function can qualify.

The Court concluded that the ingredient bins qualified, but the load-out bins did not.

“Corn and other ingredients are conveyed

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to the ingredient bins in building one and buildings five and six, each of which are essentially temporary storage facilities. The ingredients are then fed into machinery to produce a finished product. The product then makes its way to the load-out bins, where it is held until loaded into trucks for delivery. The structures essentially amount to nonautomated equipment. … With the exception of the load-out bins, the structures are ‘used directly in manufacturing the products that the establishment is intended to produce and are necessary and integral parts of the manufacturing process.’ … The load-out bins, however, are not used directly in the manufacturing process, and they only contain finished product ‘ready to be put on the market so as to be sold to the consuming public for the purpose for which it was intended.’ … We conclude the ingredient bins and exterior grain bins, but not the load-out bins, amount to machinery used in a manufacturing facility and are exempt from taxation.”

Property tax rules are peculiar to each state and, as illustrated by this case, frequently involve distinctions that are fact intensive.

However, many states do have a “machinery used in manufacturing” exemption, and this decision illustrates the potential scope of that exemption.

Patronage dividends properly continue to avoid classification as “tax expenditures”

By George W. Benson Each year, the Staff of the Joint Committee on Taxation and the Office of Tax Policy of the Treasury Department prepare reports estimating “federal tax expenditures.” See, “Estimates of Federal Tax Expenditures for Fiscal Years 2020-2024” prepared by the Staff of the Joint Committee, JCX-23-20 (November 5, 2020) (the “JCT report”) and “Tax Expenditures” prepared by the U.S. Department of the Treasury, Office of Tax Analysis (February 26, 2020) (the “Treasury report”).1

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TAXFAX The JCT report states its purposes are to “help both policymakers and the public to understand the actual size of government, the uses to which government resources are put, and the tax and economic policy consequences that follow from the implicit or explicit choices made in fashioning legislation.” The Treasury report observes that special provisions involving tax expenditures “may be viewed as alternatives to other policy instruments, such as spending or regulatory programs.”

The starting point of both reports is the definition of “tax expenditures” contained in the Congressional Budget Act of 1974. Tax expenditures are “revenue losses attributable to provisions of the Federal tax laws which allow special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”

The JCT report identifies both positive and negative tax expenditures. Positive expenditures are items that reduce tax revenue and, as a result, “may be analogous to direct outlay programs and may be considered alternative means of accomplishing similar budget objectives.”

Negative expenditures are “[t]ax provisions that provide treatment less favorable than normal income tax law and are not related directly to progressivity.”

The Treasury report identifies only positive tax expenditures.

The starting place in each report is a determination of what is regarded as “normal” or as the “baseline.” The JCT report acknowledges that the “Joint Committee staff uses its judgment in distinguishing between those income tax provisions (and regulations) that can be viewed as part of normal income tax law and those special provisions that result in tax expenditures.” The Treasury report contains a similar statement: “Identification and measurement of tax expenditures depends crucially on the baseline tax system against

which the actual tax system is compared.”

Items treated as tax expenditures are similar, but not identical, in the two reports.

The JCT report estimates tax expenditures five years in the future. The Treasury report uses a ten-year time horizon.

From the perspective of Subchapter T cooperatives, what is most important is that neither treats Subchapter T (and its exemption/deduction for patronage dividends and per-unit retain allocations) as giving rise to a “tax expenditure.”

This is not new. However, it is significant because it reflects acceptance by Treasury and the Joint Committee Staff of Subchapter T as part of the “baseline tax system” or as part of the “normal income tax law.”

In contrast, the JCT report provides that the “tax exemption for noncharitable organizations that have a direct business analogue or compete with for-profit organizations organized for similar purposes is a tax expenditure.” Included in this category are mutual or cooperative electric companies.

The Treasury report similarly classifies the exemption for “mutual and cooperative telephone and electric companies” as a tax expenditure. The Treasury report puts a tenyear cost on this exemption at $1.05 billion.

Both reports identify Section 199A as giving rise to a tax expenditure. The JCT report estimates the cost at approximately $50 billion per year. The Treasury report puts the cost slightly higher, and ranks the impact as the 16th highest tax expenditure item (out of 165 items). Neither report contains a separate estimate of the cost of Section 199A(g).

The Treasury report identifies Section 1042(g) as giving rise to a tax expenditure.

This provision allows for a taxpayer to sell stock in a farm refiner to a farmer’s cooperative and to defer recognition of the gain if the proceeds are re-invested in qualified replacement property. It is very narrowly drafted and not much used (if it is used at all). The Treasury report places a

1 – The JCT report can be found at: https://www.jct.gov/publications/2020/jcx-23-20/; and the Treasury report can be found at: https://home.treasury.gov/system/files/131/Tax-Expenditures-2021.pdf.

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TAXFAX ten-year cost of this provision at $185 million.2 The FDII provisions grant export incentives for Wech types of activities conducted by U.S. (Section 1042(g) does not appear on By theBarbara list in A.certain the JCT report.) corporations. As with other similar incentives Each of the reports identifies numerous enacted by Congress in the past,6 the basic “special” provisions. The Treasury report lists policy behind the FDII rules is to encourage U.S. 165. The JCT report identifies more, though corporations to export goods and services and many on the JCT’s list that are not on the thereby “serve foreign markets”7 from within Treasury’s list are described as giving rise to the United States, instead of using a foreign “quantitatively de minimis tax expenditures.” corporation to serve those foreign markets.

Not surprisingly, the two reports also reveal Essentially the rules are intended to eliminate or that, at this point, there are not a lot of easy neutralize the role that tax considerations have ways to raise significant revenue short of raising historically played in a taxpayer’s decision to tax rates. The large tax expenditures largely locate assets and business activities in the United involve provisions that are sacred cows and/or States versus a foreign location. have many politically-connected defenders.

FDII benefits come in the form of a permanent deduction that can be claimed only by domestic FDII: Opportunities and Challenges for corporations (including corporations that own Cooperatives Report on Issuance of Final a share in a pass-through entity). Unfortunately, Regulations REITs, RICs, “S” corporations, and individuals are not eligible for FDII benefits. Because a

By Darice Henritze, Brett Wainger, and David F. cooperative is a type of C corporation (albeit Antoni subject to special tax rules in subchapter T of the Code), cooperatives can claim FDII benefits.

I. Introduction For taxable years beginning after December This is part of a series of articles that The 31, 2017 and ending before January 1, 2026, Cooperative Accountant TAXFAX column has a cooperative can claim a deduction equal to been publishing periodically regarding various 37.5% of its FDII, subject to a taxable income tax reform rules enacted on December 22, 2017 limitation (discussed in more detail below). (“2017 Act”).3 On July 15, 2020, the IRS issued 4 Assuming a full 37.5% deduction, the effective final regulations that apply to determine the amount of deduction a taxpayer may take under tax rate on FDII is approximately 13.125%. For taxable years beginning on or after January the foreign-derived intangible income (“FDII”) 1, 2026 the deduction is reduced to 21.875%, rules of section 250.5 Such rules were enacted resulting in an effective tax rate of approximately as part of the 2017 Act. The final regulations 16.406%, based on a corporate tax rate of 21%. generally apply to tax years beginning on or after January 1, 2021. For tax years beginning III. Relaxation of Documentation before January 1, 2021, taxpayers can apply Requirements either the proposed regulations or the final The final regulations generally adopt the regulations provided the rules are applied in proposed regulations in their original form. their entirety. The following article highlights material updates included in the final regulations However, the final regulations include rules that relax the strict documentation requirements and discusses their application to cooperatives. included in the proposed regulations. As a II. What are FDII Benefits, and Who Can Claim general observation, such rules replace the form-based documentation requirements Them?

2 – Query where this number comes from? It is very difficult to structure a transaction to meet the requirements of Section 1042(g). I am not personally aware of any transaction availing itself of this benefit, though perhaps if capital gains rates go up in the future this provision will get more attention. Even the transaction for which Section 1042(g) was originally designed ended up structured in a different manner because of President Clinton’s line-item veto of Section 1042(g) (later determined to be unconstitutional by the Supreme Court in Clinton v. City of New York, 524 U.S. 417 (1998)).

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TAXFAX included in the proposed regulations with more flexible “substantiation requirements,” which are less prescriptive and focus more on the information needed to be substantiated rather than the form of such substantiation.

The documentation rules outlined in the proposed regulations included stringent requirements that limited the specific form of documentation that would be accepted to specific formal types of documents, for example, a written statement from the recipient representing that they are a foreign person or a bill of lading evidencing foreign status. New rules provide specific substantiation requirements for only a subset of transactions (e.g., a sale or license of IP or sales of general property for resale), but then provide wide latitude in the form of such substantiation, including a “catch-all” for any “credible evidence obtained or created in the ordinary course of business” or a statement describing how the taxpayer determined that the relevant substantive requirement was satisfied.8 For transactions not subject to the specific substantiation requirements, the preamble to the final regulations clarifies the government’s view that a taxpayer is required under section 6001 and Treas. Reg. § 1.6001-1(a) to substantiate that it is entitled to the section 250 deduction. Though the rules, in general, are more flexible, there are certain specific circumstances where the final regulations remove rules of convenience that applied to certain particular fact patterns that

are laid out in the proposed regulations. Such circumstances are described in greater detail later in this article.

For transactions subject to the specific substantiation requirements, the final regulations require that substantiation be “in existence” as of the FDII filing date (including extensions) of the taxpayer’s return that includes the FDII benefit.9 This is a material change from the proposed regulations which required that the seller or renderer, in the case of services, obtain the documentation by 1) the FDII filing date with respect to the FDDEI transactions (described below) and 2) no earlier than one year before the date of the sale or service. The final regulations’ elimination of the prohibition against “stale” substantiation should provide substantial relief to certain taxpayers, as they significantly relax the burden in place for many cooperatives to gather very specific evidence within a strict time frame. However, the requirement that the substantiation must be in existence as of the FDII filing date may be troublesome for taxpayers that procrastinate or otherwise struggle to compile the requisite substantiation. Note further that the preamble to the final regulations implies that Treasury generally views substantiating documents created contemporaneously with a transaction as more credible that documents created or gathered at a later time.

The final regulations provide certain anti-abuse measures designed to curb

3 – P.L. 115-97, “An Act To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (December 22, 2017) (the “2017 Act”).

4 – T.D. 9901, 85 Fed. Reg. 43,042 (July 15, 2020). Finalizing proposed regulations issued in March 2019 by REG-10446418, 84 Fed. Reg. 8188 (Mar. 6, 2019).

5 – Unless otherwise indicated, all references to sections in this article are to sections of the U.S. Internal Revenue Code of 1986, as amended (the “Code”).

6 – These include the former foreign sales corporation (“FSC”) provisions of sections 921-927, the former domestic international sales corporation (“DISC”) provisions of sections 991-994, and the extraterritorial income (“ETI”) provisions of former sections 941-943 which were repealed effective for transactions after December 31, 2004.

7 – 2017 Act, Conference Report at 494 (describing the version of FDII set forth in the Senate Bill).

8 – In addition, the final regulations include certain presumptions of foreign person status that a taxpayer may rely on provided that the taxpayer does not know or have reason to know that the person is not a foreign person. For example, a taxpayer may presume that sales made in foreign retail stores are made to foreign persons. See Treas. Reg. § 1.250(b)-4(c)(1) and (2)(i).

9 – Treas. Reg. § 1.250(b)-3(f)(1).

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TAXFAX abusive transactions and require taxpayers to obtain and retain specific evidentiary support in order to claim a deduction. This might include a transaction where a taxpayer intentionally fails documentation rules for a loss transaction in order to increase FDDEI.10 The final regulations, consistent with the proposed regulations, treat a sale of property or the rendering of a service to a foreign person as FDDEI if the treatment of such income as FDDEI would reduce FDDEI, though they narrow the scope of application to transactions that are subject to specific substantiation requirements.

Note that cooperatives’ foreign sales often involve the sale of products to foreign resellers. The final regulations include specific substantiation requirements that apply to such situations. Specifically, the cooperative must maintain credible evidence that the property will ultimately be sold to an end user located outside the United States. This can include: ● A binding contract specifically limiting subsequent sales to outside the United States; ● Proof that the property is specifically designed, labeled, or adapted for a foreign market; ● Proof that the cost of shipping the property back to the United States relative to the value of the property makes it impractical to resell the property in the United States; ● Credible evidence obtained or created in the ordinary course of business from the recipient that the property (or, in the case of fungible mass property, a specified portion of the property) will be sold to an end user outside the United States; or ● A written statement prepared by the seller, corroborated by credible evidence, that contains specifically enumerated information.11

IV. Clarification of Foreign Use Requirements Under both the proposed and final regulations, there are two general types of income that can qualify as FDDEI eligible for FDII benefits under section 250(b): (i) income derived in connection with certain sales (including leases, licenses, exchanges, and other dispositions of property12); and (ii) income from the performance of certain services. FDDEI sales are sales of tangible or intangible property to a recipient that is a foreign person and for a foreign use. The final regulations provide detailed rules that govern the foreign person and foreign use requirements. A recipient is presumed to be to a foreign person if: ● The sale is a foreign retail sale; ● In the case of a sale of tangible property that is not a foreign retail sale, the property is delivered to the recipient or an end user with a foreign shipping address; or ● In the case of a sale of intangible property or tangible property that is not described in the two bullets above, the billing address of the recipient is outside the United States.13 The final regulations provide guidance for determining whether a sale is for a foreign use, including: ● A sale of tangible property delivered by carrier or freight forwarder to an end user is for a foreign use if the end user takes delivery outside of the United States; ● A sale of tangible property delivered to an end user without a carrier or freight forwarder is for a foreign use if the property is located outside the United States at the time of the sale; ● A sale of digital content is for a foreign use if the end user downloads, installs, receives

10 – As noted in the Preamble to the Final Regulations, this rule is consistent with the principle that FDII is a single amount that takes into account all of taxpayer’s activity during a tax year rather than a sum of amounts separately computed on a transaction-by-transaction basis. See T.D. 9901, 85 Fed. Reg. 43042, 43051-43052 (July 15, 2020).

11 – Treas. Reg. § 1.250(b)-(4)(d)(3)(ii).

12 – Treas. Reg. § 1.250(b)-3(b)(16). Other dispositions include, for example, transfers to foreign corporations where gain or income is recognized under Section 367.

13 – Treas. Reg. § 1.250(b)-4(c)(2).

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TAXFAX or accesses the digital content on the end user’s device outside the United States; ● A sale of international transportation property is for a foreign use if the end user registers the property with a foreign jurisdiction; ● A sale of tangible property to an intermediary that is subject to manufacturing, assembly, or other processing is for a foreign use only if such manufacturing, assembly, or other processing occurs outside the United States;14 ● A sale of intangible property is for a foreign use to the extent the intangible property is exploited outside of the U.S. Additional rules apply with respect to sales of tangible property to related parties. A sale to a foreign related party generally qualifies as a FDDEI sale if the related purchaser sells the property to an unrelated foreign person.

A sale to a foreign related party also qualifies as a FDII sale if the related purchaser uses the property to produce products that it sells to unrelated persons or if the related party uses the property to render services to unrelated persons to the extent that such unrelated purchasers are foreign.15 The final regulations also provide guidance on whether a service qualifies as a FDDEI service, for this purpose distinguishing between seven types of services and providing different rules for determining the portion of the revenue from each service that is FDII eligible. A high-level summary of the services and associated requirements are as follows: ● Transportation services are services to transport people or property. 50% of transportation services qualify as FDDEI services if the origin or destination of the transportation is outside the United States.

100% of the services qualify as FDDEI services if both the origin and destination are outside of the United States;

● Property services are services other than transportation services performed with respect to tangible property. The services generally qualify as FDDEI services if the property is located outside of the United States for the duration of the service;16 ● Proximate services are services other than transportation services or property services that are performed in physical proximity to the recipient. These services qualify as FDDEI services if the services are performed outside of the United States; ● Advertising services are services that consist of transmitting or displaying advertising content. Advertising services qualify as FDDEI services to the extent the related advertisement is viewed or accessed outside of the United States; ● Electronically supplied services are services other than advertising services that are delivered primarily over the Internet or an electronic network. These services qualify as FDDEI services if the services are accessed outside of the United States; ● General consumer services are all other services provided to non-business recipients. These services are FDDEI services if the consumer of the service resides outside of the United States while the service is provided. Final regulations are helpful in that provide that renderers who do not have, or cannot reasonably obtain, a consumer’s place of residence (which was required in proposed regulations) can presume that the consumer is outside the United States if the consumer has a foreign billing address; ● General business services are all other services provided to business recipients.

These services are FDDEI services to the extent that the business operations of the recipients that benefit from the services are located outside of the United States.

Both proposed and final regulations include relaxed documentation rules, with a minor

14 – Treas. Reg. § 1.250(b)-4(d)(1)(iii) and (iv).

15 – Treas. Reg. § 1.250(b)-6(c)(1).

16 – Property services can qualify as FDDEI services if the property is temporarily in the United States for the purpose of receiving the service if other requirements are met.

Spring 2021 | The Cooperative Accountant

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TAXFAX modification, for small businesses. Under the final regulations, such rules apply to businesses where the business itself, and their related parties, have less than $25 million in gross receipts in the previous tax year.

There are also additional requirements that apply in the case of transactions involving related persons. Final regulations generally retain restrictions included in the proposed regulations with certain modifications. First, the final regulations clarify that a related-party service is a FDDEI service only if the relatedparty service is not substantially similar to a second service that “has been or will be” provided by the related party to a person located in the United States.17 Second, the final regulations retain certain restriction rules intended to eliminate benefits where a related party uses services to perform substantially similar services to a person located in the U.S. The final regulations modify the benefit test (which is intended to identify these situations) to be met only if 60 percent or more of the benefits conferred by the related party service are directly used by the related party to confer benefits on consumers or business recipients in the United States.18 Essentially, these modifications limit FDII benefits from a related-party service only in cases where the related party “directly uses” the service to confer benefits on persons in the United States.

V. QBAI/Taxable Income Limitation A FDII deduction is reduced by 10% of the aggregate adjusted basis (determined quarterly and using section 168(g) “ADS” depreciation) of a U.S. corporation’s depreciable tangible property that is used to produce qualifying income (qualified business asset investment or “QBAI”). As a result of the QBAI limitation, a cooperative is subject to the standard 21% U.S. corporate tax rate to the extent its taxable income (after its section 1382 patronage deduction) is equal to or less

than a fixed 10% return on its QBAI, and a 13.25% rate (increased to 16.406% in 2026) on its excess return that is attributable to qualifying exports (i.e., its qualifying FDII). In addition, a taxpayer’s section 250 deduction, which applies both for its FDII and GILTI, is subject to a “taxable income limitation” which applies if the sum of a taxpayer’s GILTI inclusion and FDII amount exceed its taxable income. Where the taxpayer’s GILTI and FDII exceed its taxable income, the taxpayer’s GILTI and FDII are reduced proportionately solely for purposes of calculating the section 250 deduction.

VI. Consolidated Calculations A cooperative that is part of a consolidated tax return filing determines its section 250 deduction by aggregating the DEI, FDDEI, QBAI, and GILTI of all members to determine an overall dedication, applying the taxable income limitation discussed above on a consolidated basis, and allocating the remaining deduction among the members of the group based on their respective contributions to the aggregate FDDEI and GILTI amounts.19 VII. FDII Opportunities for Cooperatives The FDII rules generally apply to cooperatives in the same manner as they apply to other C corporations. Given the special rules that apply to cooperatives, however, the availability of benefits may depend on whether a cooperative has positive retained taxable income after its section 1382 patronage deduction. Such taxable income earned by a cooperative may be derived from any retained patronage income or nonpatronage income.

As we describe above, sales of product by a cooperative to a related or unrelated foreign person can qualify for FDII benefits if the cooperative can determine that the sales are to a foreign person for a foreign use and that certain substantiation requirements

17 – Treas. Reg. § 1.250(b)-6(d)(1) 18 – Treas. Reg. § 1.250(b)-6(d)(2)(i) 19 – Treas. Reg. § 1.502-50.

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TAXFAX are satisfied. Likewise services appropriately categorized among the seven categories of services income and meeting the requirements set forth with respect to the particularly category can qualify.

VIII. FDII Challenges for Cooperatives The final regulations provided no specific rules related to the treatment of patronage dividends, and their impact on cooperatives.

Because section 250 and the regulations thereunder do not contain any rule that takes into account the special nature of patronage dividends, cooperatives may find that the benefit of the FDII deduction is diminished for two reasons. A U.S. corporation’s FDII benefit is calculated by reference to its gross FDDEI from sales and services, reduced by deductions properly allocable to such income.20 A cooperative’s section 1382 deduction therefore must be allocated between gross FDDEI and other gross income, and any portion of the 1382 deduction allocated against gross FDDEI reduces the cooperative’s FDII benefit.

Second, the section 1382 deduction reduces the corporation’s taxable income and therefore makes the section 250 taxable income limitation described above more likely to haircut or eliminate the corporation’s FDII deduction.

Also, as we discuss above, sales to U.S. persons and the provision of services to persons located in the United States generally do not qualify for FDII benefits. As a result, in general, income from the sale by members of product to a cooperative would not qualify for FDII benefits even if the sale or service relates to what ultimately is an export transaction.

However, if the member and the cooperative file a consolidated tax return, sales from the member to the cooperative could qualify for FDII benefits if the subsequent sale by the cooperative is to a foreign person and for a

foreign use.

Under the former ETI rules, a corporation generally determined its qualifying export income at the cooperative level. Nevertheless, the ETI rules contained a specific rule that allowed a cooperative to pass-through benefits to its members.21 Similarly, section 199A(g) allows a specified agricultural or horticultural cooperative22 to choose between claiming section 199A(g) benefits itself or passing all or a portion of them through to members.23 However, the final FDII regulations contain no comparable measure that enables the cooperative to pass a portion of the FDII benefit to its members.

Another consideration for some cooperatives involves the interaction of the FDII rules with contract manufacturing agreements. Some cooperatives structure certain contract manufacturing agreements as a sale and a repurchase of the refined product (for ultimate sale to a foreign person), instead of engaging the contract manufacturer to perform services. The FDII rules would deny FDII benefits with respect to the income attributable to the cooperative’s “sale” to a U.S. manufacturer,24 although profits from the sale of the refined product could qualify for FDII benefits. A cooperative could therefore evaluate whether it obtains a larger FDII deduction, and whether its overall tax liability decreases, if it engages the refiner to provide refining services without taking title to the product.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information specific situations should be determined through consultation with your tax adviser.

This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

20 – Deductions are generally allocated and apportioned to gross FDDEI under IRC Section 861 principals. See Treas. Reg. §1.250(b)-1(d)(2)(i).

21 – See sections 941(b)(2), 943(g), and 1385(a).

22 – See section 199A(g)(4)(A).

23 – See section 199A(g)(2)(A).

24 – See section 250(b)(5)(B)(i).

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TAXFAX

“Three-quarters of the world’s CEOs say more emphasis should be placed on measuring the value of non-financial assets such as intellectual capital and customer relationships,” writes Fred Reichheld, Bain & Company, quoting from a study of the AICPA (Reichheld, 2012, p.1). The expansion of performance measures beyond the traditional financial accounting measures was accelerated by the landmark Harvard Business Review article, The Balanced Scoreboard.

(Kaplan and Norton, 1992). A significant component of non-financial measures now includes information on corporate social responsibility (CSR). (Perrini, 2006).

Further, the idea of integrated reporting has spread from Europe to the U.S. This development represents a shift from standalone documents such as the CSR report to a more inclusive document that provides greater insight (Burke and Clark, 2016). The CSR typically includes information concerning Human Resources, and employee health and safety are frequently addressed (Perrini, 2006).

A focus on employees would often include meeting their needs as concern esteem 28

EDITOR Barbara A. Wech, Ph.D. Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham COLLAT School of Business 710 13th St. South Department of Management, Information Systems, & Quantitative Methods Birmingham, Alabama 35233 bawech@uab.edu GUEST WRITER Joseph G. Van Matre, PhD. Professor University of Alabama at Birmingham jgv@uab.edu (205) 934-8834 James D. Byrd, Jr. PhD, CPA, CHFP Assistant Professor University of Alabama at Birmingham jimbyrd@uab.edu (205) 901-3748

and personal growth. These needs are at the summit of Maslow’s hierarchy of needs.

(David, 2014). A focus on higher level needs assumes that lower-level needs have been met. Ordinarily such an assumption is appropriate. However, the covid-19 virus has recently negated this. Yes, most employees are meeting their physiological needs (food and water), but the next level of the hierarchy represents safety needs. Employees need Spring 2021 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM to feel that safety measurement instruments In the age of Covid-19, measures provide we add by extension, that employed should be modified to assess trust sufficient protection so employee trust in the in the organization with that they are free from organization can only be respect to health safety anxiety and fear. Most organizations have taken generated by the “support perceptions. In the 1990’s countermeasures against services and policies” that Harvard researchers the virus, but such actions instill employee confidence developed the “ServiceProfit Chain” model that may be inadequate that their welfare and established the linkage from the employees’ safety is paramount to the between employee perspective. This paper satisfaction, customer company. is going to review the satisfaction, and loyalty, and need for frank, unbiased to describe how value is created in a service feedback from employees. The use of a organization. According to Heskett, et al, survey instrument to obtain information will “Profit and growth are stimulated primarily also be discussed. Covid-19 and employee by customer loyalty. Loyalty is a direct result safety will be used to illustrate the basic of customer satisfaction. Satisfaction is principles. Of course, these ideas are not largely influenced by the value of services limited to employee surveys. The reader to customers. Value is created by satisfied, can also find this information useful when is loyal, and productive employees. Employee responding to questionnaires proffered by satisfaction, in turn, results primarily from others. high-quality support services and policies The Case of Cooperatives Cooperatives are owned by the members rather than shareholders as for corporations.

Employees have the same type of customer interactions, only the customer and the member are one and the same. Employee trust in the organization has an especially critical role in maintaining the trust of the customer/members of the cooperative (Jensen-Auvermanna, 2018). The employees’ trust in the organization’s interest in protecting their health in the Covid-19 will likely influence customer/members’ attitudes toward the organization. Accordingly, managers of the cooperative have a vested interest in understanding employees’ perception of their safety so that corrective action may be undertaken as required. By extension, managers need to understand customer/member perceptions of their safety is likely influenced by that of the employees.

Employee satisfaction and customer satisfaction measures as well as the Spring 2021 | The Cooperative Accountant

that enable employees to deliver results to customers.” (Heskett, et al, 1997) New measurement instruments in the days of Covid-19 are important to understand employee trust in the organization. These measures of trust should be linked to new measures of customer satisfaction to better understand how employee trust is affecting the co-operative’s customer satisfaction. In the age of Covid-19, we add by extension, that employee trust in the organization can only be generated by the “support services and policies” that instill employee confidence that their welfare and safety is paramount to the company. If that trust is not present, the lower level of Marlow’s hierarchy of needs is not met. If employees trust the organization to care about their safety, they can better focus on meeting the customers’ needs.

Assessing employees’ trust in an organization during Covid-19 Employee satisfaction surveys are good instruments for assessing employees’ 29

TCA SMALL BUSINESS FORUM perceptions about an the members’ views of The sentiment behind the organization. But in equitable treatment and phrase “Don’t shoot the uncertain times, some whether the organization messenger” was used by employers may be is operated with respect Shakespeare in 1598 and may reluctant to survey to all constituencies. employees because they even go back to the Greeks.

Transparency is key are afraid of bad results.

It has remained persistently variable. How well do However, showing members understand relevant ever since. employees that you are and have faith in the coconcerned about their op’s governance? How health and safety is important to maintain well does the co-op meet its obligations (or gain) their trust. But negative feedback to its members? Each organization will is information that is useful and critical. be different so key questions to be asked Learning gives the employer the opportunity should relate to the specific obligations to make changes on a timely basis. (Cannan, of the co-op to its members. Another 2020). According to Cannan, an employee indicator of member commitment is the survey conducted by Qualtrics showed that length of time of membership. The longer employees actually want to participate in a member is affiliated with the organization, surveys during periods of significant change, the more they appear to be committed to and such surveys contribute to building trust. the organization. In addition, whether or not Informed/data-driven action will help alleviate the member customer is also a member of a fears and suspicions during a stressful time. competing organization or acquires available A good survey will have a high response rate products and services of the cooperative from and be free of bias. The cover letter should somewhere else is another indicator of loyalty. explain clearly how the responses will remain confidential and should discuss how the data Organizational Culture will be used. NSC recommends continuing When a manager seeks to gather information to survey employees, and offers a survey from employees, the managerial environment for NSC members at https://safety.nsc.org/ must be considered regardless of whether the membership-covid-19-employee-perceptionencounter is verbal, face-to-face or through survey. a written instrument. Unfortunately, some According to Jenson-Auvermann, et al., managers are tone-deaf in this assessment or an organization’s culture heavily influences unaware of its importance. There is a long trust within an organization. Strength of trust history of anecdotes, articles, and books is affected by the member’s commitment to documenting the negative effects of a poor the cooperative. The long-term nature of culture. One could start with the pioneers of the cooperative relationship between the the quality movement who warned “Unless customer/member and the organization one can obtain…accurate data about the suggests a need for a strong relationship. workplace, there can be no control or Accordingly, a cooperative’s management improvement. But gathering facts is a very should closely monitor members’ level difficult task. “There are many lies and many of commitment to the cooperative while false data.” (Ishikawa 1985, p. 134). Or from realizing that trust and commitment must Deming “Where there is fear, there will be also be demonstrated by management. wrong figures.” (Deming 1982, p. 266). One Since the cooperative is based on members’ illustration of poor data gathering is that of perceptions, one avenue of inquiry would be an owner of several nationally franchised 30

Spring 2021 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM motels. The owner guaranteed that if a guest’s problem could not be satisfied, the guest would stay free. The owner brags that, on average, only two stays per year are comped. However, he also says . . . “if I do have to pay out…my managers are not doing their jobs, and I get rid of them.” (Hart, 1988, p. 58). Such data are produced under fear and omits information or provides false information about opportunities for service improvements. David Kearns left IBM as vice-president of marketing to join Xerox where he later became CEO. At IBM, people would speak up and debate ideas; at Xerox “meetings came to be labeled ‘Home on the Range’ meetings. Never was heard a discouraging word.” (Kearns, 1992, p. 56) The sentiment behind the phrase “Don’t shoot the messenger” was used by Shakespeare in 1598 and may even go back to the Greeks. It has remained persistently relevant ever since. The idea and its negative effects gained further traction around 2000, when the term “psychological safety” began to appear in the business literature and academic literature lead by Harvard professor Amy Edmondson and others. Her case study of Prudential Financial and the accompanying teaching note each ran over twenty pages.

The company’s “Safe to Say” initiative was created to encourage people to speak frankly as opposed to the exiting culture of “Pru polite” which valued conformity over dissent. (Edmondson, 2003, p. 6). In a different organization she reported hearing verbatim from an employee . . . “if I tell the director…what customers are saying my career will be shot.” Despite the presence of an ombudsperson and grievance procedures, half of respondents to a company survey felt that it was not “safe to speak up.”

(Detert and Edmondson, 2007, p. 23). In managerial environments characterized by little psychological safety, special care must be taken to obtain honest employee feedback. With the advent of the COVID-19 Spring 2021 | The Cooperative Accountant

virus, employees became even more sensitive to actions that might jeopardize their job security.

Anonymity An obvious method to avoid retribution for expressing a discordant view to a superior is to not reveal one’s identity. Anonymity is not possible in face-to-face meetings, but a survey offers several possibilities. One, the respondent may be asked for their identity in the survey instrument. If the employee still elects to respond, the information provided may be censored, negating the usefulness of the survey.

To provide anonymity to employees, a firm guarantee of confidentiality should be promised in the cover letter and subsequently honored. Nevertheless, it may still be best to restrict information on the instrument so that individuals cannot be identified.

However, most surveys request demographic information so that problem units (and/ or supervisors) can be determined so as to focus improvement efforts. Problems can arise when either the organization and its units are small or when the demographic data requested are excessive. When a unit is small, just learning an employee’s gender and age/years of employment may be sufficient to learn the respondent’s identity. With larger units, four or five demographics could be sufficient. Employees at a Fortune 500 firm had become concerned when employees, after providing negative feedback, learned that some superiors had attempted to learn the source of the information. Some employees then reported that “they go to libraries and coffee shops and use public computers to complete on-line surveys – because they worry, they’ll be tracked through their IP addresses otherwise.” (Detert and Burris, 2016, p. 83). An organization’s past history is relevant here, and some hypothesize that past negative behaviors carry far more weight that past positive 31

TCA SMALL BUSINESS FORUM behaviors. A continuing effort is required to change perceptions.

Designing a Questionnaire Good survey questions are generally simple, direct, specific, and actionable. (Qualtrics).

A survey question should ask a single question instead of having multiple parts and should avoid “leading” the respondent to an answer. Questions used in surveys for assessing employee trust can typically be divided into three categories: 1) credibility of management; 2) respect; and 3) fairness.

(Great Place to Work Trust Index) Examples of questions that can be used to assess employees’ perception of management credibility include: ● Management delivers on its promises ● Management makes its expectations clear ● Management is ethical and honest in its business practices ● Example questions regarding management respect for employees may include: ● Management shows appreciation for good work and extra effort ● I am offered training or development to further myself professionally ● My manager will listen and respond if I raise a workplace issue ● Example questions concerning employees’ perception of management fairness include: ● People are paid fairly for the work they do ● Promotions go to those who best deserve them ● An employee’s job performance is judged without prejudice Each of these questions could ask for a response using a five or seven point Likert scale such as 5 = Strongly agree and 1 = strongly disagree with variations in between.

COVID-19 has heightened the need to understand employees’ wellbeing. When suddenly required to adapt to working from home while balancing childcare 32

responsibilities and supervising their online school activities, employees are experiencing a very stressful time. A survey that addresses COVID-19 related concerns can demonstrate concern about employee wellbeing and increase trust. Example survey questions related to COVID-19 concerns could include: ● I

am provided with protective equipment that enables me to work safely. ● Action is usually taken when unsafe conditions are brought to management’s attention. ● I feel safe at work. ● Management is concerned about workplace safety. ● In my work unit people are willing to openly confront safety issues.

This section offers some examples that other organizations have used in employee surveys. Some may be inserted verbatim into a different organization’s survey. A different firm developing a survey will probably wish to include new inquiries unique to its environment and/or particular informational needs.

The following assumes respondents’ answers will be either yes/no or a choice from a rating scale such as strongly agree, agree, neutral, disagree, strongly disagree.

The latter are always displayed horizontally, but some elect to use the numbered scale (1-5) or (1-7) with only the two endpoints displaying text. In any event, a don’t know or not applicable (NA) option should be provided for most questions (Payne, 1980).

It should be placed at the far right of the scale and be distinguishable from the other responses by space and/or a different look for marking (e.g. box versus circle). The NA option will increase response rates. The following illustrate some of the common pitfalls in crafting questions.

1.The CDC provides useful information on personal safety and the COVID-19 virus.

Spring 2021 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM The respondent may not be familiar with the CDC, Cares Act, PPE or similar items. Use of company jargon is generally permissible but consider the presence of any new hires first.

2. The company policy of forbidding employees to wear non-company issued masks should be abolished. Double negatives are confusing to most people and should not be used. Simply change to “abolished” to “kept.” Or change “forbidding” to “insisting”.

3. I recently saw a physician concerning COVID related symptoms.” ‘Recently’ encompasses different periods for different people. Instead use an operationally defined term such as “within the last month.” Similar warnings apply to “late,” “significant,” “serious,” “material,” “costly,” etc. Such terms should not be left to readerdefined interpretations.

4. The company should provide a free, onsite flu vaccine and place hand disinfectant throughout the facility. This question (Yes/No) includes two issues that should be separated. If the response is yes, the respondent favors both measures. If no, are both disfavored or only one, which one?

5. The company’s rigid views on personal hygiene are detrimental to employee morale. Surveys often include questions relating to current or proposed policies.

However, the question should not be asked after labeling the policy as “rigid”, as this biases the response. Similarly, don’t ask “Donald Trump’s view that wearing masks provides only limited protections is correct” unnecessarily invoking a controversial personality will bias the response. Just ask about “wearing masks provides only…”

6. Fox News coverage of the COVID-19 virus has been based on scientific evidence.

Then followed by. . . “Can you name any national news networks with COVID-19 coverage that is based on scientific evidence?” This would be a violation of the rule to proceed from the general to the Spring 2021 | The Cooperative Accountant

specific. As listed above, the first question plants Fox News in the respondent’s mind, biasing his/her response to include Fox News in a later question.

The six examples above illustrate some common errors in crafting questions. The Payne book is a classic and should be consulted for more detailed guidance.

Employees are sensitive about threats to their anonymity, so minimize demographic questions and guarantee confidentiality in the cover letter. Also remember to place all demographic questions at the end of the form. An early study found that placing such questions at the end improved response rate by around eight percent. (Morrel-Samuels, 2002) Conclusions Every cooperative has concerns about the health and safety of its employees and their interaction with the customer/members.

Nationally, employers are spending an average of $3.6 million on wellness programs (Meister, 2019). Managing for safety requires the acquisition of frank, honest feedback that informs management of the success of current initiatives and the need for further change. Such information is difficult to solicit if there is fear in the workplace, defined as “feeling threatened by possible repercussions as a result of speaking up about work-related concerns (Ryan and Oestreich,1991, p.21). A recent survey found that a majority of adults feel a sense of belonging at home (52%), followed by their workplace (34%), neighborhood community (19%), and place of worship (17%). (Twaronite, 2019). This sense of belonging is a trait of a productive and motivated workforce and should be nurtured by the organization. Offering workers an opportunity to freely express their thoughts without fear of reprisal will engender belonging. The well-designed questionnaire can be helpful in this process.

33

TCA SMALL BUSINESS FORUM References Burke, J. J. & Clark, C. E. (2016). The business case for integrated reporting: Insights from Leading Practitioners, regulations and academics. Business Horizons, Vol. 59, pp. 273-283.

Cannan, C. (2020, April 27). Surveying Employees During the COVID-19 Pandemic. National Safety Council, https://www.nsc.org/home, https://www.nsc.org/safety-first-blog.

David, Susan (2014). Make Sure Your Employees’ Emotional Needs are Met, Reprint HOOWE7, Harvard Business Review, published on HBR.ORG (July 8, 2014), Deming, W. E. (1982). Out of the Crisis, Cambridge MA: Massachusetts Institute of Technology.

Detert, J. R. & Burris, T. R. (2016). Can Your Employees Really Speak Freely? Harvard Business Review, Vol.94, No. 1, pp. 80 – 87.

Detert, J. R. & Edmondson, Amy C. (2007). Why Employees Are Afraid to Speak. Harvard Business Review, Vol. 85, No. 5, pp. 23-25.

Edmondson Amy C. (2003). Safe to Say at Prudential Financial. Harvard Business School.

Case # 9-603-093. Boston: Harvard Business School Publishing.

Hart, C. W. L. (1988). The Power of Unconditional Service Guarantees, Harvard Business Review Vol. 66, No. 4, pp. 54-61.

Heskett, J. L., Sasser, W. E. Jr., & Schlesinger L.A., (1997). The Service-Profit Chain. The New York Free Press.

Ishikawa, K.. (1985). What Is Total Quality Control? The Japanese Way (Englewood Cliffs NY: Prentice-Hall, 1985).

Jensen-Auvermanna, T., Adams, I., & Doluschitz, R. (2018). Trust – Factors that have an impact on the interrelations between members and employees in rural cooperatives.

Journal of Co-operative Organization and Management, 6, 100-110.

Kaplan, R. S. & Norton, D. P., (1992). The Balanced Scoreboard – Measures that Drive Performance, Harvard Business Review, Vol. 70, No.1, pp 71-79.

David T. Kearns & David A. Nadler (1992). Prophets in the Dark (New York: Harper– Collins.

Meister, J. C. (2019). Survey: What Employees Want Most from Their Workspaces. Published on-line as a HBR Digital Article (Product No. H054EN-PDF_ENG), August 26, 2019.

Ryan, Kathleen D. & Oestreich, Daniel K. (1991). Driving Fear out of the Workplace. San Francisco: Josey-Bass Publishers.

Morrel-Samuels, Palmer. Getting the Truth into Workplace Surveys. Harvard Business Review, Vol. 80, No. 2 (February, 2002), pp. 111-118.

Payne, Stanley Le Baron.(1980) The Art of Asking Questions (Princeton NJ: Princeton University Press).

Perrini, F. (2006). The Practitioner’s Perspective on Non-Financial Reporting, California Management Review, Vol. 48. No. 2, pp. 73-103.

Reichheld, Fred (2012). CEOs Need Hard Data on Customer Loyalty. Published on-line (Product H008U5 at HBR.org, May 17, 2012 Twaronite, K. (2019). The Surprising Power of Simply Asking Co-workers How They’re Doing.

Reprint H04TFC. Published on-line on www:HBR.org , February 28, 2019.

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Spring 2021 | The Cooperative Accountant

7946 Clyo Road, Suite A, Centerville, Ohio 45459 Phone: (937) 222-6707 www.nsac.coop

Spring 2021 | The Cooperative Accountant

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