The Cooperative Accountant - Summer 2019

Summer 2019 | The Cooperative Accountant

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CONTENTS FEATURES 3 From the Editor

By Frank M. Messina, DBA, CPA

4 Utility Cooperative Forum: Financial Forecasting: A Foundation of Strategic Planning

By Peggy Boldissar Ph.D.

12 ACCTFAX Bulletin Board

By Phil Miller, CPA

18 TAXFAX

By George W. Benson; Kevin J. Feeley; Marlis Carson; Rebecca L. Smith, CPA

30 Small Business Forum: Simplifying Blockchain Technology: An Analysis of the Impact on the Accounting Profession and Cooperatives

By Barbara A. Wech, Ph.D.; Mark Edmonds, Ph.D, CPA; Lisa-Ann Polack, Ph.D, CPA

EXECUTIVE COMMITTEE

82 ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS ––––––––––––– 82 EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS ––––––––––––– ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS ––––––––––––– 8282––––––––––– ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS –––––––––––––

PRESIDENT: PRESIDENT: PRESIDENT: PRESIDENT: *William Miller, CPA (806) 747-3806 *William (806) *William Miller,CPA CPA (806)747-3806 747-3806 *William Miller, CPA (806) 747-3806 Electric Miller, Co-op Chapter bmiller@bsgm.com Electric Co-op Chapter Electric Co-op Chapter bmiller@bsgm.com Electric Co-op Chapter bmiller@bsgm.com Bolinger, Segars, Gilbert & Moss, LLP bmiller@bsgm.com Bolinger, Segars, Gilbert Bolinger, Segars, Gilbert&&&Moss, Moss,LLP LLP Bolinger, Segars, Gilbert Moss, LLP 8215 Nashville Avenue 8215 Avenue 8215Nashville Nashville Avenue 8215 Nashville Avenue Lubbock, TX 79423 Lubbock, Lubbock,TX TX79423 79423 Lubbock, TX 79423

President William Miller, CPA Bolinger, Segars, Gilbert & Moss, LLP

VICE PRESIDENT: VICE PRESIDENT: VICE PRESIDENT: VICE PRESIDENT: *Nick Mueting (620) 227-3522 *Nick (620) *NickMueting Mueting (620)227-3522 227-3522 *Nick Mueting (620) 227-3522 Mid-West Chapter nickm@.lvpf-cpa.com Mid-West nickm@.lvpf-cpa.com Mid-West Chapter nickm@.lvpf-cpa.com Mid-West Chapter nickm@.lvpf-cpa.com Lindburg,Chapter Vogel, Pierce, Faris, Chartered Lindburg, Lindburg, Vogel,Pierce, Pierce,Faris, Faris,Chartered Chartered Lindburg, Vogel, Pierce, Faris, Chartered P.O. BoxVogel, 1512 P.O. 1512 P.O.Box Box 1512 P.O. Box 1512 Dodge City, KS 67801 Dodge DodgeCity, City,KS KS67801 67801 Dodge City, KS 67801

Vice President Nick Mueting, CPA Lindburg, Vogel, Pierce, Faris, Chartered

SECRETARY-TREASURER: SECRETARY-TREASURER: SECRETARY-TREASURER: SECRETARY-TREASURER: *Dave Antoni *Dave Antoni *Dave Antoni *Dave Antoni Capitol Chapter Capitol CapitolChapter Chapter Capitol Chapter KPMG, LLP KPMG, LLP KPMG, LLP St. KPMG, LLP 1601 Market 1601 Market 1601 MarketSt. St. 1601 Market St. Philadelphia, PA 19103 Philadelphia, Philadelphia,PA PA19103 19103 Philadelphia, PA 19103

Secretary-Treasurer David Antoni, CPA KPMG, LLP

(267) 256-1627 (267) (267)256-1627 256-1627 (267) 256-1627 dantoni@kpmg.com dantoni@kpmg.com dantoni@kpmg.com dantoni@kpmg.com

IMMEDIATE PAST PRESIDENT: IMMEDIATE PAST IMMEDIATE PASTPRESIDENT: PRESIDENT: IMMEDIATE PAST PRESIDENT: *Jeff Brandenburg, CPA, CFE (608) 662-8600 *Jeff Brandenburg, CPA, (608) *Jeff Brandenburg, CPA,CFE CFE jeff.brandenburg@cliftonlarson (608)662-8600 662-8600 *Jeff Brandenburg, CPA, CFE (608) 662-8600 Great Lakes Chapter Great Lakes Chapter jeff.brandenburg@cliftonlarson GreatLakes LakesChapter Chapter jeff.brandenburg@cliftonlarson Great jeff.brandenburg@cliftonlarson ClifftonLarsonAllen LLP ClifftonLarsonAllen LLP ClifftonLarsonAllen LLP ClifftonLarsonAllen LLP 8215 Greenway Boulevard, Suite 600 8215 Greenway Boulevard, 8215 Greenway Boulevard,Suite Suite600 600 8215 Greenway Boulevard, Suite 600 Middleton, WI 53562 Middleton, WI 53562 Middleton, WI 53562 Middleton, WI 53562

Immediate Past President Jeff Brandenburg, CPA, CFE CliftonLarsonAllen LLP

*Indicates Executive Committee Member *Indicates *IndicatesExecutive ExecutiveCommittee CommitteeMember Member *Indicates Executive Committee Member

At Large NATIONAL OFFICE NATIONAL OFFICE NATIONAL OFFICE Erik Gillam, CPA NATIONAL OFFICE Kim Fantaci, Executive Director Kim KimFantaci, Fantaci,Executive ExecutiveDirector Director Kim Fantaci, Executive Director Aldrich CPAs +Advisors Jeff Roberts, Association Executive Jeff JeffRoberts, Roberts,Association AssociationExecutive Executive Jeff Roberts, Association Executive Tina Schneider, Chief Administrative Officer Tina TinaSchneider, Schneider,Chief ChiefAdministrative AdministrativeOfficer Officer Tina Schneider, Chief Administrative Officer Krista Saul, Client Accounting Manager Krista KristaSaul, Saul,Client ClientAccounting AccountingManager Manager Krista Saul, Client Accounting Manager Bill Erlenbush, Director of Education Bill BillErlenbush, Erlenbush,Director Directorof Education Bill Erlenbush, Director ofofEducation Education Phil Miller, Assistant Director of Education Phil Miller, Assistant Director of Phil Miller, Assistant Director Education Phil Miller, Assistant Director ofofEducation Education THE COOPERATIVE ACCOUNTANT

136 S. Keowee Street 136 136S. KeoweeStreet Street 136 S.S.Keowee Keowee Street Dayton, Ohio 45402 Dayton, Dayton,Ohio Ohio45402 45402 Dayton, Ohio 45402 info@nsacoop.org info@nsacoop.org info@nsacoop.org info@nsacoop.org

At Large Winter 2018 April Graves, CPA THE COOPERATIVE ACCOUNTANT Winter 2018 THE COOPERATIVE ACCOUNTANT Winter 2018 THE COOPERATIVE ACCOUNTANT Winter 2018 United Agricultural Cooperative, Inc.

For a complete listing of NSAC’s National Board of Directors and Committees, visit National Society of Accountants for Cooperatives 2

www.nsacoop.org Summer 2019 | The Cooperative Accountant

From the

Editor

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

As a University Professor, I am blessed with the opportunity to teach and study in various parts of our world. And yet, one of the most interesting things I see quite often in various countries and communities is that they seem to always have a coop or two in each of their areas. In fact, in some cases you cannot miss the huge “COOP” building signs. I remain fascinated that our cooperative principles seem to guide world-wide businesses.

You have a great chance to learn more about cooperatives yourselves. Bring your family to the 2019 Tax, Finance & Accounting Conference for Cooperatives in Denver, Colorado from August 4-7 to learn more about the cooperative world.

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

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

Positively Yours, Frank M. Messina, DBA, CPA Articles and other information which appear in The Cooperative Accountant do not necessarily reflet the official postion of he NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES and the publication does not constitute an endorsement of views or information which may be expressed.

The Cooperative Accountant (ISSN 0010-83910) is published quarterly by the National Society of Accountants for Cooperatives at Dayton, Ohio 45402. Second-class postage paid at Dayton, Ohio and at additional mail offices. The Cooperative Accountant is published as a direct benefit/service to the members of the Society and is only available to those that are eligible for membership. Subscriptions are available at university libraries, government agencies and other libraries (where there is already a current member) at a rate of $90.00 a year. International subscriptions are $110 a year. Land Grant colleges may receive a complimentary copy. Single copies are avaiable at a rate of $25.00 an issue. Postmaster: send address changes to National Society of Accountants for Cooperatives, 136 South Keowee Street, Dayton, Ohio, 45402.

Summer 2019 | The Cooperative Accountant

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Editor & Guest Writer Peggy Boldissar, Ph.D. Manager, Financial Accounting LCEC (Lee County Electric Cooperative, Inc.) PO Box 3455 North Fort Myers, FL 33918-3455 Phone (239) 656-2117 peggy.boldissar@lcec.net

What Is Financial Forecasting?

P.T. Barnum, of the famous Ringling Brothers and Barnum & Bailey Circus, has been quoted as stating “Money is a terrible master but an excellent servant�

(ForbesQuotes, n.d.). Financial forecasting is one tool that we can use to help serve us in better managing money. Financial forecasting is the processing of estimating or predicting how a business will perform in the future. Zenwealth.com (n.d.) defines financial forecasting as follows: Financial forecasting describes the process by which firms think about and prepare for the future. The forecasting process provides the means for a firm to express its goals and priorities and to ensure that they are internally consistent.

It also assists the firm in identifying the asset requirements and needs for external financing (para. 1).

Typically, a company prepares an annual budget. This budget serves as a road map which depicts the financial picture and requirements to support overall company goals and strategies in the upcoming year. The budget is really 4

just a financial forecast at a point in time.

For financial information to be useful, the budget needs to be updated with more current financial forecasts continuously so management can make intelligent and informed decisions driven by actual results and updated future projections.

Rolling financial forecasts, forecasts performed at intermittent time intervals, are valuable tools in helping the company to project out as the year progresses to accommodate trends that affect key business drivers. The timing or length of the intervals should be determined by the needs of the business. Rolling financial forecasts allow management to identify key trends and opportunities, and make quicker decisions on a more operational level. They are a key tool in the continuous planning process. Rolling forecasts should roll beyond the fiscal year-end, and should be based upon rolling periods of twelve months or more. Forecasting periods can be long-range or short-term, depending upon the intended application and use of that forecast.

Summer 2019 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM Forecasting approaches There are two basis approaches to financial forecasting: top-down and bottom-up. Rao (2016) describes these as follows: TOP-DOWN: Top-down forecasting means you first forecast the sales for your industry. You might do this with sophisticated economic and econometric methods, or do what most of us may do—read industry publications and find projections from industry experts. If you have many industry forecasts, you might take the average or pick the one you think has the best analysis. In mature industries, a commonly used method is to extrapolate from historical trends using a statistical technique called regression analysis (Building a Financial Forecast section, para.

2).

BOTTOM-UP: I prefer the bottom-up approach where you start with your sales driver, and the investment in the sales driver, then forecast sales based on that investment and the productivity of the sales driver.

Bottom-up may be better because there’s no predestined market share that you’re entitled to. Getting a sale involves effort, investment and time. If you work from the sales driver, you might estimate the investment in the sales driver, then estimate sales. You might then calculate the potential market share, which is the result of your investment in the sales driver (Building a Financial Forecast, para. 7).

Forecasting methods There are varying methods used to develop forecasts. Generally, the methods fall into two categories, which include quantitative and qualitative methods (Bragg, 2017, para.

1). Quantitative forecasting relies upon measureable data, which can be statistically manipulated. Qualitative forecasting, on the other hand, relies upon information than cannot be actually measured. Qualitative methods can be especially useful and necessary during early stages of a company or for the introduction of new products or services for an existing company. It is Summer 2019 | The Cooperative Accountant

also deployed when data may be scarce or unavailable.

Bragg provides the following examples of quantitative and qualitative methods.

Examples of quantitative methods are: ● Causal

methods. These methods assume that the item being forecasted has a cause-and-effect relationship with one or more other variables. For example, the existence of a movie theater can drive sales at a nearby restaurant, so the presence of a blockbuster movie can be expected to increase meal sales in the restaurant. The primary causal analysis method is regression analysis.

● Time

series methods. These methods derive forecasts based on historical patterns in the data that are observed over equally spaced time intervals. The assumption is that there is a recurring pattern in the data that will repeat in the future. Three examples of time series methods are: o Rule of thumb. This is based on a simplified analysis rule, such as copying forward the historical data without alteration. For example, sales for the current month are expected to be the same as the sales generated in the immediately preceding month. o Smoothing. This approach uses averages of past results, possibly including weightings for more recent data, thereby smoothing out irregularities in the historical data. o Decomposition. This analysis breaks down the historical data into its trend, seasonal, and cyclical components, and forecasts each one.

Examples of qualitative methods are:

● Market

research. This is based on discussions with current and potential customers regarding their need for goods and services. Information must be gathered and analyzed in a systematic manner in order to minimize biases caused 5

UTILITY COOPERATIVE FORUM at a consensus opinion. The results from each successive questionnaire are used as the basis for the next questionnaire in each iteration; doing so spreads information among the group if certain information was initially not available to everyone. Given the significant time and effort required, this method is best used for the derivation of longer-term forecasts.

(Bragg, 2017, para. 2-3)

by small data sets, inconsistent customer questioning, excessive summarization of data, and so forth. This is an expensive and time-consuming research method.

It can be useful for detecting changes in consumer sentiment, which will later be reflected in their buying habits. â—? Opinions

of knowledgeable personnel.

This is based on the opinions of those having the greatest and most in-depth knowledge of the information being forecasted. For example, the senior management team may derive forecasts based on their knowledge of the industry. Or, the sales staff may prepare sales forecasts that are based on their knowledge of specific customers. An advantage of using the sales staff for forecasting is that they can provide detailed forecasts, possibly at the level of the individual customer. There is a tendency for the sales staff, though, to create overly optimistic forecasts.

â—? Delphi

method. This is a structured methodology for deriving a forecast from a group of experts, using a facilitator and multiple iterations of analysis to arrive

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Chamber, Mullick, & Smith (1971) explain that the selection of a method depends on many factors.

Those factors include “the context of the forecast, the relevance and availability of historical data, the degree of accuracy desirable, the time period to be forecast, the cost/ benefit (or value) of the forecast to the company, and the time available for making the analysis (para.

3). The purpose of the forecast typically determines the selected techniques.

Successful forecasting is a collaboration between the forecaster and those in the company having the meaningful information needed to complete the forecast. This collaboration involves addressing these three questions: 1. What is the purpose of the forecast, how is it to be used?

2. What are the dynamics and components of the system for which the forecast will be made?

3. How important is the past in estimating the future?

(Chamber, Mullick, & Smith, Manager: Forecaster & Choice of Methods section, para. 3-17) The best and most accepted method of addressing uncertainties associated with Summer 2019 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM projections and estimations is the use of scenario analysis, which some also refer to as bandwidth analysis. This consists of defining multiple, potential outcomes that define a bandwidth around the most likely expectation of projected performance. The scenarios are typically defined in “best case, worst case, or most-likely case” options. Others refer to these scenarios as “aggressive, conservative, or most-likely outcome” options. A financial forecast typically presents the forecast in the most likely scenario, which can be referred to often as the base case. However, defining the other scenarios can be beneficial information to provide the reader as it offers the range of possible forecast outcomes. Identifying the risks that go along with the alternative scenarios will help decision-makers to make their decisions within the context of those risks.

Steps in preparing a financial forecast Developing a forecast can be an intimidating and challenging process because it is a prediction of the future. There are no “right” answers, only information that may help to make more successful or less successful decisions today based upon predicting possible future outcomes. Sometimes it isn’t always clear “where to start” if you haven’t

Summer 2019 | The Cooperative Accountant

done this before. While there are many ways to approach the process, some steps will be offered for consideration.

Lairmore (2018) offers six steps to financial forecasting: 1. Define revenue forecast type 2. Create a 12-month revenue forecast 3. Add direct costs 4. Add fixed expenses 5. Add discretionary or variable fixed expense 6. Add other items that impact cash In his publication “A Quick Start Guide to Financial Forecasting”, Campbell (2017) provides a step-by-step financial forecasting process as outlined below in Figure 1.

Generally, the full set of financial statements is forecast, along with pertinent financial ratios. For most companies, that would include modeling of the following statements: ● Income Statement (for-profit entity), Statement of Activities (non-profit entity) ● Balance Sheet (for-profit entity), Statement of Financial Position (non-profit entity) ● Statement of Cash Flows (for-profit and non-profit entities) ● Statement of Functional Expenses (for non-profit voluntary health and welfare organizations)

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UTILITY COOPERATIVE FORUM In creating the forecast, Campbell suggests including the following components of a full set of financial statements: ● Revenues ● Gross

Margin

● Operating

and Non-operating expenses

● Days

Sales Outstanding (DSO)

● Days

Inventory Outstanding (DIO)

● Capital ● Days

Expenditures

Payable Outstanding (DPO)

● Principal ● Other

Payments on Debt

Asset and Liability Accounts

● Owner

or Member Distributions (pp. 77-79) While those components listed above provide some general examples of components to include, the components should be tailored to those unique to the organization. For example, an electric cooperative might focus on areas important to their business. Some of the components an electric cooperative might model from their Statement of Activities, titled “Statements of Revenue, Expenses, and Changes in Patronage Capital”, could include revenues, cost of power, operating expenses, non-operating income and expenses (i.e. interest, taxes, etc.), operating margins, and net margins. Some of the components they might model from their Balance Sheet might include utility plant assets, investments, current assets, other assets, member’s equity, long-term debt, current liabilities, and any deferred credits.

Some of the components they might model from their Statement of Cash Flows might include depreciation and amortization changes, changes in significant assets and liabilities, changes in capital investments, gains or losses on sale of property, return of capital from associated organizations, retirement of patronage capital, long-term debt issuance and repayment, and changes in short-term borrowings.

Besides the main financial statements

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noted above, detailed financial forecasting may be considered for individual capital projects. Capital funding is generally a large expenditure for electric cooperatives, so preparing detailed financial forecasts for individual capital projects may be a valuable exercise. This data could also then be used to roll into the top level company-wide overall financial forecast. This may also be the case for equity distributions to electric cooperative members. Preparing more detailed and robust financial forecasts for the distribution of members’ equity will increase the ability of an electric cooperative to plan and meet equity policy goals. Finally, equity retirements can also be large cash outlays to an electric cooperative, and more granular level of modeling may be a recommended approach in obtaining a higher quality of forecasting estimates.

Additionally, some financial forecast estimates can only be determined after analysis of non-financial data. For instance, for an electric cooperative, some of the key non-financial forecasting data underlying the financial forecast could include forecasting of load and power supply to predict current and future resource needs, and ultimately, revenues. Power requirements, load forecasts, resource optimization, production cost modeling, and wholesale power modeling are all examples of non-financial forecasting that would be underlying data used to build financial forecasts.

In its “Guides for Electric Cooperative Development and Rural Electrification”, National Rural Electric Cooperative Association (NRECA) International Ltd. (n.d.) offers a forecasting model that can be used by electric companies in developing countries that might be seeking funding for their infrastructure projects. Specifically, those countries include Latin America, Africa, and South and Central Asia. The goal of this financial forecast model is to evaluate the profit or loss attributable to a proposed capital project. Their model analyzes the financial feasibility of proposed small, gridSummer 2019 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM potential of forecasting. These actions are shown below.

Actions to Avoid: ● Understand that the purpose of forecasting is not to predict the future but to influence it. ● Avoid linking forecasts to targets, measures, and rewards. ● Avoid turning forecasts into contracts and commitments. ● Don’t allow forecasts to be changed without consultation. ● Stop forecasting to the wall. Prepare rolling forecasts beyond the fiscal yearend. connected rural electrification projects. That model presents a financial forecast having four main components used in evaluating potential electric system capital projects.

These include: 1) Income Statement (showing revenues against expenses and resulting earnings).

(Shows revenue by customer class.)

2) Cash Flow Statement (comparing cash outlays against receipts) 3) Sources and Uses of Funds Statement (showing sources of cash across equity, subsidy, and debt against the destination of those funds for capital investment and operations) 4) Project Indicators (showing project statistics and feasibility indicators including debt service coverage and internal rate of return) (pp. 195-196) No matter what forecasting methods or steps are deployed by each unique organization, by incorporating a continuous financial forecast as “part of your monthly financial rhythm”, this information will play a key role in planning and managing the financial side of the business. Campbell depicts this cycle as shown below in Figure 2: CFOThoughtLeader.com (n.d.) lists financial forecasting “actions to avoid” and “actions to take”, so as to maximize the Summer 2019 | The Cooperative Accountant

Actions to Take: forecasts on rolling periods of twelve months or more. ● Make forecasts a light-touch process; base forecasts on a few key drivers. ● Choose the right forecasting horizon. ● Recognize that forecasts are more accurate at higher levels of aggregation. ● Set common standards and rules. ● Ensure that forecasting models are consistent and aligned. ● Reduce business lead times. ● Dovetail one forecasting cycle into another. ● Match the model to the requirement. ● Use range forecasting. ● Allow for random variation, but eliminate bias. ● Carry out postmortems on forecasts to learn how to improve their quality. ● Transfer ownership to the frontline team. (pp. 309-315) ● Base

Choosing the right forecasting tool for your needs For small and localized applications, simple spreadsheets may meet forecasting needs.

But, spreadsheets can be problematic when they need to be aggregated across and up the organization. In larger organizations, there are many varying assumptions, 9

UTILITY COOPERATIVE FORUM algorithms, and calculations that need to occur to produce a forecast.

These could be difficult to combine and consolidate into spreadsheets, making a more sophisticated model a better fit for use in forecasting.

There are many available software applications on the market for consideration, and the recommendation is to create forecasting requirements for your organization and then find the software application that might be the best fit for those specific requirements. You will want to select an application that can accommodate the business rules of your organization, have the ability to be modified to grow as

the needs of your organization change, and will provide updates and support going forward.

Optimally, look for an application that can integrate into existing business software and hardware systems.

Generally, the granularity of information required in the forecasting model and the flexibility in managing the information determine the requirements of a model. The lesser the requirements for either, the simpler are the structural requirements. And, conversely, the greater the requirements for either, the greater are the structural requirements. More structured models generally require more time to maintain. Be cautious in creating

Table 1: Key Elements of an Effectively Structured Financial Modeling Tool KEY ELEMENT

REQUIREMENTS TO CONSIDER

Formatting

Color coding; ability to add comments; number sign conventions

Formulas

Doesn’t allow hard coded numbers, partial inputs, or invalid field entries; provides for multiple Scenario development; provides for date-related formulas

Cell references

No duplication of information; data linked directly to source data

Worksheets

One long worksheet is better than many short sheets; information is not hidden; keeps related information together; can accommodate required periodicity

Error checking

Has built in error checks; favors direct calculations over “plugs”; aggregates error checks into one area; minimizes error traps

Present-ability

Design is easy to use and read, and communicate with others; model provides ability to share scenarios and sensitivities

Assumptions Allows for ease of assumptions to be documented and presented (Financial model structure section) 10

Summer 2019 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM forecasting requirements to keep them at a level that is manageable, relevant, material, and adding value to those using the forecast information to make decisions. Ultimately, the application selected should allow users to easily modify a variety of scenarios and present the information in a user-friendly way.

Look for tools available for your industry, and network with others to compare notes in what forecasting tools they might be using, and what their experiences have been with using those tools.

WallStreetPrep.com (n.d.) encourages those seeking a financial forecasting tool to look for best practices to be included in any tool selected. Some of the things to consider in the structure of the tool include those shown in Table 1 below.

Summary Financial forecasting is very important, but can be difficult and frustrating because it involves estimating. It provides a map of where your organization plans to go, and without it, the risk of not achieving goals can be all that much greater. It can show potential revenues, costs, cash flows, asset purchases and financing needs. It can tell how much money might be needed and how it might be obtained. But, most importantly, it will show when things are going off expected direction by catching variances from plans sooner rather than later, so that corrective action can be taken to get back on track. If well implemented, a financial forecast process can play a valuable role in assisting management and governing bodies to meet strategic expectations, enabling accountants to consolidate and manage cash required, and helping operational managers make effective decisions.

References Bragg, S. (Dec. 29, 2017). Financial forecasting methods. Retrieved May 4, 2019 from https://www.accountingtools.com/ articles/financial-forecasting-methods.html Campbell, P. (2017). A quick start Summer 2019 | The Cooperative Accountant

guide to financial forecasting: discover the secret to driving growth, profitability, and cash flow higher. Retrieved May 4, 2019 from https://financialrhythm. com/wp-content/uploads/2017/08/ Chapter4TheRecipeforFinancial ForecastingfromePDF.pdf CFOThoughtLeader.com (n.d.). Rolling forecasts, what is the practice and how effective is it? Retrieved May 4, 2019 from http://www.cfothoughtleader.com/wpcontent/uploads/2014/04/Hope_ch33-1.pdf Chambers, J.C., Mullick, S.K., & Smith, D.D. (July, 1971). How to choose the right forecasting technique. Retrieved May 4, 2019 from https://hbr.org/1971/07/how-tochoose-the-right-forecasting-technique ForbesQuotes (n.d.). Thoughts On The Business Of Life. Retrieved May 4, 2019 from https://www.forbes.com/quotes/7311/ Lairmore, M. (Nov. 6, 2018). 6 steps to successful financial forecasting. Retrieved May 4, 2019 from https://sbdctampabay. com/six-steps-to-financial-forecasting-in-business/ NRECA International Ltd. (n.d.). Guides for Electric Cooperative Development and Rural Electrification. Retrieved May 4, 2019 from http://www.nrecainternational.coop/wp-content/uploads/2016/11/Module8FinancialAnalysisofRuralElectrificationProjects.pdf Rao, D. (April 26, 2016). Financial forecasting two ways. Retrieved May 4, 2019 from https://www.americanexpress.com/enus/business/trends-and-insights/articles/financial-forecasting-top-bottom/ WallStreetPrep.com (n.d.). The Ultimate Guide to Financial Modeling Best Practices How to structure, format, audit and error-proof your financial model. Retrieved May 4, 2019 from https://www.wallstreetprep.com/knowledge/financial-modeling-best-practices-and-conventions/ Zenwealth.com (n.d.). Business Finance Online. Financial Forecasting. Retrieved May 4, 2019 from http://www.zenwealth.com/ businessfinanceonline/FF/FinancialForecasting.html 11

GENERAL EDITOR Philip W. Miller, CPA Assistant Education Director NSAC 18 Tow Path Lane South Richmond, VA 23221 (804) 339-9577 pwm01@comcast.net ASSISTANT EDITORS Greg Taylor, CPA, CVA, MBA Shareholder Williams & Company (806) 785-5982 gregt@dwilliams.net

By Phil Miller, NSAC Assistant Education Director

FASB PROPOSES REVISED IMPROVEMENTS TO INCOME TAX DISCLOSURE REQUIREMENTS On March 25, 2019, the Financial Accounting Standards Board (FASB) issued a revised proposed Accounting Standards Update (ASU) intended to improve the relevance of current income tax disclosure requirements to financial statement users. Stakeholders are encouraged to review and provide comment on the proposed ASU by May 31, 2019.

In July 2016, the FASB issued a proposed ASU that set forth enhanced disclosure requirements for income taxes. The proposed ASU was part of the FASB’s broader disclosure framework project to improve the effectiveness of disclosures in notes to financial statements.

The Board delayed finalizing the proposal because of potential tax reform. The federal government subsequently passed the Tax Cuts and Jobs Act in December 2017, which substantially changed how U.S. businesses are taxed. As a result, the FASB decided to revise its original proposal.

The resulting proposed ASU reflects these revisions, as well as stakeholder input on the original July 2016 proposal. The revised proposed ASU would (1) remove disclosures that no longer are considered cost beneficial or relevant and (2) add 12

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

disclosure requirements identified as relevant to financial statement users.

The proposed ASU is part of the FASB’s ongoing agenda project focused on improving the FASB Accounting Standards Codification and correcting its unintended application.

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

FASB ISSUES NARROW-SCOPE IMPROVEMENTS TO FINANCIAL INSTRUMENTS STANDARDS On April 25, 2019, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement.

“Since issuing the financial instruments standards, including credit losses and derivatives and hedging, the FASB staff has been working with stakeholders to obtain feedback and address questions on the guidance,” stated FASB Chairman Russell G. Golden. “Through these interactions, the FASB identified areas of the guidance that require clarification and correction.

The amendments in the ASU address those areas.”

The ASU is part of the FASB’s ongoing agenda project focused on improving the Summer 2019 | The Cooperative Accountant

ACCTFAX FASB Accounting Standards Codification and correcting its unintended application.

The ASU is available at www.fasb.org.

SEC PROPOSES TO EXPAND “TEST-THEWATERS” MODERNIZATION REFORM TO ALL ISSUERS On Feb. 19, 2019, the Securities and Exchange Commission voted to propose an expansion of a popular modernization reform that would permit investor views about potential offerings to be taken into account at an earlier stage in the process than is the case today. The new rule and related amendments would expand the “test-thewaters” accommodation – currently available to emerging growth companies or “EGCs”– to all issuers, including investment company issuers.

This proposal would allow all prospective issuers, not just EGCs, to gauge market interest in a possible initial public offering or other proposed registered securities offering by permitting discussions with certain investors prior to the filing of a registration statement. The proposed reform builds on a popular similar provision of the Jumpstart Our Business Startups Act (JOBS Act) that has been limited to EGCs. Generally, companies with more than $1 billion in annual revenues do not qualify as EGCs and, therefore, have not benefitted from JOBS Act provisions intended to foster capital formation in the public markets.

The proposed test-the-waters rule and related amendments are intended to provide increased flexibility to issuers with respect to their communications with institutional investors about contemplated registered securities offerings, as well as a cost-effective means for evaluating market interest before incurring the costs associated with such an offering.

SEC ADOPTS RULES TO IMPLEMENT FAST ACT MANDATE TO MODERNIZE AND SIMPLIFY DISCLOSURES On March 20, 2019, the Securities and Summer 2019 | The Cooperative Accountant

Exchange Commission voted to adopt amendments to modernize and simplify disclosure requirements for public companies, investment advisers, and investment companies. These amendments are expected to benefit investors by eliminating outdated and unnecessary disclosure and making it easier for them to access and analyze material information.

The amendments, consistent with the Commission’s mandate under the Fixing America’s Surface Transportation (FAST) Act, are based on recommendations in the staff’s FAST Act Report as well as a broader review of the Commission’s disclosure rules. The amendments are intended to improve the readability and navigability of company disclosures, and to discourage repetition and disclosure of immaterial information. Specifically, the amendments will, among other things, increase flexibility in the discussion of historical periods in Management’s Discussion and Analysis, allow companies to redact confidential information from most exhibits without filing a confidential treatment request, and incorporate technology to improve access to information on the cover page of certain filings.

The amendments relating to the redaction of confidential information in certain exhibits will become effective upon publication in the Federal Register. The rest of the amendments will be effective 30 days after they are published in the Federal Register.

SEC PROPOSES TO IMPROVE DISCLOSURES RELATING TO ACQUISITIONS AND DISPOSITIONS OF BUSINESSES On May 3, 2019, the Securities and Exchange Commission voted to propose rule amendments to improve the information that investors receive regarding the acquisition and disposition of businesses. The proposed amendments are also intended to facilitate more timely access to capital and to reduce complexity and compliance costs of these financial disclosures.

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ACCTFAX “The proposed rules are, first and foremost, intended to ensure that investors receive the financial information necessary to understand the potential effects of significant acquisitions or dispositions,” said Chairman Jay Clayton. “The staff’s work on the proposed rule amendments reflects years of experience. Their work to eliminate unnecessary costs and burdens of the current rules – which in some cases have been significant and frustrated otherwise attractive transactions – while at the same time improving the disclosures investors receive should be applauded.”

The proposal will have a 60-day public comment period following its publication in the Federal Register.

something we do everyday in the Office of Investor Education and Advocacy,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. “National Financial Capability Month is a perfect time to call attention to the excellent resources we have on Investor.gov to help investors navigate their way to a successful financial future.”

Among the themes the SEC’s investor education staff will convey to investors this month: ● Start Early and Create a Financial Plan to Reach Your Goals – Use our roadmap to saving and investing. Understand the basics of investing and how to research public companies before making an investment.

SEC’s INVESTOR PREPAREDNESS CHECKLIST Are you prepared for your financial future?

That’s the question the Securities and Exchange Commission’s Office of Investor Education and Advocacy (OIEA) is asking investors. To help investors get started with creating their own saving and investing plan, OIEA developed an investor preparedness checklist to empower them.

In addition to encouraging investors to start early and go to Investor.gov before they invest, the checklist reminds investors to:

● Pay

● Identify

goals and create a financial plan;

● Pay

off high-interest debt; participate in company retirement plans and take full advantage of employer matching;

● Do

a background check on any investment professional;

● Understand

risk tolerance; understand fees; research investments;

● Maintain

a diverse portfolio; and avoid investment opportunities that sound too good to be true.

“Getting practical and unbiased saving and investing information into the hands of Main Street investors is our top priority and 14

Off High Interest Rate Debt – No investment strategy pays off as well as, or with less risk than, eliminating high interest debt.

● Empower

Yourself by Using the Free Tools and Resources on Investor.gov – Check the background of any investment professional before investing. See how your money can grow over time by using the power of compound interest.

● Understand

Investment Fees and Their Impact on Returns – Fees and expenses can have a real effect on your investments, including mutual funds and ETFs, variable annuities, and 529 college savings plans.

● Discover

an Easy Way to Boost Your Retirement Savings – Take full advantage of company matching and the “free money” many employer-sponsored retirement plans offer.

● Avoid

Investment Opportunities that Sound Too Good to Be True – Be alert that claims of high returns with little to no risk are a common red flag for potential investment fraud. Learn more about how to avoid investment scams, take steps to protect your online investment accounts from fraud and look out for potential Summer 2019 | The Cooperative Accountant

ACCTFAX scams involving public companies making ICO-related claims.

AICPA WORKING DRAFT OF INVENTORY VALUATION GUIDANCE The AICPA’s Financial Reporting Executive Committee has issued an early working draft of Inventory Valuation guidance, which is part of a broader forthcoming release of the AICPA’s Business Combinations Accounting and Valuation Guide. This working draft provides nonauthoritative guidance and illustrations for preparers of financial statements, independent auditors, and valuation specialists regarding how to estimate the fair value of inventory acquired in a business combination in accordance with Financial Accounting Standards Board (FASB) ASC 820, Fair Value Measurement. This guidance is focused on measuring fair value of inventory for financial reporting purposes.

This inventory valuation guidance (which will ultimately be included in the broader guide) consists of a section, which provides general principles for valuing inventory, and two examples, which illustrate how to value finished goods and work in process inventory.

It also offers questions and answers that illustrate some of the inventory valuation considerations discussed in the preceding sections.

FASB CHAIRMAN SPEECH ON COLLABORATION WITH IASB At a financial reporting conference at Baruch College in New York City on May 2, 2019, FASB Chairman Russell Golden discussed the challenges of ‘bilateral convergence’ between IFRS and US GAAP, what the Boards have accomplished together, and how the Boards will work together in the future.

Mr. Golden began his speech by acknowledging that comparable global accounting standards help reduce complexity and costs in financial reporting. He stated, however, that “by 2013, [the FASB had] come to realize that the ideal of single set Summer 2019 | The Cooperative Accountant

high-quality global accounting standards was just that – an ideal. Different starting points, different cultures, and different legal systems made bilateral convergence impossible to achieve.”

After he highlighted the success of the joint FASB-IASB projects on business combinations, non-controlling interests, fair value measurements, borrowing costs, segment reporting, stock compensation, and non­monetary exchanges, Mr. Golden reflected on the diverging strategies for the Boards’ projects on revenue recognition, leases, credit losses, and insurance. He closely examined the reasons for divergence, which were usually due to cost and complexity for US stakeholders.

Mr. Golden discussed how the FASB is working to forge a new model for how we support the goal of more comparable, high quality accounting standards worldwide,” which includes: ● Development

of high quality GAAP — Mr. Golden noted that considering opportunities to align with IFRS when possible is ‘embedded’ in the FASB’s process. He said the FASB is in ‘constant contact’ with the IASB about the IASB’s projects and that the Boards share research activities to “continue progress toward improved, aligned solutions.”

● Active

participation in the Accounting Standards Advisory Forum (ASAF) – Mr. Golden described the FASB’s commitment to the ASAF, which advises the IASB as it develops IFRS. He called the FASB’s involvement “an important opportunity to represent U.S. interests in the IASB’s standard-setting process” and noted that the ASAF provides a “valuable opportunity to work together with other standard setters on issues of common interest.”

● Enhancing

relationships with other national standard setters – Mr. Golden mentioned that the FASB meets individually with standard setters from many countries 15

ACCTFAX to “exchange ideas on improving our respective standards. This process also helped promote the broader flow of information and ideas that mutually inform our thinking. And to con­tribute to an environment that will foster greater alignment of standards across the globe.”

He made clear in his speech that the FASB will continue to work closely with the IASB to improve accounting standards worldwide.

He also briefly provided his own opinion on sustainability reporting.

The full text of Mr. Golden’s speech is available on the FASB’s website.

LATEST DISCUSSIONS AT FASB’S PRIVATE COMPANY COUNCIL The Private Company Council (PCC) met on April 1-2, 2019. Below is a brief summary of issues addressed by the PCC at the meeting, categorized by project: Implementation Topics – Leases & Revenue Recognition: The FASB staff discussed the Board’s implementation activities for Topic 842, Leases, and Topic 606, Revenue from Contracts with Customers. The PCC members and FASB staff engaged in specific dialogue related to each Topic as well as a more general discussion of overall trends in private company implementation activities.

The staff began the discussion of leases by providing an analysis of the areas of the Topic for which technical inquiries have been received. The staff then discussed Accounting Standards Updates (ASUs) related to leases that have been issued since the last implementation update at the October 2018 PCC meeting. There was a discussion about the existing resources available on the implementation portal of the FASB website that includes a variety of resources that could be leveraged to help companies transition to the new standard.

As part of a more general implementation discussion, a Board member asked PCC members about the current status of private 16

company implementation efforts. Multiple PCC members indicated that many private companies have not yet started to implement the leasing standard because they are still concentrating on the implementation of Topic 606. A PCC member observed that it is not unusual for private companies to delay implementation efforts of new accounting standards until they approach the effective date. However, that member pointed out that many private companies with complex leasing arrangements have already begun implementation.

Distinguishing Liabilities from Equity (Including Convertible Debt): The FASB staff began by explaining the simplifications in accounting for convertible debt and convertible preferred shares that the project is pursuing. FASB staff highlighted that the simplified accounting for convertible instruments would provide a more simple and straight- forward starting point for users to perform their analysis.

Because of the comprehensive disclosure requirements, no information is expected to be lost.

The conversation concluded with a discussion of the relationship between the project and the FASB Conceptual Framework. One PCC member commented that the project provided practical and sensible conclusions but questioned whether the project aligns with the conceptual definition of a liability. The FASB staff indicated that it gave primacy to the objective of financial reporting and expected that the proposed changes would provide more relevant information to users in making decisions about providing resources to an entity. Overall, PCC members supported the reduction in the number of models and the general simplification objective of the project.

Disclosures by Business Entities about Government Assistance: The FASB staff provided an update on the Summer 2019 | The Cooperative Accountant

ACCTFAX project and shared some of the feedback that was received during the external review of the staff draft. Stakeholders requested clarification of certain aspects of the document including scope. Larger public company preparers raised concerns about the cost and complexity that could be involved in complying with the disclosures.

Preparers indicated that current systems were not capable of capturing the information that would be necessary for the required disclosures. PCC members who represent users voiced support for the proposed disclosures.

The FASB staff provided an update on the outreach that was performed during the fall of 2018. During outreach, the staff tried to understand challenges related to disaggregating functional line items by natural components. The staff heard from stakeholders that the number and variety of accounting and reporting systems complicates the consolidation process.

Both systems and the process of allocations prevent systems from disaggregating cost of revenues and selling, general, and administrative expenses by natural components because information is summarized throughout the consolidation process.

Simplifying the Balance Sheet Classification of Debt: FASB staff explained the background of the project, highlighting the objective to reduce the cost and complexity associated with determining whether debt should be classified as a current or noncurrent liability.

Specifically, the staff discussed replacing the narrow-scope, fact-specific guidance that currently exists with an overarching principle for determining debt classification.

2018 PCC meeting. The staff began by discussing proposed disclosures that would affect all entities. The staff explained that the proposed Update also would include a private-company-specific disclosure that would require an entity other than a public business entity to disclose the amount of federal, state, and foreign tax credit carryforwards and the non-tax-effected amount of other federal, state, and foreign carryforwards. PCC member feedback indicated that non-tax-effected carryforwards would be less costly to disclose and that users would find this information useful.

Disclosure – Codifying SEC Disclosures: The FASB staff explained the overall premise of the project and shared an overview of the Securities and Exchange Commission’s referred disclosures affecting private companies. The FASB staff specifically highlighted the change to the debt disclosure, which would require private companies to disclose the weighted-average interest rate associated with outstanding short-term borrowings. The staff noted that feedback from the PCC in December 2018 indicated that the disclosure could be costly to provide and PCC members who are users indicated that they can estimate it, but the Board decided to include the disclosure due to the decision-useful information provided by the disclosure when short-term borrowings fluctuate significantly during the period.

Disclosure Framework: Disclosure Review – Income Taxes: The FASB staff provided a project update on what has occurred since the October Summer 2019 | The Cooperative Accountant

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TAXFAX

TAXFAX EDITOR George W. Benson Counsel McDermott Will & Emery LLP 444 West Lake Street Suite 4000 Chicago, IL 60606 (312) 984-7529 gbenson@mwe.com

WASHINGTON UPDATE

By Marlis Carson Section 199A Regulations Farmer cooperatives and their members are anxiously awaiting regulations under new Code Section 199A. On April 2, the Treasury Department submitted proposed regulations to OMB’s Office of Information and Regulatory Affairs (OIRA) for review.

The description of the proposed regulations states: “Such regulations shall be based on the regulations applicable to cooperatives and their patrons under section 199 as in effect before its repeal.”

The timing of the release of the proposed regulations is uncertain, but by the time this article appears it is likely they will be out. However, in testimony before the Senate Finance Committee on March 14, Secretary Mnuchin was asked when Treasury planned to issue guidance with respect to the application of Section 199A for farmers and fishermen. The Secretary responded “soon… within the next month…weeks.”

Section 199A Permanence.

Proponents of Section 199A were encouraged by the introduction of H.R. 216, the “Market Street Tax Certainty Act,” which would make 18

TAXFAX GUEST WRITERS Section 199A Kevin J. Feeley permanent by McDermott Will & Emery LLP deleting the 444 West Lake Street, Suite 4000 Chicago, IL 60606-0029 provision’s (312) 984-7501 sunset date kfeeley@mwe.com of December 31, 2025.

Marlis Carson Rep. Jason General Counsel Vice President – Legal, Tax and Smith (R-MO) Accounting introduced National Council of Farmer the bill; Cooperatives Sen. Steve 50 F Street, N.W. – Suite 900 Daines (R-MT) Washington, DC 20001 (202) 879-0825 introduced mcarson@ncfc.org identical language in Rebecca L. Smith, CPA the Senate.

Director, Cooperatives NCFC and CliftonLarsonAllen LLP 10700 Research Drive, Suite 200 many other Milwaukee, WI 53226 groups support (414) 721-7513 passage of the rebecca.smith@claconnect.com bill. However, the path for making provisions of the Tax Cuts and Jobs Act permanent is uncertain at this time.

Democratic leaders in the House are not eager to re-visit the tax reform bill and are reluctant even to make technical corrections.

Pension Funding Relief.

In April, the House Ways and Means Summer 2019 | The Cooperative Accountant

TAXFAX Committee unanimously approved a bill containing funding relief for sponsors of multiple-employer plans. The bill is H.R. 1994, “Setting Every Community Up for Retirement Enhancement Act of 2019,” or the “SECURE Act.” The bill has broad support, and it is likely that the full House will pass it.

Many farmer cooperatives participate in multiple-employer plans – the SECURE Act would reduce Pension Benefit Guarantee Corporation (PBGC) funding requirements for those cooperatives for plan years beginning after December 31, 2018. A description of the bill is available at https://www.jct.gov/ publications.html?func=startdown&id=5180.

See page 77 for the multiple-employer plan provisions.

A Senate version of the bill was recently introduced and has not yet been marked up by the Senate Finance Committee. The multiple-employer plan provisions are identical in the House and Senate versions; however, there are a few provisions that differ from the House version that will need to be worked out and the path forward for the legislation is unclear.

Section 163(j) Proposed Regulations.

New Code Section 163(j) limits a taxpayer’s deduction for business interest expense to 30 percent of “adjusted taxable income” (ATI).

Farmer cooperatives may elect to be exempt from the interest limitation in exchange for using a ten-year depreciation system.

NCFC submitted comments on the proposed regulations, noting that, when calculating their ATI, regulated investment companies (RICs) and real estate investment trusts (REITs) are allowed to disregard dividends paid to their owners. The NCFC’s comments argue that cooperatives should receive similar treatment and should be allowed to add back patronage dividends when making the ATI calculation.

Tax Extenders Legislation.

Earlier this year, Senate Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) introduced a bill Summer 2019 | The Cooperative Accountant

to extend expired provisions for 2018 and 2019 and provide disaster tax relief. The “Tax Extender and Disaster Tax Relief Act of 2019” includes biofuel and biodiesel tax incentives. NCFC is a member of a diverse coalition of business, energy, transportation, real estate and agriculture entities supporting the extenders legislation. Proponents are hopeful that Congress will act on this legislation before the end of the summer.

Proposed Regulation Leave Application of the Section 163(j) Business Interest Deduction Limitation to Cooperatives Uncertain

By Kevin J. Feeley Introduction – In February of this year, Treasury issued proposes regulations that provide guidance on the new deduction limitation for business interest expense under Section 163(j) (the “Proposed Regulations”).

For cooperatives, a key issue is whether Treasury will grant relief to cooperatives to allow them to add back patronage dividends for purposes of calculating the limitation. The Proposed Regulations request comment on this issue but otherwise provide no clues on where Treasury may ultimately land. Another issue of potential relevance to cooperatives is the application of the limitation to partnerships given that many cooperatives conduct businesses through joint ventures.

The Proposed Regulations do provide helpful, although highly complex, guidance on how the limitation is calculated for partnership borrowings. Cooperatives operating through partnerships need to be mindful of the implications of Section 163(j)’s unique “entity” approach and how partnership level attributes will determine the extent to which a partner’s share of interest expense is deductible.

Background – Under the law prior to The Tax Cuts and Jobs Act (the “Jobs Act”), Section 163(j) disallowed deductions for “disqualified 19

TAXFAX interest.” In general, disqualified interest was interest paid by a corporation to a related party that was not subject to U.S. income taxation on the associated interest income.

The limitation only applied if the corporation had a debt-to-equity ratio in excess of 1.5 and then only to the extent the borrower’s net interest expense exceeded 50% of its “adjusted taxable income” (basically taxable income without regard to the deduction for net interest expense, NOLs, and depreciation/amortization).

Old Section 163(j) was designed to prevent non-U.S. parent companies from stripping earnings from domestic subsidiaries through deductible interest payments on inter-company loans. Corporate borrowers who obtained financing from banks and other external lenders generally avoided the limitation altogether. As such, this provision was generally a non-issue for agricultural cooperatives.

With tax reform came a substantial reduction in corporate tax rates and individual rates for pass-through business income. The Jobs Act partially paid for the rate reductions by substantially expanding Section 163(j)’s interest deduction limitation.

New Section 163(j) – Congress expanded Section 163(j) in three ways. First, Congress broadened its scope to cover not just corporate borrowers but individuals and pass-through entities as well. Second, Congress applied the limitation to all business indebtedness as opposed to just related-party indebtedness. Third, Congress removed the leverage threshold which had allowed corporations to avoid the limitation by maintaining a debt-equity ratio below 1.5:1.

Under new Section 163(j), effective for tax years beginning after December 31, 2017, a taxpayer’s business interest expense deduction each taxable year is limited to the sum of 30 percent of the taxpayer’s adjusted taxable income (“ATI”) plus the taxpayer’s business interest income (plus, for car dealers, 20

interest expense on floor plan financing).

Business interest expense means interest expense paid or incurred on debt properly allocable to a trade or business and does not include investment interest expense as defined in section 163(d). Disallowed interest expense is carried forward and treated as business interest paid or accrued in the next taxable year. Unlike old Section 163(j), new Section 163(j) does not allow excess limitation to carry forward. Congress’ removal of the three-year excess limitation carryforward adds new teeth to Section 163(j) and makes it more difficult to manage around.

Adjusted Taxable Income – Like the original Section 163(j), new Section 163(j) disallowed interest above a particular threshold based on a modified definition of taxable income. This threshold is the sum of 30% of the taxpayer’s “adjusted taxable income” or “ATI” plus business interest income. ATI is taxable income excluding items not related to a trade or business and business, all interest expense or interest income, the deduction under Section 199A, and any net operating loss deduction. In addition, until 2022, taxpayers may add back depreciation and amortization deductions in arriving at their ATI. In addition to the adjustments noted above, Section 163(j)(8) authorizes other adjustments as provided by the Secretary. In this connection, the Proposed Regulations authorize an adjustment to the ATI of regulated investment companies (“RICs”) and real estate investment trusts (“REITs”) for dividends paid to their owners. The preamble to the proposed regulations (“Preamble”) explains this adjustment as follows: A RIC or REIT typically pays dividends sufficient to eliminate all or nearly all ICTI [investment company taxable income] or REITTI [real estate investment trust taxable income]. As a result, if the ATI of a RIC or REIT took into account the deduction for Summer 2019 | The Cooperative Accountant

TAXFAX dividends paid, the ATI of the RIC or REIT typically would be zero, or close to zero. It would be distortive to treat the deduction for dividends paid as reducing ATI because this deduction is merely the mechanism by which RICs and REITs shift the tax liability associated with their income to their shareholders, as intended pursuant to subchapter M of the Code. Therefore, these proposed regulations would not provide a rule that would cause the ATI of a RIC or REIT to take into account the deduction for dividends paid.

The Preamble goes on to ask for comment on whether a similar rule should exist for cooperatives: The Treasury Department and the IRS request comments on whether additional special rules are needed for any other entities that are generally taxed as C corporations, including but not limited to cooperatives (as defined in section 1381(a)) and publicly traded partnerships (as defined in section 7704(b)).

In response to this invitation, the National Council of Farmers Cooperatives submitted a comment letter (the “Comment Letter”) asking Treasury to exercise its discretion to authorize an add-back to a cooperative’s ATI for patronage dividends. The Comment Letter argued that the rationale for allowing an add-back for REIT and RIC dividends applies with equal force to a cooperative’s patronage dividends. Many cooperatives distribute all of their earnings as patronage dividends leaving them with no taxable income from patronage sources.

The Comment Letter observes that if a cooperative is not allowed to add back patronage dividends in calculating its ATI, then the ATI will end up being no more than the positive adjustment allowed for interest expense. As a consequence, Section Summer 2019 | The Cooperative Accountant

163(j) will in most cases operate to allow a deduction for business interest only up to 30% of interest paid. While the disallowed interest would carryforward and could be used against excess limitation in a future year, such a scenario is unlikely as long as long as the cooperative distributes all of its earnings as patronage dividends (even if the cooperative is not highly leveraged).

The Comment Letter acknowledges that a cooperative could avail itself of an election under Section 163(j)(7)(C) to avoid the section 163(j) limit. This sub-section provides a carve-out from Section 163(j) for “electing farm businesses,” which is defined to include specified agricultural or horticultural cooperatives within the meaning of Section 199A(g)(4). Such an election, however, requires the electing farm business to utilize the alternative depreciation system for any property with a recovery period of 10 years or more (thus forgoing some accelerated depreciation). The Comment Letter points out that Treasury deemed it appropriate to grant broad relief to all REITs even though a subset of REITs would qualify for an election that would provide similar consequences to Section 163(j)(7)(C). On this basis, the Comment Letter argues that the Proposed Regulations should similarly extend relief to all cooperatives that pay patronage dividends. Lastly, the Comment Letter observes that such relief would not render the Section 163(j)(7)(C) election meaningless as many highly leveraged cooperatives might still prefer that election to the limitation under Section 163(j). Also, Subchapter T cooperatives that are not specified agricultural or horticultural cooperatives are not eligible to make the election. Ultimately the problem with Section 163(j) as applied to cooperatives is structural in nature.

Cooperatives with modest leverage should not be forced to make a Section 163(j)(7) (C) election (and suffer the attendant loss of accelerated depreciation) to mitigate a result that could easily be fixed in final regulations.

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TAXFAX Application to Partnerships – The largest source of complexity in the Proposed Regulations stems from Congress’ decision to require each partnership with business interest expense to compute its own section 163(j) limitation. This entity approach means that each partnership must determine its ATI, business interest income and business interest expense. With these inputs, a partnership computes its allowable business interest expense and includes this amount in its non-separately stated income or loss.

Such amount is not re-tested at the partner level. That is, a partner’s allocable share of business interest from a partnership is not subjected to the partner’s separate Section 163(j) limitation.

Partnership business interest expense in excess of the partnership’s Section 163(j) limitation is disallowed and referred to as “excess business interest” (“EBI”). EBI is not carried forward at the partnership level. Rather, EBI is allocated to partners and is carried forward at the partner level.

A partner may treat EBI as paid or incurred only in the year in which the partnership generates excess limitation (called excess taxable income or “ETI”). In no event may the partner’s own excess limitation be used to offset EBI. Partnerships are required to allocate ETI, along with any deductible business interest expense and EBI, according to a multi-step set of rules in the Proposed Regulations (which can be quite complex for partnerships that make special allocations but much less so for the typical straight-up, pro-rata partnership). ETI so allocated to a partner is used to offset the partner’s EBI from prior years and, after fully offsetting prior year EBI, is added to the partner’s own Section 163(j) limitation for purposes determining the partner’s deduction for non-partnership business interest expense. Otherwise, a partner’s distributive share of partnership items is not included in the partner’s ATI (given that such items are included in the partnership’s ATI computation).

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Because of the entity level computation of a partnership’s Section 163(j) limit, a partner may not utilize ETI from one partnership to offset EBI from another partnership. In essence, each partnership is a silo. If partners operate an integrated business across multiple partnerships or through tiers of partnerships, they might consider combining the partnerships if modelling would show a higher overall Section 163(j) limit from aggregating each entity’s ATI, business interest income and business interest expense.

Another source of concern in the application of Section 163(j) to partnerships is how to treat interest expense incurred on a lending transaction between the partnership and a partner (i.e., a self-charged lending transaction”). The Preamble indicates that Treasury is considering a rule similar to the self-charge rule in the passive loss regulations. Such a rule would operate to exclude both the interest expense and interest income from entering the Section 163(j) limitation calculations for both the lender and the borrower. It appears Treasury will follow through with the adoption of a rule that would achieve this result.

In sum, the Proposed Regulations provide helpful guidance on some of the computational complexities of the Section 163(j) limitation. We are hopeful that final regulations provide equitable treatment to cooperatives by granting an add-back for patronage dividends equivalent to the special relief provided to REITs and RICs. Wheat Miller’s Claimed Research Credits Disallowed by the Tax Court

By George W. Benson Congress likes to use the tax laws to try to encourage research. Currently, the principal research incentive is provided by Section 41, which was made permanent several years ago. Section 41 gives companies a credit for engaging in certain research activities.

Summer 2019 | The Cooperative Accountant

TAXFAX Whether, and to what extent, the tax law actually encourages companies to engage in research or simply rewards them for research they would have conducted anyway is open to debate. One thing that is clear is that the tax law has encouraged many companies to engage professionals to review their activities to see which might qualify for the credit.

The IRS thinks that many companies have gone too far in their claims. “Research credit scams” have regularly made the IRS annual “Dirty Dozen” list of “common scams that taxpayers may encounter any time.” See IR-2019-49 (March 20, 2019). While there is nothing wrong with a taxpayer claiming a credit to which it is entitled, the IRS has repeatedly warned against “misuse of the research credit.”

Deciding what qualifies as research for credit purposes is often difficult. Taxpayers have the burden of proving that they are entitled to what they claim. The IRS believes that many taxpayers cannot substantiate what they claim.

In IR-2019-42 (March 14, 2019), the IRS warned: Improper claims for [the research] credit generally involve a failure to participate in or substantiate qualified research activities and/or a failure to satisfy the requirements related to qualified research expenses.

To claim the Research Credit, taxpayers must evaluate and document their research activities contemporaneously (that is, over the period of time in which the research occurs) to establish the amount of qualified research expenses paid for each qualified research activity. While some expenses may be estimated, taxpayers must have a factual basis for the assumptions used to create the estimates.

Unsupported claims for the Research Credit may subject taxpayers to penalties.

Taxpayers should carefully review any reports or studies prepared by third parties to ensure they accurately reflect their activities. Third parties who are involved in the preparation of improper claims or Summer 2019 | The Cooperative Accountant

research credit studies also may be subject to penalties.”

A recent Tax Court case, Siemer Milling Company v. Commissioner, T.C. Memo. 201937 (April 15, 2019), illustrates the problems a taxpayer may encounter proving its case.

In that case, the Tax Court concluded that Siemer Milling, a wheat miller, was not entitled to the research credit claimed for a variety of projects related to the production and sale of flour. The “flour heat-treatment project” sought to develop processes to produce (i) cake flour without the use of chlorine, (ii) low-microorganism and lowbacteria flour without the use of chemicals, (iii) and all-natural replacements for modified starches. The “Pulsewave project” sought to determine whether Siemer Milling could increase the speed at which a leased Pulsewave machine operated. The “wheat hybrids project” tested new varieties of wheat to determine whether they could be used in current or new products. The “ozone project” sought to introduce ozone into the milling process to produce a lowmicroorganism flour. The “whole wheat flour project” sought to produce an ultrafine whole wheat flour product. The “hydration project” sought to maintain a consistent level of moisture in flour because that consistency is important to its customers.

Siemer Milling based its claims upon research credit studies prepared by its outside accountants, who had been Siemer Milling’s accountants for many years. They had prepared similar studies in prior years to support similar claims (which apparently had been allowed without audit by the IRS).

The IRS did audit Siemer Milling’s 2011 and 2012 returns, and it proposed disallowing the credits claimed in their entirety ($122,424 for 2011 and $116,246 for 2012) asserting simply that Siemer Milling had not proven the projects qualify for research credit.

Siemer Milling filed a Tax Court petition. The Commissioner’s answer denied the claims in the petition and asserted, for the first time, accuracy-related penalties.

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TAXFAX When a case is brought in Tax Court, the The hostile attitude of the IRS and of Courts IRS determinations in the notice of deficiency

By Barbarato A.research Wech credit claims is illustrated by issued to the taxpayer upon the conclusion another recent decision. of the audit are presumed correct, and the In Harper v. United States, Case No. taxpayer generally has the burden of proving 18cv2110 (S.D. Ca. April 25, 2019), a United otherwise. The Commissioner has the burden States District Court for the Southern District of proof on any new matters (including of California issued an order dismissing a affirmative defenses) first pleaded in its lawsuit over the denial of a research credit answer. claim. The order states: In its opinion, the Tax Court systematically “Defendant [the Government] notes HCC described each project, then outlined the [the taxpayer] had not previously sought law, and finally analyzed each project and the R&D Credit in its forty-plus year history. identified why it did not qualify.

It attributes HCC’s pursuit of the credit in According to the Tax Court, a project must 2012 to its affiliation with AlliantGroup, a meet four tests in order to constitute qualified consulting firm that markets the R&D Credit research, which it described as the Section to businesses nation-wide for a fee based 174 test, the technological information test, upon a percentage of the credit obtained. the business component test, and the process Defendant asserts the claims submitted by of experimentation test. It addition, a project HCC to the IRS fail to adequately set forth may not fall within the following categories the grounds and facts entitling Plaintiffs – research after commercial production, to any credit, and that failure deprives adaptation of existing business components the Court of subject matter jurisdiction to a particular customer’s needs, and over Plaintiffs’ suit for refund. For reasons duplication or existing business components. set forth below, the Court agrees with Efficiency surveys, market research, routine Defendant and dismissed the action.” data collection and quality control testing are The order rests its denial on the failure of the also excluded. claim to “set forth in detail each ground upon The Tax Court concluded that Siemer which a credit or refund is claimed and facts Milling did not prove that most of its projects sufficient to apprise the commissioner of the met the technological information test. exact basis thereof” as required by Treas.

Nor, in the Tax Court’s opinion, did Siemer Reg. § 301.6402-2(b)(1). prove that the projects involved a process This is likely not going to be the last word of experimentation. Interested readers are in the Harper case, but the Siemer Milling referred to the opinion for the details of the decision and the Harper order should provide Tax Court’s analysis. a warning to taxpayers to proceed with While the Tax Court held against Siemer caution in this area and to carefully document on the underlying credit issue, it concluded the basis for their claims. that penalties were not applicable because Siemer had “reasonably relied in good faith on the advice of [the accounting firm] and Grants from Governmental Entities and its employees.” The Tax Court observed Civic Groups No Longer Qualify as Taxthat the accounting firm was a “competent Exempt Contributions to Capital under advisor.” Siemer Milling had provided Section 118 the accounting firm with all necessary and

By George W. Benson accurate information. Finally, the evidence in the record established that Siemer Milling In recent years, there has been keen relied in good faith on the accounting firm’s competition among local communities expertise. hoping to attract new business projects that 24

Summer 2019 | The Cooperative Accountant

TAXFAX will promote economic development, create new jobs and expand the local tax base. To win a competition, it is not uncommon for a community to offer a package of incentives that include, among other things, free land, infrastructure development, grants, taxfavored financing, and tax credits or rebates.

Typically some of the inducements have been structured so that they will qualify as tax-free “contributions to capital” of a corporation under Section 118 of the Code.

When Congress was working on the Tax Cuts and Jobs Act of 2017 (“TCJA”) several such competitions were making news. Wisconsin had recently agreed to give Foxconn incentives valued at over $3 billion to build a $10 billion complex in Racine County, which promised to create as many as 13,000 jobs ($231,000 per job). Amazon had just announced its plan to build a new HQ2, creating 50,000 jobs. It solicited offers from interested cities and regions and had received 238 proposals. All included various incentive packages. Ultimately, Amazon decided to split the facility between two locations (National Landing in Arlington, Virginia and Long Island City in Queens, New York). Each location had offered large incentive packages – reportedly approximately $750 million for Arlington and nearly $3 billion for Long Island City (though estimates of the value vary).

Ultimately, Amazon dropped its plan to locate in Long Island City when it encountered stiff local opposition.

In response to criticism that the federal tax laws should not encourage such competitions and should not reward recipients of such packages with tax-free treatment, Congress modified Section 118 as part of the TCJA to provide that “the term ‘contribution to the capital of the taxpayer’ does not include (1) any contribution in aid of construction or any other contribution as a customer or potential customer, and (2) any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such).” See, Section 118(b).

This change does not cover all incentives Summer 2019 | The Cooperative Accountant

typically offered (for instance, no additional restrictions were placed on use of tax exempt bonds). Nor were reduced tax rates pulled in. The Report of the House Ways and Means Committee described the scope of the change as follows: “For example, a contribution of municipal land by a municipality that is not in exchange for stock … of equivalent value is considered a contribution to capital that is includable in gross income. By contrast, a municipal tax abatement for locating a business in a particular municipality is not considered a contribution to capital.”

The amendment to Section 118 is of particular concern for rural electric and telephone cooperatives claiming exemption under Section 501(c)(12).

Among other things, a rural electric of telephone cooperative qualifies as exempt “only if 85 percent or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses.” Section 501(c)(12)(A). In a letter to the Secretary of the Treasury dated December 6, 2018 (Tax Notes Doc. 20194396), the National Rural Electric Cooperative Association expressed concern with the ability of some electric cooperatives to meet that test when they receive grants now subject to tax under revised Section 118: “The amendment of IRC 118 will have a profound impact upon electric cooperatives.

Historically, electric cooperatives have received grants from a variety of federal, state and local governments to assist in providing services to their members.

Electric cooperative may receive or benefit from grants or reimbursements for purposes such as renewable energy development, energy efficiency and conservation, economic development, storm damage or rural broadband initiatives. All such grants or reimbursements typically benefit the membership of the electric cooperative.

If the government grant or reimbursement is not a capital contribution, then the grant 25

TAXFAX may be considered nonmember income and could jeopardize a cooperative’s tax exempt status under IRS Section 501(c)(12).”

Section 501(c)(12) has been amended on several occasions in the past to address similar problems by providing that problematic categories of income either should be ignored or treated as member income for purposes of the 85% member income test. See, Sections 501(c)(12)(B), (C), (H) and (I). An effort appears to be underway to convince Congress to amend Section 501(c)(12) yet again to provide similar relief for government grants. See, NRECA Fact Sheet entitled “Tax Law Change Needed to Protect Electric Co-op TaxExempt Status” (February 2019), available at https://www.cooperative.com/programsservices/government-relations/documents/ legislative%20issues/section%20118%20 fact%20sheet.pdf.

Senators Rob Portman (R-Ohio) and Tina Smith (D-Minnesota) have introduced legislation in the Senate to amend Section 501(c)(12) to provide that the 85% member test would be applied without taking into account any income received or accrued from government grants “for the purpose of relief, recovery, or restoration from, or preparation for, a disaster or emergency” and for grants “the purchase of which is substantially related to providing, constructing, restoring, or relocating electric, communication, broadband, internet, or other utility facilities or services.” See, Revitalizing Underdeveloped Rural Areas and Lands (RURAL) Act 0f 2019, S. 1032 (April 4, 2019).

Companion legislation was introduced in the House by Terri A Sewell, D-Alabama. See, H.R. 2147 (April 9, 2019).

The change to Section 118 probably is of lesser concern for nonexempt Subchapter T cooperatives since most do not receive significant government grants or subsidies.

Nonexempt Subchapter T cooperatives presumably have an interest in treating any grants they receive as patronage. Treating 26

grants as nonpatronage could lead to mismatches where the grants are used to pay or reimburse the cooperative for paying expenses treated as patronage. In addition, timing mismatches could occur where grants received one year are not expended until the next year or are used to fund purchases of property depreciated over several years.

199A Guidance for Cooperatives and Farmers

By Rebecca L. Smith As I write this article, it is April 15. While Treasury and the IRS were aware that farmers and tax preparers needed additional guidance (particularly related to Section 199A) to help them through the 2018 filing season, nothing was forthcoming.

On March 14 the Senate Finance Committee held a hearing and several individuals commented on the need for additional guidance. Senator Maria Cantwell noted “farmers need guidance in order to file taxes.” Treasury Secretary Mnuchin indicated there are “a lot of technical issues and Treasury is very focused on it” and “Treasury hopes to get guidance out quickly, perhaps within weeks.” However, that turned out to be an empty promise.

It is true that a draft of proposed regulations was submitted to OMB’s Office of Information and Regulatory Affairs for review, which means we are likely to see proposed regulations soon, but not in time for the 2018 filing season.

As a practical matter, what did the lack of guidance mean for farmers and cooperatives for the 2018 filing season?

Farmers Farmers have special estimated tax rules. See, Section 6654(i). Farmers can forgo estimated tax payments altogether provided they file their tax returns and pay the tax shown on those returns by March 1. Alternatively, farmers can forgo the first, Summer 2019 | The Cooperative Accountant

TAXFAX second and third estimated tax payments, provided they make an estimated tax payment no later than January 15 of at least two-thirds of the tax shown on the return for the year. In that case, farmers have are given until April 15 to pay the remainder of the tax and file a tax return (or request an extension).

For many farmers and their return preparers, the 2018 filing season was especially difficult (and is not yet over) because they were not able to come up with a good estimate of taxes due for the year by January 15 and were not able to file a return

by March 1 (or even April 15) because of lack of guidance in many areas including Section 199A. Many anticipated that the IRS would grant an extension of the March 1 deadline for farmers who had made no estimated tax payments. Such an extension was granted at the last possible moment. On February 28, the IRS released an announcement giving farmers until April 15 to remit the tax payment and to prepare their federal income tax returns. See, Notice 2019-7 (February 28, 2019). The reasoning was the lack of clarity on filing a return. Specifically, the announcement stated: “Due to certain changes in the rules that affect farmers and fisherman, the Treasury Department and IRS anticipate that farmers and fishermen may have difficulty accurately determining and paying their tax liability for the 2018 taxable year by March 1, 2019.” In order to be eligible for this relief, a farmer was required to be a “qualifying farmer” which means at least two-thirds of the farmer’s income from all sources for 2017 or 2018 must be from farming.

However, this extension proved of limited help.

Farmers appear to have taken several different approaches this past filing season. ● Some

farmers paid the required estimated tax payment by January 15 based upon information available at the time and then either filed a return by April 15 or requested an extension (in either case

Summer 2019 | The Cooperative Accountant

with a payment of the rest of the tax at that time). There should be no penalty associated with such an approach provided the January 15 and April 15 payments were adequate. Farmers that took this approach and filed by April 15 may need to amend when further guidance is issued. ● Some

farmers filed by March 1 and paid the tax shown on the return based on information available at the time. They may need to amend when further guidance is issued.

● Some

farmers took advantage of Notice 2019-7. To do so, a farmer needed to have both filed and paid by April 15. To claim the waiver of the estimated tax penalty, a farmer must also have attached Form 2210-F to the return. Such farmers may need to amend their returns when further guidance is issued.

● It

appears that many farmers chose not to make a January 15 payment and not to file

by April 15. Rather, they chose to extend their tax return and made a payment

by April 15 for the anticipated tax. This approach does not qualify for Notice 2019-7 relief. If a farmer wanted to have relief pursuant to Notice 2019-7, he or she needed to have filed by April 15.

Cooperatives The need for guidance for cooperatives is seen by many as not as pressing for a couple reasons.

First, the earliest due date for a 2018 tax return for an agricultural cooperative is September 15, 2019. That also is the earliest last date for a cooperative to pass through 2018 Section 199A(g) deductions to patrons.

As of today that is approximately five months away, still sufficient time if guidance is issued in the near future.

Second, the statutory language of Section 199A(g)(6) provides that “the regulations shall be issued based on the regulations applicable to cooperatives and their patrons under prior Section 199.” Many are hopeful that the regulations issued will be consistent 27

TAXFAX with the regulations under prior Section 199, however, that remains to be seen.

So although not as pressing, the timely issuance of regulations under 199A(g) will be important to allow cooperatives time for interpretation if necessary and to ensure there are no surprises.

Tax Return Preparer ID Fees Return

By Rebecca L. Smith As a result of a March 1 ruling of the U.S. Court of Appeals for the District of Columbia Circuit (the “Court of Appeals”), the IRS has the authority to charge a fee for issuing or renewing preparer tax identification numbers (PTINs). This opinion vacated a June, 2017 decision of the U.S. District Court for the District of Columbia District (the “District Court”) which concluded the IRS didn’t have the authority to charge preparers fees for obtaining and renewing PTINs. The Court of Appeals ruled the fee is justified because the PTIN confers a benefit to tax preparers by protecting the confidentiality of the preparer’s Social Security number. The reasonableness of the fee was not ruled on by the Court of Appeals and can be decided on by the lower court on remand.

The Internal Revenue Code defines a tax return preparer as any person who prepares for compensation a federal income tax return or claim for refund. In 1976 Congress enabled the IRS to require a preparer to list an identifying number on any return prepared. That number was identified as the preparer’s social security number (SSN).

In 1998 Congress was concerned about inappropriate use of the preparer’s SSN so they allowed the IRS to permit or require preparers to list a different identifying number on returns they prepare. IRS regulations were subsequently issued requiring preparers to obtain and renew annually a unique identifying number known as a PTIN and to list the PTIN, instead of the SSN, on any return they prepared. Starting in 2010 28

the IRS began charging a fee for PTINs to recoup the costs to the agency of issuing and maintaining a database of PTINs. The IRS relied on the Independent Offices Appropriations Act, which allows federal agencies to charge fees for services in certain conditions, to exact the fee.

A group of tax return preparers filed a class action lawsuit challenging the fee, arguing the IRS lacks authority under the Act to charge for obtaining and renewing PTINs. They also argued that the fee was arbitrary and capricious. The District Court ruled in favor of the preparers concluding that the IRS lacks statutory authority to charge the fee.

An injunction was then issued barring the IRS from charging the PTIN fee and ordering the IRS to refund previously collected fees. Upon appeal, the Court of Appeals concluded the IRS did act within its authority under the Act and the decision to charge the fee was not arbitrary and capricious. The Court of Appeals considered whether the service conferred a “specific benefit” to those paying the fee. Characterizing the benefit is important since under the Independent Offices Appropriations Act fees are assessed against those specifically benefitting from a particular service and taxes are imposed for the benefit of the general public. The court found that the specific benefit in this case is privacy, and the protection of the confidentiality of Social Security numbers is “adequate to support the assessment of a PTIN fee.” That benefit has, the court found, been a reliable pillar in the IRS’ arguments in favor of a PTIN since 1999.

When the IRS continued the use of PTINs in 2015 after the Loving decision, the agency explained that “requiring the use of PTINs . . . benefits tax return preparers by allowing them to provide an identifying number on the return that is not an SSN.” The Court of Appeals remanded the case to the District Court for further proceedings including an assessment of whether the amount of the PTIN fee unreasonably exceeds the costs to the IRS to issue and maintain PTINs. Summer 2019 | The Cooperative Accountant

NATIONAL DIRECTORS Kent Erhardt Director CoBank, ACB

Mark Feldman Director Crowe LLP

Jo Ann Fuller Director Alabama Farmers Cooperative, Inc.

Jeff Krejdl Director Ag Valley Cooperative

Eric Krienert, CPA Director Moss Adams LLP

Tucker Lemley Director Peace River Electric Cooperative

Emery Lewis Director CoBank

Michael Mayhew, CPA Director Countryside Cooperative

Christy Norton, CPA Director K Coe Isom LLP

Lynn Smith Director Land O’ Lakes, Inc.

For a complete listing of National Directors and Committees, please visit www.NSAC.coop

Summer 2019 | The Cooperative Accountant

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SMALL BUSINESS COOPERATIVE FORUM

What is a blockchain and what make this technology different?

Many of you have likely heard the term blockchain, especially given the increase focus on this technology by business leaders.

But what exactly is a blockchain and what distinguishes it from the technology we’ve always relied on. Simply put, blockchains are a collection of records, called blocks. They contain two primary elements that distinguish the technology from similar concepts used in the past: ● A time-stamped immutable record of data ● Data processing is accomplished using a decentralized network When trying to picture a blockchain, you shouldn’t stray too far from thinking about the standard database of information you are accustomed to. What is different are the immutable characteristics of the database and the rules governing who can make changes to the database.

So what do we mean by immutable and why is this different from prior technology?

By immutable, we simply mean the historical records on a blockchain are unchangeable.

Unlike databases of the past where authorized employees or others are able to make 30

EDITOR Barbara A. Wech, Ph.D. Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham Collat School of Business bawech@uab.edu GUEST WRITERS Mark Edmonds, Ph.D, CPA Assistant Professor of Accounting Department of Accounting and Finance COLLAT School of Business, UAB The University of Alabama at Birmingham CSB 320 | 710 13th St S | Birmingham, AL 35233 (205) 936-1336 maedmond@uab.edu Lisa-Ann Polack, Ph.D, CPA Assistant Professor of Accounting Department of Accounting and Finance COLLAT School of Business, UAB The University of Alabama at Birmingham CSB 321 | 710 13th St S Birmingham, AL 35233 (205) 934-8820 lpolack@uab.edu

changes to the records within the database, no such option exists for a blockchain.

Records stored on the blockchain can never be altered or deleted, creating an immutable record of information. But how do blockchains accomplish this immutability of records?

The simple answer to this question is that blockchains rely on a decentralized processing of data as opposed to more Summer 2019 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM traditional centralized methods of processing data. Most of us are accustomed to a centralized processing environment in which a single entity or party is responsible for processing and maintaining all records in the database. For example, if you use your credit card to purchase an item, the credit card company is solely responsible for creating and maintaining the record of your transaction. In this instance, the credit card company is the central source of truth and we as customers must put our trust in these companies to accurately record and maintain our financial records. These companies rely on a complex system of internal control to maintain the validity of data, but risks still exist for data to become corrupted or altered in an undesirable way.

Unlike our previous example, decentralized processing requires numerous independent computers across a network to come to a consensus prior to allowing an additional record to be added to the database. This is accomplished by keeping a historical record of all prior entries into the database on every individual computer on the network. For a new record to be added to the database, every independent computer on the network must first agree that the historical record has not be altered in any way. In other words, if any single computer makes a change to the historical record, no further transactions could be processed to the blockchain since the historical record across all the machines will differ. This aspect of the block chain is what provides the key element of immutability.

low on the trust The key problem element. Presently, that blockchain news organizations not operating on technology is a blockchain can intended to solve publish stories that is trust. In fact, later turn out to be false and simply this is the primary remove the story concept you from their website. In should focus on the current scenario, we have no way when considering to checking the whether to adopt historical accuracy of a news networks blockchain reports because they technology. have full control over their historical record.

However, if this same news organization published its stories on a blockchain, we as consumers would have an immutable historical record which we could use to gauge how accurate the network has been over time. This example highlights the importance of immutable historical record to build trust.

This concept has been applied to a multitude of use cases with some of the most popular being:

What is the problem blockchains solve?

The key problem that blockchain technology is intended to solve is trust. In fact, this is the primary concept you should focus on when considering whether to adopt blockchain technology. To put this in perspective, let’s use a news organization as an example. You are probably aware that in today’s political climate, news media currently rates pretty

● Real

Summer 2019 | The Cooperative Accountant

● Payment

processing and money transfers in the form of cryptocurrencies, bitcoin being the most popular.

● Monitoring

supply chains

● Intangible

asset protection including copyrights.

● Digital

estate, land, and title transfers

● Food ● Tax

voting

safety

regulation and compliance

● Medical

record keeping

The one thing all of these use cases have in common is the need for trust.

Cryptocurrencies and the underlying blockchain infrastructure arose out of distrust 31

TCA SMALL BUSINESS FORUM

for central banks. Digital voting solves the issue of a vote being double counted due to the immutable characteristics of the blockchain. Deed and title information stored on a blockchain could eliminate property ownership risk by ensuring ownership is not transferred to multiple parties. Financial records kept on a blockchain would increase transparency and reduce risks associated non-compliance with IRS regulations. All of these use cases increase trust by providing an immutable historical record, thereby eliminating manipulations of the data or the potential for double counting.

Many organizations initially intrigued by the buzz of blockchain have found they simply have no need for it, because it is really only beneficial if you need to increase the trust your consumers have in the data you provide.

If this isn’t something your organization is struggling with, then blockchains are likely of little use to you. Conversely, if building trust is pivotal to your organization, blockchains may be your best solution.

Misconception of validation One of the major misconceptions regarding blockchains is that the technology eliminates 32

misinformation from entering the database. While the historical record is immutable, blockchains do not validate that the information entering the database is accurate or valid. The phrase “garbage in garbage out” still very much applies to blockchain technology.

The problem is complicated by the fact that once misinformation is entered into the blockchain, there is no way to remove it from the historical record. Presently, blockchains address these concerns using several methods, many of which are beyond the scope of this article (i.e. encryption).

What is important for our purposes is to clearly understand that just because information is included on a blockchain, doesn’t mean that information is accurate. It simply means it is unchanged from when it was originally entered in the blockchain. If you are considering adopting blockchain technology, you need to ensure that you have the proper controls in to place to ensure only accurate and valid information is being uploaded to the blockchain. Likewise, if you are relying on information stored in a blockchain, ensure that you have a firm understanding of the process used to validate stored information.

How blockchains are changing the accounting profession So far, we have discussed blockchains as being synonymous with databases, but from an accounting perspective you can also view them as sophisticated ledgers. In fact, the Summer 2019 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM bitcoin blockchain that most of you have likely heard of is exactly that, a ledger storing transactional data. “In essence, blockchain presents the possibility of a new type of accounting ledger — one that can be continuously updated and verified without the threat of being altered or corrupted” (Vetter 2018). Another major difference is the ability for companies to utilize “shared ledgers” over a blockchain, where “instead of keeping separate records based on transaction receipts, companies can write their transactions directly into a joint register, creating an interlocking system of enduring accounting records” (Deloitte 2016).

Let’s provide an example of these shared ledgers to help better clarify these concepts.

Imagine we have two companies, Company A, a supplier, and Company B, a retailer.

Theoretically, these companies could share a blockchain accounting ledger such that when Company B buys inventory from Company A, the receivable on Company A’s books must match the corresponding payable on Company B’s books. Combining this with the inability for either company to alter the historical record (i.e. change the amount of the payable or receivable) would ensure that both books are kept accurately at all times.

This same example could be applied to nearly all financial statement accounts such that all transactions require consensus across all parties involved in the transaction before being added to the accounting ledger.

While there is no doubt that this technology will disrupt the accounting profession, it will hardly replace the need for accountants. Instead, as with all technological innovations, their role will need to change to address new issues that arise with new technology. To demonstrate, in our previous example there would no longer be a need for an auditor to confirm Company’s A’s receivable with Company B, because the two ledgers are linked such that the receivable must match the payable.

Summer 2019 | The Cooperative Accountant

Instead, an auditor’s …the real role in this instance question as will need to shift to auditing the controls to whether surrounding data entry blockchain into the blockchain to technology can ensure only accurate and valid information be of a benefit is entered into the to cooperatives accounting ledger.

Many have coined is centered this new approach on whether of focusing on input a particular controls as opposed to focusing on the coop has a historical ledger need to build as “continuous auditing”. trust between While shared its various blockchain ledgers consumers, would fundamentally change the way we vendors, keep, store, and contractors and modify our accounting records, it is important markets. to note blockchain technology can serve a larger purpose in accounting than just being a joint register for all accountingentries. “The Blockchain as a source of trust can also be extremely helpful in today’s accounting structures. It can be gradually integrated with typical accounting procedures: starting from securing the integrity of records, to one day creating a completely traceable audit trails” (Deloitte 2016). The uses for this technology in accounting are limitless and it is up to us as a profession to find our new role in this changing environment.

Blockchain technology in cooperatives All of the benefits of blockchain technology previously described would apply to cooperatives just like any other business form. However, as stated previously, the real 33

TCA SMALL BUSINESS FORUM question as to whether blockchain technology can be of a benefit to cooperatives is centered on whether a particular coop has a need to build trust between its various consumers, vendors, contractors and markets.

Andre Joseph, National Rural Electric Cooperative Association Principal of Cybersecurity states “The problem that blockchain was created to solve – providing a verifiable and secure means of tracking digital transactions between different parties – isn’t really a problem for electric cooperatives…

Cooperatives are obviously involved in a lot of transactions: billing and receiving payments from consumers, contracting with vendors, and, of course, purchasing power through contractual arrangements with G&Ts, other power generators, or on the energy markets. But co-ops have systems in place to deal with all these transactions that function well and, most importantly, have established their integrity in managing these transactions.

They are the trust agent. They’re a reliable, trustworthy agent, and our members express that fact.”

The conclusion expressed in this quote is more often than not the case with most companies and co-ops considering the adoption of blockchain technology. That is not to say blockchain technology has no usefulness for co-ops, to the contrary there are several examples of how this technology can benefit co-ops. One such example involves Dairy Farmers of America (DFA), a U.S. national milk marketing cooperative who is utilizing blockchain technology to increase the transparency of their supply lines. David Darr, Vice President of Sustainability and Member Services at DFA, states: “Consumers today want to know where their food comes from and blockchain technology, like ripe.io, gives consumers realtime data, which can really help increase trust 34

and confidence about food production from start to finish.”

Co-ops will need to decide where this technology fits into their business model and ask themselves the key question of whether a lack of trust is something they need to address. As the technology continues to evolve, we are likely to see additional use cases in co-ops. Early adopters of this technology will be able to leverage the additional trust it provides to strengthen their relationships with their customers, suppliers, other in their network.

References Deloitte (2016). Blockchain Technology: A game-changer in accounting? [online] Deloitte. Available at https://www2.deloitte. com/content/dam/Deloitte/de/Documents/ Innovation/ Blockchain_A%20gamechanger%20in%20accounting.pdf Vetter, A. (2018). Blockchain is already changing accounting. [online] Accounting Today. Available at: https://www. accountingtoday.com/opinion/blockchain-isalready-changing-accounting.

Articles of Interest Alexandre, A. (2018). Major US Dairy Co-Op Pilots Blockchain Technology for Food Supply. [online] Cointelegraph. Available at: https:// cointelegraph.com/news/major-us-dairy-coop-pilots-blockchain-technology-for-foodsupply.

Vetter, A. (2018). CPAs’ top 5 questions about blockchain, cryptocurrencies. Journal of Accountancy.

Williams, S. (2018). 20 Real-World Uses for Blockchain Technology. [online] The Motley Fool. Available at: https://www.fool.com/ investing/2018/04/11/20-real-world-uses-forblockchain-technology.aspx.

Summer 2019 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM

Each time you create a password at work, remind yourself how much sensitive company data you have in your care. From names, addresses, dates of birth, and Social Security numbers to tax and financial information, and business entity details – you’re tasked with protecting some of your company’s most valuable data. And your network and system security are only as strong as the passwords you create.

DOs Do use a passphrase instead of a password Complex passphrases invented from random words are harder for computers to guess and easy for you to memorize but steer clear of common phrases or popular sayings.

Do change default passwords If any hardware or software came with a default password, change it! Too many hackers breach systems easily because default passwords were never changed.

Do use multi-factor authentication Multi-factor authentication using a tool like Google Authenticator is one of the best ways to safeguard systems by requiring you to present something you know (password) and something you possess (authentication code from your mobile device).

Do use a password manager Use a tool like LastPass, Dashlane, or Summer 2019 | The Cooperative Accountant

1Password, which can generate and store super-complex passwords for you. Make sure to create a strong, memorable passphrase for your password manager.

DON’Ts Don’t use the same password for all your logins It may make remembering passwords easier, but it also means that if hackers crack your password once, they can access multiple systems and devices with it.

Don’t store passwords in a spreadsheet Don’t do hackers a favor by packaging all your passwords up in a single unencrypted document.

Don’t use personal details in your passwords Don’t use any parts of your name, kids’ or pets’ names, birthday, mailing address, phone numbers, bank PIN numbers, or Social Security numbers in passwords.

Don’t use words found in a dictionary If you’re set on passwords instead of passphrases, don’t include any real word in English or any other language. Instead, use a hard-to-crack combination of letters, numbers, and symbols. *Find other Best Practices Articles on the NSAC website under the Benefits Tab. 35

136 Keowee Street Dayton, Ohio 45402 Phone: (937) 222-6707 Fax: (937) 222-5794 www.nsac.coop

Register now: www.nsacoop.org

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Summer 2019 | The Cooperative Accountant