The Cooperative Accountant - Fall 2023

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

EXECUTIVE COMMITTEE

President

Eric Krienert, CPA

Moss Adams LLP

Vice President

Erik Gillam, CPA

Aldrich CPAs +Advisors

PRESIDENT:

Treasurer

*William Miller, CPA (806) 747-3806

Kent Erhardt

Electric Co-op Chapter bmiller@bsgm.com

Bolinger, Segars, Gilbert & Moss, LLP

8215 Nashville Avenue Lubbock, TX 79423

VICE PRESIDENT:

CoBank, ACB Secretary

*Nick Mueting (620) 227-3522

Jim Halvorsen

Mid-West Chapter nickm@.lvpf-cpa.com

CLA (CliftonLarsonAllen)

Lindburg, Vogel, Pierce, Faris, Chartered P.O. Box 1512

Dodge City, KS 67801

Immediate Past President

SECRETARY-TREASURER:

*Dave Antoni (267) 256-1627

David Antoni, CPA

Capitol Chapter dantoni@kpmg.com

Moss Adams LLP

KPMG, LLP 1601 Market St. Philadelphia, PA 19103

Executive Committee

IMMEDIATE PAST PRESIDENT:

*Jeff Brandenburg, CPA, CFE (608) 662-8600

Julia Sevald, CPA

Great Lakes Chapter jeff.brandenburg@cliftonlarson

ClifftonLarsonAllen LLP

Land O'Lakes, Inc.

8215 Greenway Boulevard, Suite 600 Middleton, WI 53562

*Indicates Executive Committee Member

NATIONAL OFFICE

Kim Fantaci, Executive Director 136 S. Keowee Street

Jeff Roberts, Association Executive Dayton, Ohio 45402

Tina Schneider, Chief Administrative Officer info@nsacoop.org

Krista Saul, Client Accounting Manager

For a complete listing of NSAC’s National Board of Directors and Committees, visit

Bill Erlenbush, Director of Education

Phil Miller, Assistant Director of Education

www.nsacoop.org

From the Editor

Divisiveness, Political Polarization, Disagreement. None of these words represent what we stand for and that is Cooperation. We all need a voice of reason to get us moving forward. Let it start with each of us. As members of NSAC, we all know that with cooperation and working together, we have had success after success of so many Cooperative developments in our country and the world. Let’s all try harder and help spread cooperation around not only our country, but around the world!

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

UAB Department of Accounting & Finance

Collat School of Business

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

fmessina@uab.edu

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

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

Positively Yours,

Frank M. Messina, DBA, CPA

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

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

Introduction

Artificial Intelligence (AI) has been a buzzword across industries for the last decade and is emerging with significant and potential significant advancements in technology and operational efficiencies. One of the emerging trends, generative AI, which is a subset of AI, has shown great potential in reshaping industries. Both AI and generative AI will continue to impact finance professionals and the roles they serve within their cooperatives, it is important to gain an understanding of them and how they might impact your company. A global survey of Chief Financial Officers (CFOs), completed in 2022 by the Everest Group, reveals the following survey results:

• Over 70% of CFOs recognize “implementing digital technologies to improve efficiency, effectiveness and stakeholder experience” as the top priority, which was up from 47% in 2020.

• 63% of CFOs consider “leveraging AI and analytics to extract insights” as a strategic priority.

• While pricing/cost pressure was the third biggest organizational challenge in 2020, it

is the foremost challenge in 2022. • 40% of organizations are moving beyond transactional processes to focus on transforming judgment-intensive processes.

(Hung et al., 2022)

This survey was taken amongst 300 CFOs and their direct reports across major geographical areas including North America, UK, Europe, Asia Pacific, and the Middle East and Africa. The survey included industries such as insurance, consumer packaged goods and retail, hi-tech and technology, life sciences, manufacturing, airlines, and hospitality. A similar study in 2020 had concluded that COVID-19 had created a need for organizations to accelerate their transformation journeys regarding adopting new technologies. Some of the top finance functions that these organizations have identified to address include cash flow improvement, compliance and controls review (risk mitigation), organizational information improvement, business strategy reassessment, and operating cost reductions. The Everest Group is a research firm focused on strategic IT, business services, engineering

services, and sourcing.

Marr (2023), of Forbes.com, describes the main difference between traditional AI and generative AI:

[It] lies in their capabilities and application. Traditional AI systems are primarily used to analyze data and make predictions, while generative AI goes a step further by creating new data like its training data. In other words, traditional AI excels at pattern recognition, while generative AI excels at pattern creation. Traditional AI can analyze data and tell you what it sees, but generative AI can use that same data to create something entirely new.

(The Key Difference section, para. 1)

Fisher (2023), of qlik.com, further explain s the differences as follows:

While traditional AI is focused on detecting patterns, generating insights, automation, and prediction, generative AI starts with a prompt that lets a user submit a question along with any relevant data to guide content generation. Traditional AI algorithms process data and return expected results, such as analyses or predictions; generative AI algorithms produce newly synthesized content, like text or images, based on training from existing data. A reason that generative AI became so popular so quickly, is because it empowers the end user: right now, anyone can log on to ChatGPT and start using it, which is a first for an AI application. Zero barrier to entry. Traditional AI necessitates rigorous data preparation and processes to develop and test a model designed to produce a good outcome. With generative AI, you can just start talking to it, and it will understand what you want to do and offer a response.

(para. 1)

Generative AI and traditional AI have both separate and combined financial applications. Traditional AI is useful for decision making. Examples of this include account reconciliation and anomaly detection, credit

scoring, compliance and fraud detection, and spend category analysis. Generative AI can overlay and extend the information from those functions by producing content, generating ideas, and answering questions. By supplementing traditional AI with generative AI capabilities, companies could have an added benefit of things like a recommendation engine, demand forecasting, audit risk detection, and databased insights for planning and decisionmaking activities. Generative AI could assist in any writing task (i.e., contracts, member communications, summaries of meeting minutes, etc.), financial-scenario generation, automated report generation, analysis of new regulations, and business intelligence and strategic insights.

Ribeiro (2023) highlights the following finance areas where generative AI is emerging as a powerful tool:

• Automated data entry - Algorithms can extract relevant information from documents, understand their context, and accurately input the data into financial systems.

• AI algorithms are now being trained to analyze vast volumes of financial transactions, identify patterns indicative of fraudulent activities, and provide real-time alerts.

• Traditional financial forecasting methods rely on historical data and human judgment, making them susceptible to biases and limitations. However, generative AI can analyze market trends, economic indicators, and historical performance to generate more accurate forecasts.

• Generative AI has the potential to revolutionize risk assessment processes in finance.

• Process automation is another area where generative AI can have a profound impact. Repetitive accounting and finance tasks, such as accounts payable and receivable processes, payroll processing, and financial reporting, can be automated using AI algorithms. This liberates finance

professionals from mundane administrative tasks, allowing them to focus on highervalue activities such as financial analysis and strategic planning.

• Integrating generative AI with natural language processing capabilities will enable more advanced financial forecasting models.

• Generative AI algorithms will play a crucial role in ensuring compliance with financial regulations by analyzing vast volumes of data for anomalies and discrepancies. They will assist in generating accurate regulatory reports, reducing the risk of non-compliance and potential penalties. This will bring greater transparency and efficiency to regulatory processes, benefiting businesses and regulatory bodies.

Who created generative AI?

Joseph Weizenbaum first created the initial generative AI in the 1960’s and it was part of the Eliza chatbot. Then, in 2014, Ian Goodfellow demonstrated generative adversarial networks (GAN’s) for generating realistic-looking and realistic-sounding people. There was subsequent research completed into large language models (LLM’s) from Open AI and Google has most recently directed enthusiasm for this technology into tools like ChatGPT, Google Bard and Dall-E. (Lawton, 2023, Who created generative AI?)

Finance areas that may benefit from a generative AI deployment

While there are many industries and functions within a company where generative AI can be deployed, the following discusses financial areas that may benefit:

• Financial Planning & Analysis – by helping to achieve more efficient strategic planning, forecasting, modeling, and monitoring of results.

• Transactional Finance – by augmenting finance operations for enhanced efficiency and reduced operational costs and improving customer experience.

• Controllership – by producing internal and external financial reports more efficiently and automating some of the daily activities such as reconciliations, journal entries, and financial consolidations.

• Internal Audit and Compliance – by improving continuous controls monitoring and detection.

• Tax – by taking on more of the routine tax reporting so that tax professionals can focus on monitoring tax activities and provide more one-on-one and value-added service for clients.

• Member Relations – by generating member materials for publication, time spent gathering data could be reduced so that member relations staff have more time to focus on and draft key messaging. (Deloitte, 2023, pp. 3-4)

Navaraj (2023) notes that compliance and regulatory intelligence generated by generative AI can be invaluable. An example provided includes the conversational capability in handling various accounting conventions and its interpretations (including Generally Accepted Accounting Principles (GAAP)), and policies and control frameworks. Generative AI can alert finance professionals and auditors about new regulations and produce summarized tables of all regulatory changes.

Examples of generative AI tools

Generative AI tools exist for various modalities, such as text, imagery, music, code, and voices. Some popular AI content generators to explore are listed below. While these can be useful one-off tools, generative AI technologies can be embedded directly into versions of technology software or tools we already use.

• Text generation tools include GPT, Jasper, AI-Writer and Lex.

• Image generation tools include Dall-E 2, Midjourney and Stable Diffusion.

• Music generation tools include Amper, Dadabots and MuseNet.

• Code generation tools include CodeStarter, Codex, GitHub Copilot and Tabnine.

• Voice synthesis tools include Descript, Listnr and Podcast.ai.

• AI chip design tool companies include Synopsys, Cadence, Google and Nvidia. (Lawton, What are some examples of generative AI tools?)

Human talent will be needed, more than ever

For all of its capabilities and potential efficiencies offered to enhance business operations, generative AI has some limitations and will still require human talent. The implementation of this technology will change the roles and responsibilities of workers, but the same current desirable human traits of curiosity/learning, critical thinking, empathy, and the ability to work well in teams will continue to top the list of desirable employee traits. But finance professionals will need to learn new generative AI terminology and the skills to be able to deploy it so that it creates value within an organization. For example, some of the things that finance professionals will need to be proficient at is to ask good questions, recognize bias, and confirm the quality and validity of automated data modeling results. Additionally, since it is processing data, the security of the information will need to be protected. The security of financial information will need to be managed by both finance professionals and their Information Technology (IT) staff. Generative AI has already started to be used to enhance financial reporting, financial analysis, risk mitigation efforts, and streamline business processes in some businesses. But the data will only be valuable if used to enhance business functions from current-state. Human oversight will be more important than ever in validation, interpretation of AIgenerated outputs, and will be crucial to ensuring accuracy, to mitigate risks, and to help maintain trust in financial processes.

Summary

Now is the time for finance managers to learn about the applications of emerging generative AI that will have the most impact to their cooperative, prepare to capitalize on emerging capabilities, and develop strategies for how generative AI might impact functions within their organization. They are advised to see beyond the media and industry hype and seek a realistic understanding of how these tools can reshape work in the future. Over the next five to ten years there are expected to be many advancements.

In the immediate future, work will continue on developing and improving the user experience and workflows of generative AI tools. There have been some challenges to adoption along the way. The consumer public has not yet gained trust in generative AI technologies and their results. Governmental and regulatory authorities have not yet put their arms around the impacts of the deployment of these technologies and how they might be used as a weapon by those intent on evil doings. Accuracy and data security are two areas of significant concern as AI opens the risk of bad information or bad actors taking advantage of and misusing information. Additionally, generative AI “can sometimes produce inaccurate responses in a highly convincing manner” which is referred to as “hallucinations” (Demyttenaere et al., 2023). Robust governance models have not been established to validate and protect information produced through generational AI processes. Regulations and standards around generative AI must be developed to govern the use of the information and ensure that algorithms are fair, unbiased, and compliant with privacy regulations.

Despite these challenges, generative AI has arrived and is evolving at an unprecedented pace. Many companies have started using customized programming on their own data to help improve targeted processes. Some vendors have begun to integrate generative AI to streamline content generation and workflows and are reporting this is intended

to drive innovation and productivity. Generative AI has also started playing a role in various aspects of data processing, transformation, vetting, and labeling of data for analysis. This information then allows a company to refine risk assessments and opportunity analysis and identification.

Financial professionals that can adapt and learn with this technology movement can lead the future. The first steps include identifying possible use cases within your organization where this technology might be useful in gaining cost and process efficiency and effectiveness. Additionally, identification and developmental training of internal talent that can skillfully adapt the technology will

References

be important. And a strong collaboration with your IT team will be essential for identifying and deploying AI tools. Jimenez et al. (2023), of IBM, offer an approach to addressing generative AI possibilities for your organization:

• Start with a sound AI strategy.

• Pilot the technology.

• Design a well-defined F&A roadmap.

• Co-create with a tech partner with F&A expertise.

• Consider the ethical implications.

• Communicate with your F&A teams about it.

Deloitte. (2023). The implications of generative AI in Finance. Retrieved August 28, 2023 from the following website: https://www2.deloitte.com/us/en/pages/consulting/articles/ generative-ai-in-finance.html?id=us:2ps:3gl:genai24:awa:cons:082123:finance%20trends:b:c:kwd343092534183&gclid=Cj0KCQjwi7GnBhDXARIsAFLvH4l-Ng7hYSL8dq3mn-1EjSt-JC2_WCwpRHfKEoVkh13VLrK17iWgu0aAhljEALw_wcB

Demyttenaere, M., Roos, A., Sheth, H., Rodt, M., Harris, M., Khodabandeh, S., Fehling, R., Martines, D., & Grabowski, J. (August 22, 2023). Generative AI in the Finance Function of the Future. Retrieved August 28, 2023 from the following website: https://www.bcg.com/publications/2023/generative-ai-in-finance-andaccounting

Fisher, J. (July 11,2023). Traditional AI vs. Generative AI. Retrieved August 28, 2023 from the following website: https://www.qlik.com/blog/traditional-ai-vs.-generative-ai

Hung, S., Vignesh K, Das, A., & Singh, A. (2022). Everest Group: Global CFO Survey 2022. Retrieved August 28, 2023 from the following website: https://s3.wns.com/S3_5/Documents/global-cfo-survey-2022/ WNS_Everest_Global_CFO_Survey_2022_Report.pdf

Jimenez, J., Sherlock H., Juarez L., Varshney, S., & Pillutla, V. (June 23, 2023). How to improve your finance operation’s efficiency with generative AI. Retrieved August 28, 2023 from the following website: https:// www.ibm.com/blog/how-to-improve-your-finance-operations-efficiency-with-generative-ai/ Lawton, G. (July 2023). What is generative AI? Everything you need to know. Retrieved August 28, 2023 from the following website: https://www.techtarget.com/searchenterpriseai/definition/generative-AI Marr, B. (July 24, 2023). The Difference Between Generative AI And Traditional AI: An Easy Explanation For Anyone. Retrieved August 28, 2023 from the following website: https://www.forbes.com/sites/ bernardmarr/2023/07/24/the-difference-between-generative-ai-and-traditional-ai-an-easy-explanation-foranyone/?sh=63a97466508a

Navaraj, B. (2023). The Future-forward CFO: Harnessing Generative AI in Finance. Retrieved August 28, 2023 from the following website: https://www.wns.com/perspectives/articles/articledetail/1096/the-futureforward-cfo-harnessing-generative-ai-in-finance

Ribeiro, P.J. (June 18, 2023). The Rise of Generative AI: Transforming Accounting and Finance. Retrieved August 28, 2023 from the following website: https://www.linkedin.com/pulse/rise-generative-aitransforming-accounting-finance-ribeiro#:~:text=Traditional%20forecasting%20methods%20rely%20 on,to%20generate%20more%20accurate%20forecasts

By Greg Taylor

FASB ISSUES PROPOSED ASU ON INCOME STATEMENT – REPORTING COMPREHENSIVE INCOME – EXPENSE DISAGGREGATION DISCLOSURES (SUBTOPIC 220-40)

Issued on July 31, 2023, with a comment deadline of October 30, 2023, this proposed accounting standards update aims to improve disclosures by requiring disaggregated financial reporting information (in the income statement, the statement of cash flows, or the notes to financial statements) be presented to users of PUBLIC COMPANY financial statements. Investors have observed that more detailed information about expenses is critically important in understanding an entity’s performance, assessing an entity’s prospects for future cash flows, and comparing an entity’s performance both over time and with that of other entities. Investors specifically indicated that more granular information about cost of sales and selling, general, and administrative expenses (SG&A) would assist them in better understanding an entity’s cost structure and forecasting future cash flows. Some investors also noted that employee compensation costs should be disclosed in greater detail.

The main provisions of the proposed update include:

1. Disclose the amounts of (a) inventory and manufacturing expense, (b) employee compensation, (c) depreciation, (d)

intangible asset amortization, and (e) depreciation, depletion, and amortization recognized as part of oil- and gasproducing activities (DD&A) included in each relevant expense caption. A relevant expense caption would be an expense caption presented on the face of the income statement within continuing operations that contains any of the expense categories listed in (a)–(e).

2. Disclose a further disaggregation of inventory and manufacturing expense (from 1 above) into the following categories of costs incurred:

(a) purchases of inventory,

(b) employee compensation,

(c) depreciation,

(d) intangible asset amortization, and

(e) DD&A. Costs incurred would include those that are either capitalized to inventory or, if not capitalized to inventory, directly expensed (expensed as incurred) during the current period. On an annual basis, an entity would disclose its definition of other manufacturing expenses.

3. Include certain amounts that are already required to be disclosed under existing generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements.

4. Disclose a qualitative description of the amounts remaining in relevant expense

captions or in inventory and manufacturing expense that are not separately disaggregated quantitatively.

5. Disclose the total amount of selling expenses and, on an annual basis, an entity’s definition of selling expenses.

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

The amendments in this proposed Update would improve financial reporting by requiring that public business entities disclose additional information about specific expense categories on an annual and interim basis in the notes to financial statements. This information is generally not presented in the financial statements today.

Currently, Topic 220, Income Statement— Reporting Comprehensive Income, does not require the presentation of specific expense captions on the face of the income statement (excluding the U.S. Securities and Exchange Commission [SEC] Sections). That Topic also does not currently require any disaggregation of expense captions. Certain income statement expense captions are required by industry-specific guidance or are triggered when a specific event occurs (for example, goodwill impairment). Other types of expenses, even when not required to be presented separately on the face of the income statement, are required to be disclosed separately in the notes to financial statements. For public business entities subject to the SEC’s presentation requirements, certain articles of SEC Regulation S-X (17 CFR Part 210) apply to entities in different industries. The amendments in this proposed Update would not change or remove those presentation requirements or any other existing presentation requirements.

The amendments in this proposed Update do not change or remove existing expense disclosure requirements. However, the proposed amendments would affect where

this information appears in the notes to financial statements because entities would be required to include certain existing disclosures in the same tabular format disclosure as the other disaggregation requirements in the proposed amendments.

FASB ISSUES PROPOSED ASU ON FINANCIAL INSTRUMENTS – CREDIT LOSSES (TOPIC 326) PURCHASED FINANCIAL ASSETS

Issued on March June 27, 2023, with a comment deadline of August 28, 2023, the Financial Accounting Standards Board (FASB) is proposing amendments to improve accounting for changes due to the credit deterioration of purchased financial assets –here’s ChatGPT 4’s summarization of the issue and the proposed ASU:

Plain English Summary: What’s the Background? The Board has issued an update called “Accounting Standards Update No. 2016-13” that relates to how financial losses on financial instruments are measured. Since releasing this, they’ve been helping people understand and apply it. This involved making educational content, hosting workshops, and checking on how it’s been used in financial reports.

What’s the Problem? People have pointed out some issues around how you account for certain financial assets that are acquired. These assets are recorded at what they’re worth now, and there’s a separate system for anticipating potential losses. Also, there’s a difference in how you record the value if you buy something above or below its face value. Then, there’s this term called “PCD assets.” They are assets that have seen a significant drop in credit quality since they were first made. But, the rules are a bit vague on what “significant drop” really means. Some assets might be marked as PCD, while others aren’t. If they aren’t, they’re accounted for differently, and there’s a point where you recognize a loss right from the get-go.

People have also pointed out that the methods for accounting for these PCD and non-PCD assets are confusing and make things hard to compare. For non-PCD assets, recording a loss at acquisition, especially when it hasn’t deteriorated that much, seems off. Meanwhile, for PCD assets, even though they’ve seen a major drop in value, there’s no such immediate loss recorded. People also say the rules for figuring out which assets are PCD are hard to grasp and are applied unevenly.

Most feedback suggests that there should be just one way of accounting for these bought assets, and they prefer the way PCD assets are currently treated.

What’s Being Proposed? The proposed changes aim to simplify things. The idea is to use the PCD method for all acquired assets, getting rid of the distinction based on how much credit quality has dropped. This means that when a company buys an asset, they won’t have to figure out if it’s PCD or not. There are some exceptions and criteria, but essentially, the changes are all about making things consistent.

Who Does This Affect? This would affect all entities that follow the rules in Topic 326. That includes public companies, private ones, and non-profits.

Main Changes Vs. What We Currently Do?

The main change is expanding the use of the PCD approach. Instead of figuring out if an asset’s credit has dropped significantly, every acquired asset would use the PCD approach. However, how these assets are measured and shown wouldn’t change.

When Would This Start and How Do We Switch? The exact start date hasn’t been decided yet. The changes will be applied looking back to when the 2016-13 update was adopted. Any adjustments needed would be made at that point, or the earliest period they show in their reports.

FASB ISSUES ASU ON PRESENTATION OF FINANCIAL STATEMENTS (TOPIC 205), INCOME STATEMENT-REPORTING COMPREHENSIVE INCOME (TOPIC 220), DISTINGUISHING LIABILITIES FROM EQUITY (TOPIC 480), EQUITY (TOPIC 505), AND COMPENSATION-STOCK COMPENSATION (TOPIC 718) UPDATE 2023-03

Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280— General Revision of Regulation S-X: INCOME OR LOSS APPLICABLE TO COMMON STOCK (Issued in July 2023)

Here is ChatGPT 4’s breakdown of the changes for Topic 220s:

Amendments to Topic 220:

Background: Company X faced a lawsuit and hadn’t noted any liability related to this in their books. A main stockholder of the company gave some of their shares to the plaintiff to settle the lawsuit. If the company had settled this directly, it would’ve been recorded as an expense.

Key Definitions:

• Principal Owners: People who own more than 10% of the voting interests of a company.

• Economic Interest: Any kind of monetary interest in an entity. This can include things like equity securities, contracts, and leases. A main stockholder has this kind of interest in a company.

Main Question: Should the company reflect this share transfer as an expense in their financial records? If yes, how should this be done?

Response: Yes, the value of the shares that were transferred should be recorded as an expense with a corresponding credit to

contributed capital. Why?

• Such transactions are similar to share-based payments awarded as compensation. Essentially, a stockholder gives the company something, and in return, the company compensates someone else (like an employee).

• This kind of accounting isn’t just for stock compensations. Even if a main stockholder pays a company’s expense, it should be reflected in the books. An exception would be if the stockholder’s payment has nothing to do with their role as a stockholder or doesn’t benefit the company at all.

Additional Points:

• Some people believe that only the material related party transactions should be disclosed as required by FASB ASC Topic 850. This topic deals with transactions involving related parties. However, this doesn’t tackle how these transactions should be measured.

• While related party transactions can be complex and may not always reflect the real market value, transactions like the one discussed here are different. In this case, a stockholder is essentially covering a company’s expense to possibly protect or increase the value of their investment.

• So, the key takeaway is that even if a transaction is structured in a certain way, it should be recorded based on its actual nature, not just its form.

Here is the summary provided by Bing Chat:

ASU 2023-03 amends the SEC paragraphs in the FASB Accounting Standards Codification to reflect the changes made by SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280. These changes affect how registrants present income or loss applicable to common stock in their financial statements.

The main provisions of ASU 2023-03 are:

- Registrants should present income or loss applicable to common stock as a separate line item in the statement of comprehensive income, rather than as a component of earnings per share.

- Registrants should disclose the amount and nature of any adjustments made to net income or loss to arrive at income or loss applicable to common stock, such as dividends on preferred stock, accretion of redeemable preferred stock, or allocation of earnings to participating securities.

- Registrants should apply the amendments retrospectively for all periods presented, unless impracticable. If impracticable, registrants should apply the amendments as of the earliest date practicable and disclose the reasons for not applying them retrospectively.

- Registrants should adopt the amendments for fiscal years ending after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted.

FASB ISSUES ASU ON LIABILITIES (TOPIC 405) UPDATE 2023-04 AMENDMENTS TO SEC PARAGRAPHS PURSUANT TO SEC STAFF ACCOUNTING BULLETIN NO. 121

Introduction and Amendments

1. Amendments Pursuant to SEC Staff Accounting Bulletin No. 121: The Accounting Standards Codification has been updated according to the SEC Staff Accounting Bulletin No. 121.

2. Amendments to Topic 405:

• The purpose of the Subtopic 405-10-052 has been clarified to identify the places in the Codification that offer guidance about liabilities. Several topics, from “Asset Retirement and Environmental Obligations” to “Distinguishing Liabilities from Equity”, are listed.

• A new section, 405-10-S99, provides the text of SAB Topic 5.FF, focusing on “Accounting for Obligations To Safeguard Crypto-Assets an Entity Holds for Its Platform Users”.

SEC Materials

1. There’s been a rise in entities offering platforms for users to transact in cryptoassets. Alongside, entities might be safeguarding the crypto-assets for these users, leading to unique challenges, including:

• Technological risks (safeguarding the assets and the fast-paced changes in the crypto market)

• Legal risks (lack of legal precedence on handling such assets)

• Regulatory risks (limited regulatory oversight or entities not adhering to existing regulations)

2. Questions and Interpretive Responses:

• Question 1: How should an entity, referred to as “Entity A”, account for its obligations to safeguard crypto-assets held for platform users?

• Response: If Entity A is safeguarding crypto-assets for its platform users, it should present a liability on its balance sheet. It’s also suggested that this liability (and a corresponding asset) be measured at the crypto-assets’ fair value.

• Question 2: What kind of disclosures should Entity A provide regarding its safeguarding obligations?

• Response:Given the risks associated with safeguarding crypto-assets, entities should disclose the nature and amount of crypto-assets they’re holding for users, the vulnerabilities due to concentration, and details about the fair value measurements. They should also disclose who holds the cryptographic key, who maintains internal record-keeping, and who is obligated to secure these assets.

• Question 3: How should Company A apply the guidance from this Topic in its financial statements?

• Response: The guidance should be applied no later than financial statements covering the first interim or annual period ending after June 15, 2022, with retrospective application.

3. Amendments to Status Sections: Changes were made to Subtopic 405-10-00-1 with an addition to the table indicating amendments to paragraph 405-10-05-2 in a certain 2023 Accounting Standards Update.

In essence, the document underscores the accounting nuances and necessary disclosures surrounding crypto-assets, given the distinct risks they present.

FASB ISSUES ASU ON BUSINESS COMBINATIONS – JOINT VENTURE FORMATIONS (SUBTOPIC 80560) RECOGNITION AND INITIAL MEASUREMENT UPDATE 2023-05

In August 2023, the FASB issued ASU 2023-05 to: address the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements. The objectives of the amendments are to (1) provide decisionuseful information to investors and other allocators of capital (collectively, investors) in a joint venture’s financial statements and (2) reduce diversity in practice.

What Are the Main Provisions, How Do They Differ from Current Generally Accepted Accounting Principles (GAAP), and Why Are They an Improvement?

Requiring a joint venture to recognize and initially measure its assets and liabilities using a new basis of accounting upon formation reduces diversity in practice and provides decision-useful information to a joint venture’s investors.

Because the Codification does not contain specific guidance for the accounting by a joint venture for net assets contributed upon formation, there is diversity in practice. Stakeholders observed that, before the amendments in this Update were issued, a joint venture may recognize and initially measure its net assets upon formation at the carrying amounts of the venturer that

contributed those net assets, and, in certain circumstances, a joint venture may recognize and initially measure its net assets at fair value upon formation.

Feedback from practitioners indicated that (1) there is a lack of guidance for the accounting by a joint venture and (2) the factors used by the joint venture to determine when its net assets should be recognized and initially measured at fair value are nonauthoritative and outdated. Generally, practitioners supported requiring that a joint venture initially measure the contributions at fair value upon formation, citing that they view the formation of the joint venture as a change in control of the contributed net assets that should result in a new basis of accounting.

Feedback from preparers indicated that the venturers are usually, but not always, the primary users of a joint venture’s financial statements. Feedback from preparers generally supported fair value measurement, observing that fair value

(1) is more relevant than the venturers’ carrying amounts of the contributed net assets at the formation date and (2) would reduce equity method basis differences (any difference between the venturer’s cost of its investment in a joint venture and the amount of underlying equity in net assets of the joint venture).

In response to the feedback received, the Board decided to require that a joint venture, upon formation, apply a new basis of accounting. As a result, a newly formed joint venture should initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). That approach is generally consistent with other new basis of accounting models in GAAP, such as fresh-start reporting in accordance with Topic 852, Reorganizations. It is also broadly consistent with the accounting outcome that would result from treating the joint venture as the acquirer of a business within the scope of Subtopic 805-10, Business

Combinations—Overall. The amendments in this Update require that a joint venture apply the following key adaptations from the business combinations guidance upon formation:

1. A joint venture is the formation of a new entity without an accounting acquirer. The formation of a joint venture is the creation of a new reporting entity, and none of the assets and/or businesses contributed to the joint venture are viewed as having survived the combination as an independent entity—that is, an accounting acquirer will not be identified.

2. A joint venture measures its identifiable net assets and goodwill, if any, at the formation date. The joint venture formation date is the date on which an entity initially meets the definition of a joint venture.

3. Initial measurement of a joint venture’s total net assets is equal to the fair value of 100 percent of the joint venture’s equity. The amendments require that a joint venture measure its total net assets upon formation as the fair value of the joint venture as a whole. The fair value of the joint venture as a whole equals the fair value of 100 percent of a joint venture’s equity immediately following formation (including any noncontrolling interest in the net assets recognized by the joint venture).

4. A joint venture provides relevant disclosures. The purpose of the disclosures is to help a user of a joint venture’s financial statements understand the nature and financial effect of the joint venture formation in the period in which the formation date occurs. Joint venture disclosure requirements upon formation are different from the requirements for business combinations.

The amendments in this Update permit a joint venture to apply the measurement period guidance in Subtopic 805-10 if the initial accounting for a joint venture formation is incomplete by the end of the reporting period in which the formation occurs.

Many of the amendments in this Update,

other than the addition of Subtopic 80560, Business Combinations—Joint Venture Formations, are clarifying or conforming amendments.

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

The amendments in this Update are effective prospectively for all joint venture formations with a formation date on or after January 1, 2025.

Additionally, a joint venture that was formed before January 1, 2025 may elect to apply the amendments retrospectively if it has sufficient information. Early adoption is permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance), either prospectively or retrospectively.

FASB ISSUES CHAPTER 2 of STATEMENT OF FINANCIAL ACCOUNTING CONCEPTS NO. 8 - THE REPORTING ENTITY

Here is ChatGPT 4’s summary of this addition to the concept statements:

Chapter 2: The Reporting Entity

Introduction:

• The main aim of general-purpose financial reporting is to offer financial data about the reporting entity that aids stakeholders in making resource allocation decisions, especially about buying, selling, or holding assets, and settling loans or credits.

• General purpose financial reporting is beneficial as it provides insights about a reporting entity’s resources, claims to those resources, and changes therein. A complete set of financial statements is the main way the entity communicates this information.

• While entities report information in various forms, the term “reporting entity” within this framework specifically refers to those that produce general-purpose financial reports.

Description of a Reporting Entity:

• A reporting entity is characterized by its economic activities that can be portrayed through general-purpose financial reports to help stakeholders make decisions.

• Three features define a reporting entity:

1. It has undertaken economic activities.

2. These activities are distinct from other entities.

3. The financial information in its reports truthfully represents its economic activities and is beneficial to decisionmakers.

• To present accurate financial data, the boundaries of economic activities must be identified.

• A reporting entity can encompass multiple entities or even be a part of one. Having a legal entity is not a necessity to determine a reporting entity.

Consolidated Financial Statements:

• In situations involving a parent-subsidiary relationship within a reporting entity, consolidated financial statements are needed to offer a true representation of the entity’s economic activities.

• Both the parent entity and its subsidiaries are essential for resource providers when evaluating economic activities. Thus, consolidated financial statements are vital as they provide a comprehensive view of the parent and its subsidiaries.

Parent-Only Financial Statements:

• These types of statements can be useful in certain contexts but don’t offer a full picture of the economic activities if there’s a parent-subsidiary relationship. They show subsidiaries as investments and miss out on displaying the detailed resources, claims, and changes in those resources and claims of the subsidiaries.

Portion of an Entity:

• Parts of a larger entity, like a branch or division, can be considered as reporting

entities. Such portions still need to consolidate any of their subsidiary relationships to achieve the objective of general-purpose financial reporting.

• To prepare general-purpose financial reports, these portions must specify their economic activities. They might also produce special-purpose financial reports if the users require it, but these reports won’t be considered general-purpose financial reporting.

Combined Financial Statements:

• Such statements depict multiple entities under common control or management. They can be used even if a parentsubsidiary relationship is absent. If these entities can produce general-purpose financial reports, they can be considered a reporting entity.

PCAOB ISSUED A PROPOSED AMENDMENT TO PCAOB AUDITING STANDARDS WITH BROAD RANGING IMPACT IF APPROVED – COMPANY’S NONCOMPLIANCE WITH LAWS AND REGULATIONS

On June 6, 2023 the PCAOB issued a proposed change to auditing standards that would have the largest single impact of any standard in the history of the PCAOB. Below is the assessment of EY in their “To The Point” newsletter of June 29, 2023.

What you need to know

• The PCAOB proposed expanding the auditor’s responsibility for considering a company’s noncompliance with all laws and regulations, including those related to fraud, and eliminating the distinction between direct and indirect effects on financial statements in today’s standard.

• The proposal would expand the evidence auditors need to obtain, through inquiry and other procedures, to understand the registrant’s processes and identify laws and

regulations that could reasonably have a material effect on the financial statements if the registrant didn’t comply with them. Auditors would then be required to plan and perform specified procedures to determine whether there is information indicating that noncompliance has or may have occurred.

• Two of the five PCAOB board members (both CPAs) dissented, citing a number of concerns, including their belief that the proposal would unduly expand the scope of audits of public companies.

How we see it

• The proposal would significantly expand the scope of public company audits by establishing new auditor obligations and responsibilities that go beyond existing PCAOB and International Auditing and Assurance Standards Board requirements, as well as requirements of Section 10A of the Exchange Act. Auditors would likely need to rely heavily on lawyers and other specialists to comply.

• The proposal could lead auditors to request more information from registrants that could be subject to the attorneyclient privilege or another legal protection, and registrants may be concerned about waiving such protections. Failure of registrants to provide that information could impact the auditor’s ability to obtain sufficient audit evidence.

• The proposal would likely increase the volume of matters that auditors discuss with audit committees when noncompliance has or may have occurred. Such communications would likely vary substantially in significance.

• The proposal would introduce, without defining, new concepts such as “could reasonably have a material effect,” “has or may have occurred” and “likely to have occurred” to guide the auditor’s effort.

Editors comment - If enacted as written the standard would vastly expand the responsibility of financial statement auditors to that of gatekeeper of compliance of all laws and regulations that might have a material impact on public companies. Such gatekeeping, testing, and documentation would require the employ of many other specialist in many other field outside the purview of financial statement auditing and compliance. If the AICPA ASB follows suit with a similar standard for private companies, governmental entities and not-for-profit entities, the scope and expense for an audit would be drastically increased.

RECENT ACTIVITIES OF THE PRIVATE COMPANY COUNCIL

The Private Company Council (PCC) met on Thursday, June 22, 2023 and Friday, June 23, 2023. Below is a summary of topics addressed by the PCC at the meeting:

• Improvements to Income Tax Disclosures: FASB staff summarized the main proposed amendments for private companies in the proposed Accounting Standards Update, Income Taxes (Topic 740): Improvements to Income Tax Disclosures and highlighted comment letter feedback pertaining to private companies. Overall, user PCC members expressed support for the enhanced disclosures in the proposed Update, stating that the disclosures would provide useful information. Some practitioner PCC members questioned the relevance of the proposed changes to the qualitative rate reconciliation disclosure for private companies, noting that it would impose additional costs, while acknowledging the current requirement for private companies to disclose qualitative information about the rate reconciliation. Some preparer PCC members stated that the disclosures would not impose significant additional costs to prepare. Some PCC members suggested aggregating state income taxes paid information and expressed concern

with the interaction of materiality and the proposed 5 percent threshold for income taxes paid to individual jurisdictions. Other PCC members noted that aggregation of the taxes paid disclosure would diminish the utility of the information. Most PCC members supported providing private companies with additional time to implement the proposed amendments beyond the effective date for public business entities. User PCC members supported retrospective transition to assess trends but noted that they would support prospective transition to get the information sooner.

• Disclosure Improvements in Response to the SEC’s Release on Disclosure Update and Simplification: FASB staff summarized the Board’s recent decisions during redeliberations of SEC-referred disclosures included in the proposed Accounting Standards Update, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosures Update and Simplification Initiative, including required disclosures for private companies, effective date, and transition. PCC members expressed support for the Board’s decisions applicable to private companies. PCC members asked clarifying questions about specific disclosures and the effective date for private companies.

• Credit Losses—Implementation: FASB staff provided an update on the Purchased Financial Assets project and asked PCC members for feedback on that project and on other credit losses implementation matters. Some PCC members discussed their observations on the scope of the credit losses guidance and the application of that guidance by entities that are not financial institutions.

• Scope Application of Profits Interest Awards: FASB staff discussed the amendments in the proposed Accounting Standards Update, Compensation— Stock Compensation (Topic 718): Scope Application of Profits Interest Awards and

noted that the comment period closes July 10, 2023. PCC members noted that the proposed illustrative guidance will help to reduce diversity in practice and indicated support for the proposed transition requirements. Some PCC members, including the PCC Chair, emphasized the importance of communicating the amendments in the proposed Update to relevant stakeholders.

• Accounting for and Disclosure of Software Costs: PCC members discussed certain elements of the single model being researched by the FASB staff that would apply to costs that a company incurs to acquire, internally develop, or modify software. Those elements include the probable threshold and related indicators, unit of account, costs incurred after the software project is substantially complete, and presentation and disclosure. Overall, PCC members were supportive of the single model. Several PCC members supported the probable threshold and related indicators. Some PCC members expressed concern with including compulsion as an indicator that supports the application of the probable threshold. PCC members discussed challenges with applying the single model in an agile environment, including the judgment involved in identifying the unit of account and determining when a project is substantially complete. Some PCC members stated that data conversion costs should be included in the costs eligible for capitalization.

• Stock Compensation Disclosures (PCC Research Project): FASB staff and members of the PCC’s stock compensation disclosures working group summarized the working group’s continued outreach with private company stakeholders, including practitioners and users, on research related to whether disclosures differences are warranted for private companies. Working group members thanked the staff for its efforts and noted that outreach participants

have provided the working group with helpful feedback to continue its research.

• Definition of a Derivative: FASB staff summarized feedback received as part of the June 2021 Invitation to Comment, Agenda Consultation, and provided an overview of certain arrangements identified by stakeholders that generally meet the definition of a derivative (R&D funding arrangements, financial instruments with ESG-linked features, litigation funding arrangements, and certain variable consideration provisions in revenue arrangements). Several PCC members stated that the definition of a derivative is complex and, as a result, it can be difficult to evaluate whether an arrangement meets the definition. PCC members suggested solutions, including a derivative scope exception for arrangements that involve an entity’s performance. The PCC Chair noted that creating new scope exceptions for specific arrangements may necessitate additional standard setting in the future as new arrangements emerge.

• Leases Implementation: PCC members discussed recent observations from the implementation of Topic 842, Leases, and the feedback received during the PCC forum held at the June 2023 AICPA ENGAGE conference. PCC members discussed materiality thresholds, related party leases, embedded leases, the shortterm lease recognition exception, and disclosures. User PCC members noted that previous concerns about the effect Topic 842 would have on debt covenants and financial ratios generally did not materialize.

• Other Business: The PCC will hold an interactive, town-hall style forum at the AICPA Peer Review Conference in August 2023. The FASB will hold its next semiannual webcast, IN FOCUS: FASB Update for Private Companies and Notfor-Profit Organizations, on December 11, 2023.

The next PCC meeting is scheduled for Monday, September 11, and Tuesday, September 12, 2023.

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

PCAOB Faes Competing Requests in Revising Audit Requirements for NonCompliance With Laws and Regulations

August 11, 2023

Judging by the unusually high number of comment letters the Public Company Accounting Oversight Board (PCAOB) has received—121 as of Aug. 10, 2023—the board has a lot of work to do before it can finalize a proposal aimed at strengthening its standard to require public company auditors to more proactively identify, evaluate and communicate instances of a company’s non-compliance with laws and regulations (NOCLAR).

While Thomson Reuters has not done a complete comment letter tally of all standardsetting projects during the board’s 20-year history, the PCAOB has usually gotten much fewer than 100 comment letters, largely ranging from about 20 to 50. There have been a few exceptions, for example, when the board took seven years to write a rule that expanded the auditor’s report to go beyond the pass-fail model that had been in place for 70 years. Auditors today disclose critical audit matters.

But it is not just the sheer volume of comment letters that the board has received on NOCLAR, it is also the differences in views expressed by investors, auditors, company management and others that the PCAOB has to carefully consider and balance the costs and benefits before crafting any final rule. The comment period closed Aug. 7.

Contrasting Views

In most standard-setting projects, the PCAOB usually gets fairly predictable opposing views. On the one hand, investor advocates want strong standards so that people’s investments are protected. On the other hand, companies and their external auditors—while noting some broad support— emphasize concerns, citing costs or impracticability of proposed standards. And this is also the case for NOCLAR.

The PCAOB has a single mandate: investor protection. And its own Investor Advisory Group (IAG) submitted a comment letter on Aug. 10, saying that it supports the NOCLAR proposal but suggested improvements to make the standards even more robust.

By contrast, 20 organizations that represent businesses and the auditing profession, including the U.S. Chamber of Commerce and the Center for Audit Quality (CAQ), wrote a joint comment letter on Aug. 7, saying that the proposal “raises a series of significant concerns for the business community.”

The U.S. Chamber is a powerful business group whose office is located right across from the White House. The CAQ, an affiliate of the AICPA, represents accounting firms that audit public companies.

In addition, when the PCAOB voted to issue the proposal in June, two board members dissented.

The PCAOB’s proposed newly worded Auditing Standard (AS) 2405, A Company’s Noncompliance with Laws and Regulations, would cover all ranges of non-compliance— intentional or unintentional—from outright financial statement fraud to non-compliance matters that may have a material effect on the financial statements.

The proposal has three key elements. Auditors would be required to identify NOCLARs that could reasonably have a material effect on the company’s financial statements during their initial risk assessment. After identifying a potential NOCLAR, the proposal would require auditors to

evaluate it with enhanced procedures. The final proposed provision would enhance communication.

To improve the proposed standards, the IAG said that it believes that a company’s compliance functions, including whistleblower programs, are important sources in identifying fraud. And the advisory panel asked the PCAOB to require more explicit auditor responsibilities related to ethics and compliance programs.

In particular, IAG said auditors should obtain an understanding of the audit committee’s and management’s policies, processes and procedures for the program. Auditors must test controls to determine if the process is operating as expected. Auditors must review and assess complaints that are reasonably likely to have a material effect on the financial statements. Moreover, when the auditor deems it necessary and is able to do so, the auditor should interview the whistleblower or complainant.

The IAG also asked the PCAOB to explicitly require documentation of the audit team members who performed procedures to identify and asses NOCLAR risks.

In addition, the group pointed out a flaw in the proposed communication requirement of potential NOCLAR because it has an exception—when the matters are “clearly inconsequential.”

The IAG is concerned with the proposal’s description of “clearly inconsequential” because it is “inconsistent with the longunderstood meaning of the phrase and could result in the phrase being misinterpreted as creating a broad exception from the proposed communication requirements.”

Further, the IAG said that when the auditor has determined that it is reasonably likely that an instance of NOCLAR has occurred, but the company has failed to take appropriate actions to address the matter, then the auditor should report to the Securities and Exchange Commission, the PCAOB and to investors whether or not the auditor

resigns from the engagement unless the communication is otherwise prohibited by federal or state law. The SEC, as the capital markets regulator, oversees the board.

“We believe expanding the auditor responsibility to communicate NOCLAR to the SEC, the PCAOB, and investors could increase audit quality and potentially function as a deterrent to issuer fraud and NOCLAR,” the comment letter states.

However, the coalition of businesses highlighted several problems. The group asked for precise terminology because as currently drafted, the proposal’s language would not provide auditors “with a practical filter or guide for which laws and regulations to evaluate.”

“The vague and intentionally expansive terminology used by the Exposure Draft would drive new liability concerns among auditors, creating a more unfocused and ineffective risk mitigation environment that would push legal, compliance, and audit costs even higher,” business associations noted.

The IAG noted in its comment letter that, at least for the proposal’s language that says “could reasonably have a material affect,” it recommended changing it to “reasonably likely to.” Such language has served for risk assessment for management’s discussion and analysis disclosures, for example.

In the meantime, another significant concern the business organizations noted is the transformation of the nature and scope of auditor responsibilities.

The proposal turns “financial statement audits into wide-ranging investigations of potential instances of NOCLAR. Auditors perform a vital function in U.S. markets, ensuring the integrity of financial statement information that ultimately facilitates effective capital deployment,” the joint letter states. “Changing the nature of the audit to serve as an examination of NOCLAR would add a host of new responsibilities and requirements for auditors, unnecessarily deviating from the purpose of an audit. These new auditor

responsibilities would fundamentally alter the audit function and would insert auditors into core legal and management decisions.”

Moreover, “auditors may be put into a position to second-guess a company’s own legal counsel regarding whether noncompliance may have occurred,” the letter states. “The requirement that auditors perform ‘enhanced risk assessment procedures’ could result in auditors secondguessing how management allocates the company’s financial and human resources. This would not only blur responsibility between the legal, management, and audit functions, but also would divert auditors’ time, attention, and resources away from auditing financial statements.”

Reason for Proposed Changes

The board issued the proposal largely because some investor advocates for years have said that the old 1988 AICPA standard—renamed as the PCAOB’s AS 2405, Illegal Acts by Clients, has not protected investors. The AICPA’s standard was adopted in an interim basis when the PCAOB was established by the Sarbanes-Oxley Act, which Congress passed in 2002 to prevent a recurrence of accounting scandals that toppled companies like Enron and WorldCom and put their auditor—then-Big Five Firm Arthur Andersen—out of business. Before the PCAOB was established, the auditing profession essentially regulated itself.

A renewed focus on the auditor’s responsibilities regarding NOCLAR originally came amid a string of high-profile cases in the past several years.

For example, Wells Fargo & Co. created more than 1.5 million unauthorized bank accounts and more than 560,000 credit card applications from 2011 to 2015, and investors asked where its auditor, KPMG LLP, was to prevent the fraud. The audit firm denied any wrongdoing. But when the public found out about the scandal, Wells Fargo lost $7.8 billion in stock valuation. More recently, Wells Fargo agreed to pay $1 billion to settle a

class-action suit from investors, alleging the bank misled them about compliance with consent orders imposed by regulators.

IAG pointed out that its members are worried that auditing standards have not changed even though the business and financial reporting environment has evolved.

“We are concerned that fraudulent behavior within companies can go undetected in periods of rapid change,” IAG’s letter noted.

The letter cites a research, estimating that only one-third of corporate frauds are detected, with an average of 10 percent of large public companies committing securities fraud every year.

“This means that the true extent of corporate fraud is much larger than what is currently being reported,” the IAG letter states. “The research also estimates that corporate fraud destroys 1.6% of equity value each year, which equals to $830 billion in 2021.”

Can FASB Fix Complex Commodities Accounting Rules? Not Without IFRS, CPA Group Says

July 21, 2023

Accountants who believe that the FASB may end up aligning U.S. GAAP with international financial reporting standards on commodities, recently said that such a move would make the sense.

Today’s rules are overly complex, unmanageable, expensive to implement and do not align with how businesses manage risk, Allison Henry, VP of Professional and Technical standards at the Pennsylvania Institute of Certified Professional Accountants (PICPA), said. “The international standards are more aligned and have a clear objective of alignment with a company’s risk management activities and I do think they align more closely and I do think that convergence with IFRS makes sense,” she said on July 19, 2023, on behalf of the group.

Hedge accounting under IFRS 9, Financial

Instruments is broad with a clear objective for tackling commodities, Henry said. “They’re saying that the objective of hedge accounting is to represent in the financial statements, the effect of the entity’s risk management activities,” she said. On the contrary, U.S. GAAP does not allow the same flexibility which, for example, Southwest Airlines Co.’s recent 10-K signals.

“If you look in their financial derivative instrument footnote, you can see what they’re saying; what they do is they cannot find jet fuel contracts, derivative contracts to perfectly align with the jet fuel that they’re trying to manage,” said Henry. “And so what they do is they hedge using a variety of different derivatives, using things like West Texas intermediate crude oil, Brent crude oil, heating oil, unleaded gas, and so they’re using a potpourri of different derivatives contracts to manage the risk of the jet fuel,” she said. “And in many cases they can’t qualify for the hedge accounting treatment, because it’s not perfectly aligned with jet fuel derivatives, there’s just not a market there and so they have what they’re referring to in that footnote as an economic hedge, meaning their business risk is being managed, but they’re not qualified for the accounting standards and so they end up with volatility in their financial statement because they don’t meet the hedge accounting requirements and that is technical the request the FASB got to address.”

Board Has a Research Project on Accounting for Commodities

The FASB has a project on accounting for commodities on its research agenda, but has not yet voted on whether or not the topic meets the cut for its technical agenda where rules are set.

The issue came to the board from the International Swaps and Derivatives Association’s (ISDA) Accounting Committee, which two years ago asked that the scope of Topic 825, Financial Instruments be expanded to include physical commodity

inventories and executory contracts for physical commodities such as storage, transportation, non-derivative purchase or sale contracts.

The ISDA in a letter stressed that current accounting rules for measuring physical commodity inventories and related executory contracts cause companies’ earnings to appear volatile and at variance with their economic position. (See Accounting Rules for Physical Commodities Causing Earnings

Volatility, Industry Group Says in the June 16, 2021, edition of Accounting & Compliance Alert.)

A Colossal Challenge

The topic is complex and has been so for years – stemming from FASB Statement (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which was issued in 1998 using a rules-based approach.

Companies that had to implement the standard found it nightmarish and costly, some holding two-day and threeday programs to train staff just to get an understanding of the standard. Ultimately, the FASB received so many questions that the board issued derivatives implementation guidance – affectionately called “the dig” by accountants who felt that the board kept digging itself deeper into a rules-based approach with hundreds of pages of nuance upon nuance around various facts and circumstances.

“It was a colossal challenge,” Henry explained. “The hedge accounting requirements are so rigorous, not only do you have to meet certain requirements but the specific documentation requirements are extensive, and when they originally pushed it out they had to defer it for a year because there were so many questions,” she said. “Then we had this huge rash of restatements and you think you have the best and brightest from all these international firms working on these companies and then there were all

these massive restatements, you just have to step back and say ‘something’s not right.’”

Compounding the issue was the SEC’s decision that companies were not meeting the hedge documentation requirements, were not eligible for hedge accounting, and therefore had to restate their financial reports. Subsequently, the FASB kept making changes to the guidance – in 2017 and then in 2020 to fix the questions resulting from the 2017 changes.

“Now you see it’s coming back again,” Henry observed. “On the other side of the pond you have IFRS and it’s really interesting that they have such a different perspective on their standards.”

AICPA Auditing Standards Board’s Work Plan Includes Potential Convergence Projects with International Standards

May 26, 2023

The AICPA’s Auditing Standards Board (ASB) is working on several standardsetting or research projects, according to its 2023 workplan, which was discussed during a meeting on May 16-17 in Nashville, Tennessee. And many of the projects are tied to the board’s goal to converge its standards—as much as possible—with those of the International Auditing and Assurance Standards Board (IAASB). While the board aims to publish proposals for comment or finalize standards during a specified quarter, the timing is just best estimates of how each project will progress.

Standard-Setting Projects

A task force has been drafting a proposal to revise attestation standards to conform with quality management audit standards. While an exposure draft was previously planned for June, this is likely to be in the third quarter. “The ASB plans to vote to issue the proposed amendments for exposure, likely during a special meeting to be held in early August,”

Ahava Goldman, an associate director with the Association of International Certified Professional Accountants, noted on May 25. (See AICPA Board is Working on Quality Management Attestation Standards in the May 24, 2023, edition of Accounting & Compliance Alert.)

There are two projects that are under consideration for standard-setting.

The first one is attestation standards related to internal control. The objective of this project is to consider “revisions to the attestation standards to address emerging areas of assurance, including engagements on internal control over matters other than financial reporting,” according to the work plan.

The ASB is currently discussing issues related to the project, and at the moment, it is unknown whether an exposure draft will be issued as next steps will be determined later this year or early next year.

The other active project under consideration is leveraging technology. The goal is to consider “additional guidance or actions that might be taken to further encourage the effective and appropriate use of technology, including data analytics, to enhance audit quality.”

The board is in an early stage on this project as the plan says it will be in information gathering mode throughout 2023.

Monitoring IAASB’s Work

The IAASB is expected to vote on final standards on audits of less complex entities (LCEs) in September.

The AICPA board will be discussing this topic throughout the year with a goal to consider “additional guidance or actions that might be taken to address issues and challenges associated with audits of financial statements of LCEs.”

The ASB is also monitoring IAASB’s work on environmental, social and governance

(ESG) and sustainability. The international board is aiming to issue a sustainability assurance framework in June and vote on a final set of standards in the third quarter of 2024.

The U.S. board’s objective is to “identify and prioritize possible actions the ASB should take in addressing assurance on Sustainability/ESG reporting.” The ASB will be discussing these issues through the year, and it might issue an exposure draft in 2024.

At this juncture, the ASB’s Sustainability Task Force “is providing feedback to the IAASB and is considering if any changes would be helpful to ASB attestation standards and guidance,” Goldman noted.

Another project the ASB is monitoring is the IAASB’s work on fraud. The international standard-setter is working to issue a proposal in the fourth quarter of this year with a goal to vote on a final standard in the first quarter of 2025.

The ASB will consider “additional guidance or actions that might be taken to address issues and challenges relating to the identification of fraud in an audit of financial statements.” The board is planning to issue an exposure draft in 2024.

The ASB is monitoring three other projects, but they are on slower track for board action: audit evidence; definition of listed entity and public interest entity (PIE); and going concern.

On these projects, the ASB will be in discussion mode with next steps undetermined.

The IAASB issued an exposure draft on audit evidence in the fourth quarter of 2022 and a final vote is planned for second quarter of 2024.

The ASB’s goal is to “explore whether additional changes are needed to AU-C 500 [Audit Evidence] based on revisions to [IAASB’s] ISA 500.”

The international board currently has a two-track workstream on the definition of

listed entity and PIE.

Track 1 is transparency, and the IAASB is expected to vote on a final standard this quarter.

Track 2 is definitions and differential guidelines, and the IAASB will issue an exposure draft in the first quarter of 2024 and vote for a final standard in the fourth quarter of 2024.

The ASB’s objective is to monitor the IAASB’s project and the AICPA’s Professional Ethics Executive Committee’s (PEEC) “related actions, if any, and consider the implications on ASB standards.” (See AICPA Panel to Propose Changes to Definitions of Public Entities in the May 22, 2023, edition of ACA.)

As for going concern, the IAASB issued an exposure draft in the first quarter of this year and is planning to vote for a final standard in the fourth quarter of 2024.

The ASB’s plan is to consider “additional guidance or actions that might be taken to address issues and challenges relating to addressing going concern in an audit of financial statements.”

Monitoring PCAOB’s Standard-Setting Activities

The ASB’s goal is to minimize differences between the AICPA’s and the PCAOB’s standards.

The ASB writes audit standards for private companies while the PCAOB writes standards for auditors of public companies and brokerdealers that are registered with the SEC.

The PCAOB has several standardsetting agendas, some of which are in the proposal phase, including quality control, confirmations and AS 1000 general responsibilities. The PCAOB will also issue a proposal on going concern this year.

Greg Taylor

(with assistance from ChatGPT 4 and Bing regarding summarization of some FASB standards and proposed standards)

Yet another court weighs in on the continued applicability of the mailbox rule

By George W. Benson

In recent years, courts have split as to whether the enactment of Section 7502 supplanted or supplemented the so-called common-law mailbox rule. Recently, the Fourth Circuit Court of Appeals joined the Second and Sixth Circuits in holding that the common-law rule was supplanted. See, Pond v. United States, 131 AFTR 2d 20231844 (May 26, 2023). The Eighth and Tenth Circuits have held otherwise.

The question arises if a “return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period, or on or before a prescribed date” is mailed by regular mail and the IRS claims it did not receive the return or payment. This is Mr. Pond’s situation with respect to a 2013 refund claim.

If Mr. Pond had used registered mail, the “registration shall be prima facie evidence that the return, claim, statement, or other document” was delivered. Section 7502(c) (1). A similar presumption would have applied had Mr. Pond used certified mail or a designated delivery service. Under

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the federal common-law mailbox rule, there was a similar presumption of delivery for claims sent by first-class mail. But presumption when ordinary mail is used is not included in Section 7502.

The courts addressing this question have started from a presumption of their own:

“When a federal statute invades an area occupied by federal common law, we generally presume the statute does not change the established common law.” But they recognize that this presumption can be overcome when the language of a state is clear and explicit that it supplants the common law. The courts have differed as to how explicit the statute must be to have it displace common law and as to whether Section 7502 is explicit enough.

While Section 7502 does not explicitly provide that it supplants common law, the Fourth Circuit concluded that it “abrogate[s] the common-law mailbox rule because the Act ‘speaks directly’ to the same question as the common-law rule. … [I] t directly addresses the common-law rule’s question. For taxpayers, §7502 provides a complete, if slightly narrower, set of mailbox

TAXFAX EDITOR

presumptions. And that supplants the common law without the need for an express statement or unavoidable conflict.”

In the Pond case, all is not lost even though Pond cannot rely on a mailbox rule presumption. The Fourth Circuit concluded that the lower court erroneously granted the Government’s motion to dismiss Pond’s complaint because the complaint contained had sufficient allegations of physical delivery to survive a motion to dismiss. Among other things, Pond claimed that he timely mailed claims related to both his 2012 and 2013 years in the same envelope. While the Government alleges it never received the 2013 claim, it refunded the amount claimed for 2012.

The Fourth Circuit observed, that when a motion to dismiss is made, even one alleging a jurisdictional matter, the court –“… must draw all reasonable inferences in light most favorable to Pond [the nonmoving party]. After doing so, we find that Pond plausibly alleged in his complaint that his 2013 claim was physically delivered to the IRS before the statutory deadline. This is enough to show that the district court has jurisdiction within the united States’s sovereign-immunity waiver under § 1364(a) to hear his claim. So Pond’s complaint should not have been dismissed under Rule 12(b)(1).”

On course, it would have been better for Pond if he had sent his claim by registered or certified mail so he could have avoided the issue in the first place.

Reduction Act of 2022, Pub. L. 117-69 (August 16, 2022) (the “IRA”). One of its centerpieces is the subtitle labeled “Energy Security” containing a wide variety of clean energy tax incentives, many of which take the form of tax credits. During the past year, the IRS National Office has been busy issuing guidance related to the new incentives.

Providing credits and fast write-offs to encourage investment in favored energy projects is not new. Historically the effectiveness of such incentives has been limited because many developers have a limited ability to use tax incentives. Approaches (tax equity structures) have been developed and approved by the IRS to permit monetization of the incentives by transferring the tax benefits to taxpayers who can use them. See, Rev. Proc. 2007-65, 2007-50 IRB 967; Rev. Proc. 2014-12, 20143 IRB 415; and Rev. Proc. 2020-12, 2020-11 IRB 511. However, these approaches involve complex structures, not practical for small projects, and a limited pool of interested investors.

The IRA contains two new sections designed to make monetization easier.

• Section 6417 – refundability (for an “applicable entity”). Section 6417 allows “applicable entities” to elect to treat “applicable credits” as tax payments, eligible for refund to the extent they exceed tax liability. Twelve credits are designated as “applicable credits” for this purpose.

Proposed regulations address monetization of new energy credits: what they mean for cooperatives

By George W. Benson

Last year Congress passed, and the President signed the so-called Inflation

For this purpose, “applicable entity” means “(i) any organization exempt from the tax imposed by subtitle A, (ii) any State or political subdivision thereof, (iii) the Tennessee Valley Authority, (iv) an Indian tribal government…, (v) any Alaska Native Corporation …, or (v) any corporation operating on a cooperative basis engaged in furnishing electric

energy to persons in rural areas.” Section 6417(d)(1)(A).

• Section 6418 – transferability (but only for entities other than “applicable entities”). Section 6418 allows “eligible taxpayers” to elect to transfer all or part of “eligible credits” to others. Eleven of the twelve applicable credits are designated as “eligible credits” for this purpose. (Note that the twelfth applicable credit, which is refundable for most applicable entities under Section 6417 but not transferable under Section 6418, is the new Section 45W credit for qualified commercial vehicles.)

For this purpose, “eligible taxpayers” is defined broadly to mean any taxpayer which is not an “applicable entity” as defined in Section 6417(d)(1)(A).

• Credits refundable for everyone. For three credits – for production of clean hydrogen, for carbon oxide sequestration and for advanced manufacturing – any electing taxpayer is regarded as an “applicable entity” eligible to treat the credit as a tax payment. See, Section 6417(d)(1)(B), (C) and (D). As a result, these three credits are effectively refundable for all entities, not just taxexempt organizations.

“Eligible taxpayers” may also transfer those credits. Since tax-exempt entities are not “eligible taxpayers,” they are not able to transfer those credits.

Subchapter T cooperatives often have little taxable income so historically effectively benefiting from credits and fast write-offs has been a challenge.

Credit pass-through for cooperatives –mandatory and elective.

Cooperatives are often described through as pass-through entities, but generally they

are not permitted to pass through credits to patrons like patronage dividends. However, over the years, Congress has authorized cooperatives to pass certain credits through to patrons. Credit pass-through provisions have taken two forms. Some require a cooperative to pass through any credit it cannot use. Others permit a cooperative to choose whether to pass credit though.

To the extent that a cooperative is required to pass through one of the applicable or eligible credits to patrons, there highly likely will be no unused credit to monetize under Sections 6417 and 6418. The required pass-through is of credit “which the organization cannot use.” Query whether monetization would be considered “use” for this purpose?

• Historically, a Subchapter T cooperative has been required to pass-through any Section 48 energy credit which it cannot use. See, Section 50(d)(3), which applies to credits described in Subpart E of Part IV of Subchapter A of the Code. Section 48 has been extended through the end of 2024. In addition, it has been enhanced in certain respects (for instance, adding energy storage technology, qualified biogas property and microgrid controllers).

• The new Section 48E clean energy investment credit is made part of Subpart E. As a result, Section 50(d)(3) applies, and a Subchapter T cooperative is required to pass through any Section 48E credit it cannot use.

• The new Section 45Y clean electricity production credit includes a passthrough provision. See, Section 45Y(g) (6). The provision is limited to farmer cooperatives (defined as “a cooperative organization described in section 1381(a) which is owned more than 50 percent by

agricultural producers or by entities owned by agricultural producers”). The passthrough is at the option of the cooperative and is made by sending a written notice to patrons during the payment period. Once made, the election is irrevocable. Cooperatives are responsible if they pass through more credit than they in fact earn.

• A similar pass-through provision is contained in the new Section 45Z clean fuel production credit. See, Section 45Z(f) (5).

• Changes have been made to the Section 179D energy efficient commercial buildings deduction. One modification is to allow “any organization exempt from tax imposed by this chapter” to allocate the deduction to the person primarily responsible for designing the property in lieu of the owner of such property. See, Section 179D(d)(3)(B)(iii). Arguably this provision applies to Section 521 cooperatives.

Credit pass-through provisions have not been widely used, but, in appropriate situations, they give cooperatives yet another avenue for benefiting from some credits (or, as noted above, may deprive cooperatives of monetization opportunities).

Nonexempt cooperatives should now be able now to transfer eligible credits they are not required to pass through to patrons.

Most Subchapter T cooperatives (with the possible exception of Section 521 cooperatives) should now be able to monetize “eligible credits” through transfer pursuant to Section 6418 (at least to the extent they are not required to pass them through to patrons). They also should be eligible to be buyers of credits if they so desire.

Guidance with respect to the monetization rules has been eagerly anticipated, particularly guidance with respect to transferring credits. In June, the Treasury released proposed regulations implementing Section 6417 and 6418. See, REG-10160723, 88 Federal Register 40528 et seq. (June 21, 2023) (containing Prop. Treas. Reg. §§ 1.6417-0 to 1.6417-6 and a detailed explanation) and REG-101610-23, 88 Federal Register 40496 et seq. (June 21, 2023) (containing Prop. Treas. Reg. §§ 1.6418-0 to 1.6418-5 and a detailed explanation). Also issued were temporary regulations. See, Temp. Treas. Reg. § 1.6417-5T and Temp. Treas. Reg. § 1.6418-4T. Finally, the IRS posted several sets of frequently asked questions on its website. See, https://www. irs.gov/credits-deductions/elective-pay-andtransferability-frequently-asked-questionstransferability.

The proposed regulations flesh out how transfers are to be made. More guidance is likely to come when the regulations are put in final form. Most details are beyond the scope of this short article. However, a few things should be noted.

• A transfer election must be made, and that requires advance registration with the IRS. A sizable portion of the regulations describes how this is done. If the transferor and transferee do not comply with the rules, a transfer will be ineffective.

• Once made, an election is irrevocable.

• Transfers must be for cash, as relatively narrowly defined in the regulations. This seems to preclude characterizing credits as property and transferring them to members as part of a cooperative’s patronage dividend. (However, as noted above, some credits can (or must) be passed through to patrons.)

• Second transfers are not permitted. (The proposed regulations do not address whether this would limit the ability of a

patron to transfer any credit a cooperative passed through.)

• If there is an excessive credit transfer and, as a result, the transferee claims too much credit on its return, the transferee is liable for the excess and may (unless it is able to establish there was reasonable cause) also be liable for an amount equal to 20% of the excessive credit transfer. The proposed regulations provide that all the facts and circumstances are considered in determining whether there is reasonable cause, including, most importantly, the transferee’s due diligence in determining the proper amount of the credit being transferred.

• If there is a recapture event, the transferee is liable for any tax as far as the IRS is concerned (but the parties can contractually agree that the transferor will indemnify the transferee).

The statute and the proposed regulations provide that the amount paid for transferred credits is not included in the gross income of the transferor. For cooperatives, this should eliminate any issue with respect to the character of what is received as patronage or nonpatronage.

There still are some issues peculiar to cooperative taxation. Cooperatives that transfer credits will need to work through the impact on their patronage dividends that could arise from book/tax differences in the treatment of the incentives. These potential issues are, of course, not addressed in the proposed regulations.

The regulations make clear that a purchaser of a creditor does not have gross income for tax purposes as a result of using the credit. In addition, the proposed regulations provide that the difference what was paid for the credit and its face amount will not be treated as taxable income to

the purchaser. They also provide that “no deduction is allowed under any provision of the Code with respect to any amount paid by the transferor taxpayer” for the credit. They ask for comments regarding the proper treatment of transaction costs and as to “whether a transferee taxpayer is permitted to deduct a loss if the amount paid to an eligible taxpayer exceeds the amount of the eligible credit that the transferee taxpayer can ultimately claim.”

Whether there are any limits on how cooperatives may use purchased credits (if any choose to do so) is not addressed in the proposed regulations. Historically, credits have not been characterized as patronage or nonpatronage and have not been subject to limitations comparable to limitations placed on the use of patronage losses. If relevant, arguably any purchased credits would be nonpatronage in nature and, like nonpatronage losses, should be usable against either nonpatronage or patronage income.

Where do Section 521 cooperatives fit in?

One issue not addressed in the proposed regulations is whether Section 521 cooperatives are “applicable entities” (eligible to elect to treat credits as tax payments under Section 6417) or are “eligible taxpayers” (eligible to elect to transfer tax credits pursuant to Section 6418).

As noted above, for Section 6417 purposes, “applicable entities” include “any organization exempt from the tax imposed by Subtitle A.” This seems to sweep in Section 521 cooperatives since Section 521(a) provides that such cooperatives “shall be considered an organization exempt from taxes for purposes of any law which refers to organizations exempt from income taxes.” Similarly, Treas. Reg. § 1.1381-2(a) (1) provides: “For purposes of any law which refers to organizations exempt from

income taxes such an association [i.e., a Section 521 cooperative] shall, however, be considered exempt under section 501.” The preamble to the proposed regulations requests comments on the definition of any organization exempt from the tax imposed by subtitle A, including other organizations beyond those listed in the proposed rules.

This question may be largely academic since today there are relatively few Section 521 cooperatives (and, the author suspects, most cooperatives that today qualify as Section 521 cooperatives have business profiles that make it unlikely that they will earn material amounts of energy credits). But there could be exceptions.

As noted above, “applicable entities” can potentially obtain refunds with respect to twelve kinds of credits. One of the twelve credits (the Section 45W credit for qualified commercial vehicles) is refundable only to “applicable entities” described in Section 168(h)(2)(A)(i), (ii) or (iv) of the Code. Section 168(h)(2)(A)(ii) specifically excludes Section 521 cooperative. Thus, Section 521 cooperatives appear unable to monetize Section 45W credits for qualified commercial vehicles whether or not they are applicable entities.

Section 521 cooperatives cannot claim refunds for purchased credits. Also, the regulations take the position that refundable credits under Section 6417 are limited to those earned by an “applicable entity.” They do not include those which the entity may have purchased from another taxpayer pursuant to a Section 6418 transfer. The preamble contains a lengthy explanation of why the Treasury/IRS decided to take this position and invites comments. It admits that the statute is silent as to the treatment of purchased credits and that some taxpayers have argued that refunds of purchased credits should be permitted under Section 6417.

Rural electric cooperatives.

As noted above, the term “applicable entity” for Section 6417 purposes includes “any corporation operating on a cooperative basis which is engaged in furnishing electric energy to persons in rural areas.”

• The preamble to the proposed Section 6417 regulations notes that the proposed regulations “do not elaborate on this definition” and requests comments as to whether any further clarification is required.

• The preamble also requests comments as to whether “additional guidance is necessary to address any uncertainty that may exist regarding the application of section 6417 in the context of a consolidated group with members that are cooperatives subject to the rules of subchapter T of chapter 1.”

• Finally, in response to questions raised in comments, the preamble states that any refund paid to an exempt electric cooperative “will not affect the application of the 85-percent income tax with respect to the electric cooperative.”

The IRS FAQs draw one distinction between tax exempt rural electric cooperatives and those that are not. FAQ 8 provides:

“Tax exempt rural electric cooperatives are eligible to use elective pay for all 12 credits listed in [the statute]. Those that are not tax exempt may use elective pay for each of the credits listed except for the Commercial Clean Vehicles credit (45W).”

Reliance.

The proposed regulations provide an August 14 deadline for comments. They set an August 21 date for a public hearing. Presumably, some months later, final

regulations will be promulgated.

The preambles provide that taxpayers may rely upon the proposed regulations prior to the publication of the final regulations if they do so in their entirety and in a consistent manner. Accompanying the proposed regulations is a set of temporary regulations containing the mandatory information and registrations requirements for taxpayers planning to monetize credits under Section 6417 and 6418. These are identical to the portions of the proposed regulations addressing information and registration requirements and are in effect until adoption of the final regulations.

By Barbara A. Wech

20, 2023). Sanders received a notice of deficiency which specified the last day to file a petition with the Tax Court was December 12, 2022. Sanders waited until the last day to file his petition. He did so electronically but encountered problems doing so. As a result, his petition was not received by the Tax Court until 00:00:11.693 on December 13 (i.e., eleven seconds after midnight). The Tax Court’s filing system automatically “applied a cover sheet to the Petition that states that the Petition was electronically filed and received at ‘12/13/22 12:00 am.’”

Tax Court dismisses a petition filed eleven seconds too late

By George W. Benson

To bring a case in Tax Court, a taxpayer must file a petition within 90 days of the date of mailing of a notice of deficiency, or, if the notice of deficiency contains a specified date (which is usually the case) “on or before the last date specified for filing such petition by the Secretary in the notice of deficiency.” Section 6213(a).

Filing a timely petition is regarded by the Tax Court as jurisdictional. See, Hallmark Research Collective v. Commissioner, 159 T.C. No. 6 (November 29, 2022) (dismissing a petition filed one day late). A petition that is not timely is dismissed by the Tax Court without considering the merits. The IRS can then assess the tax deficiency. Taxpayers who wish to challenge the IRS determination must pay the tax and bring suit either in a United States District Court or in the United States Court of Federal Claims. Those courts are not a user friendly as the Tax Court, particularly for small cases.

A recent Tax Court case illustrates that these rules are strictly enforced. Sanders v. Commissioner, 160 T.C. No. 16 (June

The Commissioner filed a motion to dismiss for lack of jurisdiction, arguing that the petition was not timely filed. The Tax Court granted the motion and dismissed the case.

In so doing, it held:

• A petition must be timely filed. “The Court cannot extend the deadline for filing a petition, and we must dismiss a case for lack of jurisdiction if the petition is not filed within the statutorily prescribed time.”

• Petitions are generally regarded as filed when received. This applies to petitions that are mailed as well as those that are electronically filed.

• The timely mailing rule does not apply to electronically filed petitions. Even if it did, Sanders did not relinquish control of the petition until nine seconds after midnight.

• The only exception is contained in Section 7451(b)(1) which provides that “in any case (including by reason of a lapse in appropriations) in which a filing location is inaccessible or otherwise unavailable to the general public on the date a petition is due, the relevant time period for filing such petition shall be tolled for

the number of days within the period of inaccessibility plus an additional 14 days.”

• The exception does not apply when the problems are the result of user error or technical difficulties on the user’s side, which is what occurred in Sanders’ situation.

• Equitable tolling does not apply to extend the deadline to file a petition in a Tax Court case.

The Tax Court observed:

“Mr. Sanders’s case exemplifies the risk in last-minute electronic filing. Filing close to the deadline leaves ‘little margin for error.’ Beal, 633 B.R. at 410. As the U.S. Court of Appeals for the Seventh Circuit has noted: Courts used to say that a single day’s delay can cost a litigant valuable rights. … With e-filing, one hour’s or even a minute’s delay can cost a litigant valuable rights. A prudent litigant or lawyer must allow time for difficulties on the filer’s end. A crash of a lawyer’s computer, or a power outage at 11:50 PM, does not extend the deadline, even though unavailability of the court’s computer can do so. …

Justice, 682 F. 3d at 665.”

After Sanders, the Seventh Circuit’s statement can now be updated to provide that “even eleven seconds delay can cost a litigant valuable rights.”

However, this is not going to be the last word on the subject.

The Third Circuit Court of Appeals recently disagreed with the Tax Court’s position that the 90-day period for filing a Tax Court petition is jurisdictional. See, Culp v. Commissioner, Case No. 22-1789 (3rd Cir.; July 19, 2023). The Third Circuit based its conclusion on a recent U.S.

Supreme Court decision that concluded a different Tax Court filing deadline was not jurisdictional. See, Boechler, P.C. v. Commissioner, 142 S. Ct. 1493 (2022). The Third Circuit then went on to provide that Culp’s tardiness may be excused if there is a basis for equitable tolling and remanded the case to the Tax Court to determine whether there was a basis for equitable tolling.

The Third Circuit stated:

“Missing a statutory filing deadline is never ideal for the filer. But the specific consequence for doing so depends on the legislature’s intent. If the statute clearly expresses the deadline is jurisdictional, the filer’s tardiness deprives a court of the power to hear the case. Without a clear statement, courts will treat a filing period to be a claims-processing rule that is presumptively subject to equitable tolling. Because we discern no clear statement that § 6213(a)’s deadline is jurisdictional, we hold it is not. And because the presumption that nonjurisdictional time limits are subject to equitable tolling has not been rebutted here, we hold it may be tolled.”

It will be interesting to see what the Tax Court will do on remand. There is no dispute that the petition was filed late, but the Culps claimed they never received a statutory notice of deficiency (even though Government records show one was mailed).

In addition, it will be interesting to see whether other Courts follow the Third Circuit’s lead. The Tax Court’s decision in Hallmark was reviewed by the full court and unanimous. While they are bound by Culp in the cases appealable to the Third Circuit. They are not bound by that decision in other circuits. The Sanders case is appealable to the Fourth Circuit, not the Third Circuit, so perhaps the Fourth Circuit will get the opportunity to weigh in.

We wish to thank KPMG for allowing us to re-print this article.

Could a legal structure common to credit unions and rural utilities revitalize blockchain and help realize the web3 vision of a new digital world?

EDITOR

Barbara A. Wech, Ph.D.

Department of Management, Information Systems, and Quantitative Methods

University of Alabama at Birmingham

COLLAT School of Business

710 13th St. South

Department of Management, Information

Systems, & Quantitative Methods

Birmingham, Alabama 35233 bawech@uab.edu

GUEST WRITERS

Anthony Tuths KPMG Senir Partner Leader – Digital Asset Group atuths@kpmg.com

David Antoni, CPA Tax Managing Director Moss Adams LLP dave.antoni@mossadams.com

Scott Heiser Leader Cooperative Tax KPMG Director Strategic Corporate Tax mheiser@kmpg.com

Published October 21, 2022 By Sandra Beckwith, CFO.com

Ravi Narula (CFO of FinancialForce) recalls a particularly frustrating situation several years ago when closing a deal with a company in another country. The two parties had negotiated all terms. With no remaining questions or open items, they submitted the contract for legal review.

During that two-week period, Narula’s counterpart continued to request changes. “We had all agreed in good faith upon these various terms. Why was this happening?” wondered the now CFO of FinancialForce, a business process automation software provider. He got his answer when discussing the situation with friends who lived in that country. “They said that it didn’t mean there were problems with the deal. This approach is just part of their culture,” Narula said.

It reminded him of how important it is to know who you’re negotiating with, but especially so in cross-cultural situations.

Whether you’re negotiating with someone around the world or down the hall, Narula

and others offer the following tips for becoming skilled negotiators.

1. Set Goals

Start with an over-arching goal, advises James Reiman, principal at Reiman Negotiations, and author of Negotiation Simplified: A Framework and Process for Understanding and Improving Negotiating Results. “Your goal is almost never to win. It’s to reach a conclusion that’s beneficial to both parties,” he said.

Using vendor negotiation as an example, Reiman asks, “Is your goal to get the very best price? Or is your goal to secure a longterm supplier relationship?”

“Your goal is to get the best price from your vendor so that your vendor can supply you consistently at the quality level you need,” Reiman continued. “It’s almost always to get the best value, but the value is not necessarily the price. And how you define value goes back to your goal.”

Here’s how to get better at negotiating both inside and outside the company.

2. Prepare, Prepare, Prepare

CFOs and experts universally agree that in-depth preparation is essential. Reiman views negotiating as a three-act play with preparation as the first act. “Think about it as planning and rehearsal,” he said. “Dig into the details, but also plan what you’ll say and make sure it conveys what you need it to.”

While many companies do a post-mortem evaluation after a negotiation, Narula suggests adding a pre-mortem to the process. “What would success look like at the end? What are the challenges?” he tries to ask himself.

Reiman spoke about setting realistic goals to get familiar with the feeling of achievement. “Establishing goals and success criteria along with ideas for achieving them leads to better alignment and less stress,” he said.

When Holly Grey, CFO of cybersecurity company Exabeam, is brought into a negotiation with a prospect, it’s often because the discussion stalled. Before joining the conversation, she meets with her legal or account negotiating team.

Grey broke down the process of her preparation prior to even meeting with the prospect. “We’ll spend half an hour just going through the prospect’s issue and concerns. Do we have any insight on why these are their concerns? If it’s a list of say, five things, I’ll consider which ones I’m willing to give on versus which that I’m not, or which I can flex a little bit on even though it’s not as much as they’re asking for.”

3. Earn and Build Trust

“Trust-building starts with viewing the negotiation not as a transaction, but as a partnership,” said Narula when asked about the value of trust. “Once you have trust, you respect the other side more. You’re willing to listen to them, you’re willing to get their feedback.”

Narula builds trust internally during the budgeting process by turning what could be a tense negotiation over numbers into

a collaborative discussion about goals and how to fund them. “I have learned to involve [the team] earlier on as part of the decision-making around key corporate goals. Once they are fully aligned, we can work together as partners and as a team to find a mutual solution. This approach works for the company and for them,” he said.

Michele Williams, professor of management and entrepreneurship at the University of Iowa’s Tippie College of Business, recommends building trust with internal colleagues long before there’s a negotiation situation. “Take time to get to know the people you’re working with and the people who you’re going to be making decisions for because part of trust is them believing that you’re making a decision that’s in their best interest given what’s in the company’s interest,” she said. “Building trust also helps to move people away from an adversarial mindset.”

4. Regulate Your Emotions

Some neuroscience research shows that when adrenaline triggers your brain’s fight or flight response during high-stress situations, you lose access to your brain’s frontal lobe, where creativity and problem-solving occur. Considering how important both are to finding a mutually beneficial outcome in a negotiation, learning to regulate emotions before and during the discussion is critical.

Rachel Kanarowski, a workplace consultant and founder of Year of Living Better, offered these tips:

• “Sleep well before the negotiation. It seems simplistic, but when you’re not getting enough sleep, you’re having a lot more stress response happening in your body.”

• “Become aware of how you feel when you’re emotional or stressed so you can recognize and address it quickly.”

• “Calm down with breathwork when you begin to feel emotional. Take two short breaths, then a long exhale. Repeat.”

• “When you begin to lose focus because you’re thinking ahead to alternatives or solutions, notice your feet connecting with the floor. That should tune in your sense of listening and bring your attention back to the moment.”

5. Listen

Build trust and uncover essential information by listening. “As negotiators, we take the other person’s perspective and try to make deals that we think will work for them. Asking questions and listening allows you to get to know them better while getting more information about what would really make a win-win deal,” Williams said.

Grey has found that skill to be particularly important when she’s brought in to deescalate a tense negotiation. She describes a situation where she joined a Zoom call and listened while a potential customer vented. She showed she was listening by nodding her head and taking notes.

“I think defusing the situation, especially if there’s a little bit of an edge to the conversation, is step number one,” said Grey.

“When they finished, I said, ‘I understand your position. I see where you’re coming from. Let me help alleviate some of your concerns.’ Then I went through it from a business perspective, addressing their issues.”

“Listen to what’s not being said, too,” cautioned Reiman, using a vehicle purchase negotiation as an example. He said if the salesperson doesn’t bring up delivery timing, that’s a clue it’s going to be a problem. While we don’t know what we don’t know, preparing for the negotiation with “enormous energy and detail, will help you learn more about what to listen for.

Grey believes that the range of internal and external situations CFOs are required to negotiate can give them an advantage. Sometimes you’re the customer, other times you’re the vendor. “The fact that you can have that Jekyll and Hyde view can be a little bit of a whirlwind where you’re seeing both sides,” she said, “but it helps you bring both understanding and empathy to the process.”

Source: CPA Letter, Sept 30, 2022, AICPA & CIMA and CFO.com, Sept 29, 2022

INDEPENDENT AUDITORS' REPORT

INDEPENDENT AUDITORS' REPORT

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF FINANCIAL POSITION

DECEMBER 31, 2022 AND 2021

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF FINANCIAL POSITION

DECEMBER 31, 2022 AND 2021

DECEMBER 31, 2022 AND 2021

OF FINANCIAL

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF FINANCIAL POSITION

DECEMBER 31, 2022 AND 2021

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF FINANCIAL POSITION

DECEMBER 31, 2022 AND 2021

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS

OF FINANCIAL POSITION

DECEMBER 31, 2022 AND 2021

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES

STATEMENTS OF FINANCIAL POSITION

DECEMBER 31, 2022 AND 2021

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS

OF FINANCIAL POSITION

DECEMBER 31, 2022 AND 2021

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF FINANCIAL POSITION

DECEMBER 31, 2022 AND 2021