The Cooperative Accountant - Fall 2022

CONTENTS

By Frank M. Messina, DBA, CPA

Krienert,

Adams

Vice President

Gillam,

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

PRESIDENT:

*William Miller, CPA (806) 747-3806

By Editor Greg Taylor, MBA, CPA, CVA; and Assistant Editor Bill Erlenbush, CPA

By George W. Benson; Michael E. Fincher; Connor Meinke

Barbara A. Wech, Ph.D.

Co-op Chapter bmiller@bsgm.com

Erhardt

Segars, Gilbert & Moss, LLP

Nashville Avenue

TX 79423

Secretary

VICE PRESIDENT:

*Nick Mueting (620) 227-3522

Halvorsen

(CliftonLarsonAllen)

nickm@.lvpf-cpa.com

Immediate Past President

SECRETARY-TREASURER:

Antoni (267) 256-1627

Antoni,

dantoni@kpmg.com

(608) 662-8600

Graves,

From the Editor

Frank M. Messina, DBA, CPA

Alumni & Friends Endowed Professor of Accounting

UAB Department of Accounting & Finance Collat School of Business

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

Well as I enter my 30th year at the University of Alabama at Birmingham and my 20th year as editor of The Cooperative Accountant, I begin to reflect more on the word – Cooperation. One definition is – “the process of working together to the same end.” Where has this commonality of the same end gone? Why do we continue to see emphasis on differences instead of cooperation? It appears to me that our society has lost sight of what is so important. Who should we blame? – technology, society, human nature, our upbringing, greed, etc. Some of the richest areas in our country now are those that surround our nation’s capital. What does freedom really mean? I am not sure, but we surely should look within ourselves.

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!

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.

The objective of this Financial Accounting Standards Board (FASB) project is to improve the accounting for and disclosure of certain digital assets. In December 2021, FASB added a project to its research agenda to explore accounting for and disclosure of a subset of exchange-traded digital assets and exchange-traded digital commodities. In May 2022, the Board added a project to its technical agenda to improve the accounting for and disclosure of certain digital assets. At that same time, the Board decided not to add to its technical agenda a project that would address the accounting for exchangetraded commodities, but instead decided that this topic would remain a research agenda project. The Board will consider potential scope alternatives for digital assets at a future Board meeting. These could be the first steps toward possible new rules around accounting for digital assets that would provide greater transparency for those interested in investing in these. These actions by FASB follow a March release of a Securities and Exchange Commission (SEC) staff bulletin that provides reporting guidance

for entities that safeguard digital assets. The SEC issued Staff Accounting Bulletin (SAB) No. 121 in March 2022, which provides guidance on the measurement of liabilities and obligations to safeguard cryptoassets that an entity holds for platform users. Ilgenstein and Savage note that “the SEC issued the guidance due to the increase in the number of entities that provide custodial services and the unique technological, legal, and regulatory risks and uncertainties specific to safeguarding crypto-assets” (SEC Guidance on Custodial Obligations for Digital Assets, para. 1).

There is a growing use and acceptance of crypto assets, prompting this need for guidance on how these assets should be treated for accounting purposes. While FASB has not yet issued a formal codified guidance on the application of accounting standards to digital assets, the American Institute of Certified Public Accountants (AICPA) and Chartered Institute of Management Accountants (CIMA) merged efforts to release a nonauthoritative practice

guide in 2022 titled “Accounting for and auditing of digital assets: Practice aid.” The objective of the practice aid was to develop nonauthoritative guidance on how to account for and audit digital assets under US generally accepted accounting principles (GAAP) for nongovernmental entities and generally accepted auditing standards (GAAS). The practice guide represents the joint views of AICPA staff and associated Digital Assets Working Group, and the guide is not approved, nor disapproved, by the Auditing Standards Board or by the AICPA membership or governing body as of this writing. The Digital Assets Working Group consists of expert professionals from nationally prominent audit firms. The auditing portion of the practice aid is considered an “other auditing publication” as defined in AU-C section 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards.” Ilgenstein and Savage (2022), of Weaver Assurance, Tax, and Advisory service, note that “However, the price volatility of digital assets presents notable difficulty with this accounting treatment. ASC Topic 350-30 requires crypto assets to be recorded at cost and then tested for impairment, which occurs when an asset’s fair value is less than the recorded value.” (Current Accounting Practices and Challenges, para. 1).

Until there is further authoritative or nonauthoritative guidance issued, practitioners can refer to the AICPA & CIMA practice guide to provide guidance on the following subject matter areas, including references to applicable GAAP and GAAS standards:

• Classification and measurement when an entity purchases crypto assets

• Recognition and initial measurement when an entity receives digital assets that are

classified as indefinite-lived intangible assets

• Subsequent accounting for digital assets classified as indefinite-lived intangible assets

• Measurement of cost basis of digital assets that are classified as indefinite-lived intangible assets when derecognized

• Derecognition of digital asset holdings that are classified as indefinite-lived intangible assets

• Recognition of digital assets when an entity uses third-party hosted wallet service

• Meeting the definition of an investment company when engaging in digital asset activities

• Accounting by an investment company for digital assets it holds as an investment

• Recognition, measurement, and presentation of digital assets specific to broker-dealers

• Considerations for crypto assets that require fair value measurement

• Accounting for stablecoin holdings

Additionally, the practice guide offers guidance in the areas of:

• Client acceptance and continuance – including auditor skill sets and competencies, management skill sets and competencies, management integrity and overall business strategy, and processes and controls (including information technology)

• Risk assessment and processes and controls – understanding the entity and its environment, understanding and evaluating the entity’s risk assessment process, and understanding the entity’s processes and controls

• Laws and regulations – understanding laws, regulations, and related parties Digital assets are defined as broadly

as digital records that are made using cryptography for verification and security purposes on a distributed ledger referred to as a blockchain. Digital assets can refer to the medium of exchange, the method of access to digital asset goods or services, or to the financing vehicle (i.e. security). The accounting treatment for a digital asset will be driven by the specific terms, form, underlying rights, and obligations of the digital asset. Digital assets are generally accounted for as indefinite-lived intangible assets under Accounting Standards Codification (ASC) Topic 350-30, Intangibles - Goodwill and Other - General Intangibles Other Than Goodwill.

What exactly is blockchain technology?

The AICPA, Chartered Professional Accountants of Canada (CPA), and the University of Waterloo Centre for Information (UWCISA) had combined resources to publish a 2017 article titled “Blockchain Technology and its Potential Impact on the Audit and Assurance Profession” which describes blockchain as follows:

A blockchain is a digital ledger created to capture transactions conducted among various parties in a network. It is a peer-topeer, Internet-based distributed ledger which includes all transactions since its creation. All participants (i.e., individuals or businesses) using the shared database are “nodes” connected to the blockchain,5 each maintaining an identical copy of the ledger. Every entry into a blockchain is a transaction that represents an exchange of value between participants (i.e., a digital asset that represents rights, obligations or ownership). In practice, many different types of blockchains are being developed and tested. However, most blockchains follow this general framework and approach.

When one participant wants to send value

to another, all the other nodes in the network communicate with each other using a predetermined mechanism to check that the new transaction is valid. This mechanism is referred to as a consensus algorithm.6 Once a transaction has been accepted by the network, all copies of the ledger are updated with the new information. Multiple transactions are usually combined into a “block” that is added to the ledger. Each block contains information that refers back to previous blocks and thus all blocks in the chain link together in the distributed identical copies. Participating nodes can add new, time-stamped transactions, but participants cannot delete or alter the entries once they have been validated and accepted by the network. If a node modified a previous block, it would not sync with the rest of the network and would be excluded from the blockchain. A properly functioning blockchain is thus immutable despite lacking a central administrator. (p. 3)

Blockchains can be used to cut out the middleman and create a secure, decentralized way for service providers and customers to connect and transact safely and directly. While blockchain technology has been around for over a decade, it is still in its infancy as far as the development and implementation of practical applications in the business world. Levy (2022) of “The Motley Fool” identifies the following potential practical applications:

1. Money transfers - Money transfers using blockchain can be less expensive and faster than using existing money transfer services.

2. Financial exchanges - While blockchainbased exchanges primarily deal in cryptocurrency, the concept could be applied to more traditional investments as well.

3. Lending - can include contract execution, automatically trigger things like a service payment, a margin call, full repayment of

the loan, and release of collateral. As a result, loan processing is faster and less expensive, and lenders can offer better rates.

4. Insurance - can include policy execution, recording all claims on a blockchain would keep customers from making duplicate claims for the same event. Furthermore, using smart contracts can speed up the process for claimants to receive payments.

5. Real estate - Using blockchain technology to record real estate transactions can provide a more secure and accessible means of verifying and transferring ownership. That can speed up transactions, reduce paperwork, and save money.

6. Secure personal information - Keeping data such as your Social Security number, date of birth, and other identifying information on a public ledger (e.g., a blockchain) may actually be more secure than current systems more susceptible to hacks.

7. Voting - If personal identity information is held on a blockchain, that puts us just one step away from also being able to vote using blockchain technology. Using blockchain technology can make sure that nobody votes twice, only eligible voters are able to vote, and votes cannot be tampered with. What’s more, it can increase access to voting by making it as simple as pressing a few buttons on your smartphone. At the same time, the cost of running an election would substantially decrease.

8. Government benefits - Using blockchain technology could reduce fraud and the costs of operations. Meanwhile, beneficiaries can receive funds more quickly through digital disbursement on the blockchain.

9. Securely share medical information - Keeping medical records on a blockchain can allow doctors and medical

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professionals to obtain accurate and upto-date information on their patients. That can ensure that patients seeing multiple doctors get the best care possible. It can also speed up the system for pulling medical records, allowing for more timely treatment in some cases. And, if insurance information is held in the database, doctors can easily verify whether a patient is insured and their treatment is covered.

10. Artist royalties - Using blockchain technology to track music and film files distributed over the internet can make sure that artists are paid for their work.

11. Non-fungible tokens - Non-fungible tokens, or NFTs, are commonly thought of as ways to own the rights to digital art. Since the blockchain prevents data from existing in two places, putting an NFT on the blockchain guarantees that only a single copy of a piece of digital art exists. That can make it like investing in physical art but without the drawbacks of storage and maintenance. NFTs can have varied applications, and ultimately, they’re a way to convey ownership of anything that can be represented by data. That could be the deed to a house, the broadcast rights to a video, or an event ticket. Anything remotely unique could be an NFT.

12. Logistics and supply chain trackingUsing blockchain technology to track items as they move through a logistics or supply chain network can provide several advantages. First of all, it provides greater ease of communication between partners since data is available on a secure public ledger. Second, it provides greater security and data integrity since the data on the blockchain can’t be altered. That means logistics and supply chain partners can work together more easily with greater trust that the data they’re provided is accurate and up to date.

13. Secure Internet of Things networks - The

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Internet of Things (IoT) is making our lives easier, but it’s also opening the door for nefarious actors to access our data or take control of important systems. Blockchain technology can provide greater security by storing passwords and other data on a decentralized network instead of a centralized server. Additionally, it offers protection against data tampering since a blockchain is practically immutable.

14. Data storage - Adding blockchain technology to a data storage solution can provide greater security and integrity. Since data can be stored in a decentralized manner, it will be more difficult to hack into and wipe out all the data on the network, whereas a centralized data storage provider may only have a few points of redundancy. It also means greater access to data since access isn’t necessarily reliant on the operations of a single company. In some cases, using blockchain for data storage may also be less expensive.

Ashford (2022) of Forbes.com describes the most commonly known form of blockchain currently in use, Bitcoin. It is used to transact currency digitally.

Bitcoin is a decentralized digital currency that you can buy, sell and exchange directly, without an intermediary like a bank. Bitcoin’s creator, Satoshi Nakamoto, originally described the need for “an electronic payment system based on cryptographic proof instead of trust.”

Every Bitcoin transaction that’s ever been made exists on a public ledger accessible to everyone, making transactions hard to reverse and difficult to fake. That’s by design: Core to their decentralized nature, Bitcoins aren’t backed by the government or any issuing

institution, and there’s nothing to guarantee their value besides the proof baked in the heart of the system.

“The reason why it’s worth money is simply that we, as people, decided it has value—same as gold,” says Anton Mozgovoy, co-founder & CEO of digital financial service company Holyheld.

Since its public launch in 2009, Bitcoin has risen dramatically in value. Although it once sold for under $150 per coin, as of June 8th, 1 BTC equals around $30,200. Because its supply is limited to 21 million coins, many expect its price to only keep rising as time goes on, especially as more large institutional investors begin treating it as a sort of digital gold to hedge against market volatility and inflation. Currently, there are more than 19 million coins in circulation.

(What is Bitcoin? Section)

Today it’s possible to buy some things with Bitcoins using Bitcoin debit cards. These cards are issued by Visa or Mastercard and can be loaded with funds via Bitcoin. While companies have been slow to accept payment Bitcoin directly, the adoption of Bitcoin as a payment method is increasing each year. Additionally, companies that act as a crypto payment gateway have emerged, which will also cause adoption of Bitcoin as payment to increase as these gateway companies can integrate to any business and allow it to accept Bitcoin in addition to other types of digital coin payments. Although Bitcoin was created in 2009, it’s still

Today it’s possible to buy some things with Bitcoins using Bitcoin debit cards. These cards are issued by Visa or Mastercard and can be loaded with funds via Bitcoin.

considered a relatively new kind of currency. The benefits of paying with a digital currency is that it is very accessible and versatile in that it can be transferred quickly to another person or to pay for goods and services to businesses that accept the currency. Users are identified by numerical codes, thus can be safer from fraud. Most importantly, these are decentralized currencies not regulated by the government or a central bank, giving users autonomy and control over their money (but on the flip side are also not protected by government regulation as a traditional banking account would provide).

The AICPA, CPA, & UWCISA referenced article provides a table illustrating areas where high interest in blockchain technology has been shown by significant investments from venture capital firms and/or large enterprises. This table has been provided below: (p. 8)

Summary Blockchain technologies have the potential

to impact recordkeeping processes, which could include the way transactions are initiated, processed, authorized, recorded and reported. Changes in business processes due to the implementation of blockchain technologies could impact financial reporting and tax preparation. As such, independent auditors will need to understand this technology and its impacts on the audit and assurance engagements of their clients. In cases where blockchain technologies have been adopted, auditors will need to consider implementing auditing practices and programs that accommodate both traditional stand-alone general ledgers as well as blockchain general ledger transactions. With blockchain technologies, there also may be a potential for greater transparency in reporting and accounting, resulting in more efficient data extraction and analysis. Blockchain technologies could bring new challenges and opportunities to accountants and auditors, causing them to evolve in adapting to these new technologies. This is a topic

Table: Areas of interest in blockchain technology investments (AICPA & CPA)

Financial services

Several stock exchanges around the world are piloting a blockchain platform that enables the issuance and transfer of private securities. Additionally, multiple groups of banks are considering use cases for trade finance, cross-border payments, and other banking processes.

Consumer and Companies in the consumer and industrial industries are industrial products exploring the use of blockchain to digitize and track the origins and history of transactions in various commodities.

Life sciences and Healthcare organizations are exploring the use of blockchain healthcare to secure the integrity of medical records, medical billing, claims, and other records.

Public sector Governments are exploring blockchain to support asset registries such as land and corporate shares.

Energy and resources Ethereum is being used to establish smart-grid technology that would allow for surplus energy to be used as tradable digital assets among consumers.

that accountants and auditing professionals should monitor for emerging new information to determine how it will impact their organization or others they serve. It would also be advised to refer to industry experts

and the company’s legal representatives when seeking advice in entering into digital activities to ensure that your organization remains in compliance with current law and regulation to minimize risk to the business.

References

AICPA, & CIMA. (2022). Accounting for and auditing of digital assets (Practice aid). Retrieved August 28, 2022 from the following website: https://us.aicpa.org/content/dam/aicpa/ interestareas/informationtechnology/downloadabledocuments/2104-39790-da-pda-updateweb.pdf

AICPA, CPA, & UWCISA. (December, 2017). Blockchain Technology and its Potential Impact on the Audit and Assurance Profession. Retrieved August 28, 2022 from the following website: https://us.aicpa.org/content/dam/aicpa/interestareas/frc/assuranceadvisoryservices/ downloadabledocuments/blockchain-technology-and-its-potential-impact-on-the-audit-andassurance-profession.pdf

Ashford, A. (June 8, 2022). What Is Bitcoin and How Does It Work? Forbes.com. Retrieved August 28, 2022 from the following website: https://www.forbes.com/advisor/investing/ cryptocurrency/what-is-bitcoin/

Ilgenstein, P., & Savage, T. (July 28, 2022). FASB and SEC Developing Accounting Rules for Digital Assets. Weaver Monthly Insights, newsletter. Retrieved August 28, 2022 from the following website: https://weaver.com/blog/fasb-and-sec-developing-accounting-rulesdigital-assets

Levy, A. (July 13, 2022). 15 Applications for Blockchain Technology. Retrieved August 28, 2022 from the following website: https://www.fool.com/investing/stock-market/marketsectors/financials/blockchain-stocks/blockchain-applications/

Additional resources:

AICPA website resource, Blockchain podcast series: https://www.aicpa-cima.com/disruption

FASB website project resources, Accounting for and Disclosure of Digital Assets, https://www. fasb.org/Page/ProjectPage?metadata=fasb-Accounting-for-and-Disclosure-of-Digital-Assets

SEC Staff Accounting Bulletin No. 121, https://www.sec.gov/oca/staff-accounting-bulletin-121

By Greg Taylor

FASB ISSUES ASU ON FAIR VALUE MEASUREMENT OF EQUITY SECURITIES SUBJECT TO CONTRACTUAL SALE RESTRICTIONS (Topic 820)

In June 2022, the FASB issued ASU 202203 to: (1) clarify the guidance in Topic 820, Fair value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security; (2) amend a related illustrative example, and (3) introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. Quoting extensively from the ASU:

“Who Is Affected by the Amendments in This Update?

The amendments in this Update affect all entities that have investments in equity securities measured at fair value that are subject to a contractual sale restriction.

What Are the Main Provisions?

The amendments in this Update clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and

GENERAL EDITOR

Greg Taylor, Shareholder, D. Williams & Co., Inc.

1500 Broadway, Suite 400 Lubbock, TX 79401 (806) 785-5982

gregt@dwilliams.net

ASSISTANT EDITOR

Bill Erlenbush, CPA

NSAC Education Director (309) 530-7500 nsacdired@gmail.com

measure a contractual sale restriction. The amendments in this Update also require the following disclosures for equity securities subject to contractual sale restrictions:

1. The fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet

2. The nature and remaining duration of the restriction(s)

3. The circumstances that could cause a lapse in the restriction(s).

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

The amendments in this Update do not change the principles of fair value measurement. The amendments clarify those principles when measuring the fair value of an equity security subject to a contractual sale restriction and improve current GAAP by reducing diversity in practice, reducing the cost and complexity in measuring fair value, and increasing comparability of financial information across reporting entities that hold those investments.

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

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. For all entities except investment companies as defined under Topic 946, Financial Services— Investment Companies, the amendments in this Update should be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. An entity that qualifies as an investment company under Topic 946 should apply the amendments in this Update to an investment in an equity security subject to a contractual sale restriction that is executed or modified on or after the date of adoption. An investment company with an equity security subject to a contractual sale restriction that was executed before the date of adoption should continue to account for the equity security until the contractual restrictions expire or are modified using the accounting policy applied before the adoption of the amendments (that is, if an investment company was incorporating the effects of the restriction in the measurement of fair value, it would continue to do so).”

The ASU is available at www.fasb.org

INVITATION TO COMMENT CONCERNS ACCOUNTING FOR GOVERNMENT GRANTS BY BUSINESS ENTITIES (Potential Incorporation of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, into Generally Accepted Accounting Principles

On June 13, 2022, the FASB issued an

invitation to comment on whether or not the provisions of IAS 20 (International Accounting Standards 20) promulgated by the International Accounting Standards Board should be incorporated into U.S. generally accepted accounting principles. IAS 20 directly addresses the issue of government grants received by business entities, whereas current GAAP does not provide specific authoritative guidance on how business entities should recognize, measure, and present grants received from a government. In the absence of specific guidance, many but not all business entities analogize to the guidance in IAS 20. The invitation to comment poses twenty-seven (27) questions for respondents – the following includes the first four questions for respondents:

Question 1 (All Respondents): GAAP does not have specific topical authoritative guidance on the accounting for government grants by business entities. Should the FASB consider incorporating into GAAP the guidance in IAS 20 as it relates to the accounting for government grants? If yes, what aspects of IAS 20 related to recognition, measurement, and/or presentation should be incorporated and why?

Question 2 (Preparers/Practitioners): a. What type of government grants do you (or the companies you audit) receive? b. How do you (or the companies you audit) recognize, measure, and present government grants received? Do you (or the companies you audit) apply IAS 20 by analogy or another model? c. What issues or challenges, if any, have arisen (or do you anticipate would arise) in the application of IAS 20 as it relates to government grants?

Question 3 (Investors): a. Are government grants a key aspect of your analysis of an entity’s financial performance? Please explain why or why not. What types of grants do

those entities receive and how do you use that information? b. Do you currently receive sufficient information about the impact of government grants on an entity’s financial results? Please explain why or why not. c. If there is diversity in how government grants are accounted for, would disclosure of the different models be sufficient or would your analysis benefit from a single model?

Definition of a Government

Paragraph 3 of IAS 20 indicates that the term government refers to a government, government agencies, and similar bodies, whether local, national, or international.

Question 4 (All Respondents): Is the definition of the term government in IAS 20 understandable and operable, and if not what changes would need to be made to make it operable?

The invitation to comment, including all twenty-seven questions and a copy of IAS 20, is available at www.fasb.org

FASB ISSUES PROPOSED ASU ON INVESTMENTS-EQUITY METHOD and JOINT VENTURES (Topic 323) Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the emerging issues task force)

On August 22, 2022, the FASB issued a proposed ASU to allow for reporting entities to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits consistently.

What Are the Main Provisions?

The amendments in this proposed Update would permit reporting entities to elect to account for their tax equity investments, regardless of the program from which the income tax credits are received, using the proportional amortization method if certain

conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). To qualify for the proportional amortization method, if elected in accordance with paragraph 323-740-25-4, all the following conditions must be met:

1. It is probable that the income tax credits allocable to the investor will be available.

2. The investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project.

3. Substantially all of the projected benefits are from income tax credits and other income tax benefits. Projected benefits include income tax credits, other income tax benefits, and other non-income-taxrelated benefits. The projected benefits should be determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project.

4. The investor’s projected yield based solely on the cash flows from the income tax credits and other tax benefits is positive.

5. The investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment.

A reporting entity would make an accounting policy election to apply the proportional amortization method on a taxcredit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. A

reporting entity that applies the proportional amortization method to qualifying tax credit investments would account for the receipt of the investment tax credits using the flowthrough method under Topic 740, Income Taxes, even if the entity applies the deferral method for other investment tax credits received.

A reporting entity would be required to disclose certain information in annual and interim reporting periods that enables investors and other users of its financial statements to understand the nature of the following:

1. Its tax equity investments in projects that generate income tax credits and other income tax benefits from a program for which the reporting entity has elected to apply the proportional amortization method.

2. The impact of the tax equity investments and related income tax credits on its financial position and results of operations.

This proposed Update would amend paragraph 323-740-25-1, which contains the conditions needed to apply the proportional amortization method. The proposed amendments would make certain limited changes to those conditions to clarify their application to a broader group of tax credit investment programs. However, the conditions in substance remain consistent with current GAAP. The amendments in this proposed Update would require specific disclosures for all tax equity investments in a program to which an entity has elected to apply the proportional amortization method. The amendments to paragraphs 323-74050-1 through 50-2 would require that an entity disclose information to enable financial statement users to understand (1) the nature of the entity’s investments that generate income tax credits and other income tax

benefits through a program for which the entity has elected to apply the proportional amortization method and (2) the effect of the recognition and measurement of its tax equity investments and the related income tax credits on its financial position and results of operations. In addition, the proposed amendments also provide other examples of disclosures that an entity could provide in meeting those objectives in paragraph 323740-50-1.

The proposed ASU, including questions for respondents, is available at www.fasb.org

RECENT ACTIVITIES OF THE PRIVATE COMPANY COUNCIL

The Private Company Council (PCC) met on Thursday, June 23 and Friday, June 24, 2022. Below is a summary of topics addressed by the PCC at the meeting:

• Disaggregation—Income Statement

Expenses: FASB staff provided an overview of the feedback on income statement expense disaggregation received in response to the 2021 FASB Invitation to Comment, Agenda Consultation (the Agenda Consultation ITC); the background on the agenda project; and the feedback on income statement expense disaggregation received during prior PCC meetings. FASB staff solicited feedback from PCC members on private company practices on income statement presentation; the need for further disaggregation of cost of sales and selling, general, and administrative expenses in private company financial statements; and potential disaggregation principles and approaches. PCC members were generally supportive of exploring further expense disaggregation but expressed varying views on the most appropriate approach and factors to consider. PCC members who are users discussed the benefits of incremental disaggregation, including the

ability to better understand an entity’s operating leverage, predict future cash flows, and distinguish between an entity’s periodic expenses and costs incurred as an investment in the business. PCC members who are preparers and those who are practitioners raised concerns about a disaggregation principle that may be costly to implement and whether the benefits to users would exceed those costs.

• Accounting for and Disclosure of Digital Assets: FASB staff summarized the Board’s recent decision to add a project on digital assets to its technical agenda, the project’s background and scope, and issues related to current practices for digital asset accounting. PCC members noted that this is a growing area of interest for private company preparers and practitioners. Specifically, PCC members discussed the need for guidance on the recognition, measurement, and balance sheet classification of digital assets. PCC members also discussed the enhanced internal controls needed to audit digital assets, the volatility inherent in using the impairment model, and the accounting for digital assets used to settle receivables.

• Leases—Implementation Issues: A PCC member who is a preparer highlighted the topics discussed at the Leases Implementation Best Practices session of the June 2022 AICPA ENGAGE conference. Those topics included embedded leases, capitalization thresholds, discount rates, lease and non-lease components, and related party leases. That member also discussed the effect of applying Topic 842, Leases, on internal controls and the use of software to comply with that Topic. PCC members highlighted related party leases as an area that received significant attention during both the Leases Implementation Best Practices session and the PCC Town Hall meeting at the same conference.

PCC members noted that many related party leases are between entities under common control, some of which have written terms that may not be at arm’s length and others that are unwritten. PCC members emphasized that those factors make it difficult for private companies to determine the legally enforceable terms of a related party arrangement for purposes of applying Topic 842. PCC members discussed ways in which they (or the FASB) could assist private company stakeholders in applying the related party leases requirements in Topic 842 through either educational materials (such as an FASB Staff Q&A) or Codification improvements. The PCC also discussed performing outreach with private company stakeholders to determine whether the issue with applying the Topic 842 related party leases requirements is limited to common control arrangements or includes other related party arrangements.

• Stock Compensation Disclosures: FASB staff provided the PCC with an update on the formation of a working group and noted that the initial working group meeting is scheduled for the end of June. The working group comprises three PCC members and a member of the AICPA’s Private Companies Practices Section Technical Issues Committee. The PCC Chair acknowledged recent feedback received from some private company stakeholders that stock compensation is not an area that broadly affects all private companies and indicated that the PCC will be cognizant of balancing its resources in this area with other broader issues facing private companies.

• Identifiable Intangible Assets and Subsequent Accounting for Goodwill: FASB staff highlighted the Board’s recent decision to deprioritize and remove the project from its technical agenda and noted the Board’s continued

interest in monitoring the IASB’s Goodwill and Impairment project.

• Agenda Consultation: FASB staff updated the PCC on the Board’s recent discussions and decisions in response to stakeholder feedback received on the Agenda Consultation ITC, the resulting changes to the research and technical agendas, and next steps. The FASB Chair explained the objective of the newly added research project, Financial Key Performance Indicators for Business Entities, and its interdependency with the Disaggregation—Income Statement Expenses project. PCC members also asked about the Board’s recent removal of the Leases (Topic 842): Lease Modifications project from the technical agenda. FASB staff explained that stakeholder feedback had indicated that there was not a pervasive need to amend the guidance at this time. Additionally, because Topic 842 is currently being implemented by nonpublic entities, the FASB did not want to propose amendments at this time. FASB staff also noted that outreach will continue in this area in connection with postimplementation review activities.

• Accounting for Environmental Credit Programs: FASB staff summarized this FASB technical agenda project, feedback received on the Agenda Consultation ITC, recent Board decisions made, and next steps. PCC members noted that while private companies enter into certain environmental, social, and governance (ESG)-related transactions, PCC members have limited experience to date with environmental credit programs.

• EITF Issue No. 21-A, “Accounting for Investments in Tax Credit Structures

Using the Proportional Amortization Method”: FASB staff provided the PCC with an overview of the project, the consensus-for-exposure reached by the

EITF, and next steps. The PCC member who observes EITF meetings provided additional details about certain aspects of the project (for example, transition method). In response to PCC member questions, the staff clarified that the project focuses on investments in certain tax credit structures by tax equity investors and not on the accounting by project sponsors. PCC members expressed support for the consensus-for-exposure reached by the EITF.

• Other Business: The PCC Chair highlighted an issue on the accounting for increasing freight costs related to inventory and whether those freight costs should be expensed or capitalized. The PCC Chair referenced guidance that exists in Topic 330, Inventory, to assist private company stakeholders in accounting for such freight costs.

The next PCC meeting is scheduled for Thursday, September 22, and Friday, September 23, 2022.

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

August 31, 2022 - Negative Impact of Credit Loss Accounting Standard on Buyers’ Earnings Biggest Concern About Rules

The FASB may need to study the credit loss accounting standard for better tailoring in relation to acquisitions because it causes buyers of other banks or loans to initially book an earnings loss, practitioners said.

The current expected credit losses (CECL) standard takes effect in less than six months for private companies and small public companies.

“It’s a massive undertaking. It really is,

particularly for lenders,” Michael Lundberg, RSM US LLP’s Industry Audit Policy Leader and National Director Financial Institutions, said on Aug. 25, 2022.

“It also can have a direct impact on reported earnings,” he said. “If you buy a portfolio or another bank, then you record loss reserves on all those loans that you buy all at once. Depending on the size of the transaction, you can actually wipe out earnings for the quarter. So if Bank A buys Bank B and it’s a large transaction, the loss reserves that get recorded as part of that transaction have an enormous impact on earnings and could drive it to a loss.” RSM is an audit, tax, consulting firm focused on the middle market.

Lundberg said questions that keep surfacing relative to CECL have been around how to handle acquired loans. “No decisions have been made at the FASB but that’s the biggest thing coming out of the standard.”

August 29, 2022 - U.S. and China Sign Historic Agreement on Audit Firm Supervision

The U.S. Public Company Accounting Oversight Board (PCAOB) on Aug. 26, 2022, finally signed an agreement with Chinese authorities that will allow the board to inspect and investigate audit firms based in China and Hong Kong whose clients trade on American exchanges. And the PCAOB inspection team is planning to be on the ground by mid-September to begin audit inspections.

This comes as Congress stepped in to help the PCAOB to get a deal with Chinese authorities. Among other legislative provisions, if the U.S. board cannot inspect auditors for three years in a row, then their clients—such as technology giants Alibaba Group Holding Ltd. and Baidu Inc.—will face a trading ban.

The PCAOB and China have been in onagain, off-again negotiations to carry out

audit inspections, to no avail. China has so far not granted full access to audit papers fearing infringement to its sovereignty. Moreover, the communist regime was worried that audit work papers may contain state secrets. However, U.S. officials did not buy some of the arguments made by the Chinese.

In the meantime, there have been many accounting frauds at Chinese companies that cost a lot of money for U.S. investors, including at Luckin Coffee Inc., a coffee chain that competes against Starbucks Corp. in China. About $1.7 trillion in securities of China-based issuers are listed on U.S. exchanges.

“The U.S. Congress sent a strong message with the passage of the Holding Foreign Companies Accountable Act that access to the U.S. capital markets is a privilege, not a right,” PCAOB Chair Erica Williams said. “The PCAOB has been working to execute our mandate under the law.”

The Sarbanes-Oxley Act of 2002 established the PCAOB following a string of large accounting scandals that cost investors an estimated $85 billion at the time. Under the law, not only does the board have the power to inspect and investigate accounting firms that audit public companies, it can also write auditing standards that firms must follow.

August 22, 2022 - How Long Will it Take to Develop Crypto Accounting Rules? FASB Isn’t the Problem Speculation has bubbled up about how fast the FASB, the nation’s main accounting rulemaker, can move to issue new accounting rules for Bitcoin and other cryptocurrencies recently touted by basketball icon Steph Curry and others.

It is not the FASB, but the vitriolic feedback it can receive from some stakeholders during its due process that can hinder a project, accounting professionals said.

“I feel like the people at the FASB are

really smart when it comes to accounting, and if they decide to work on a project, their teams can come up with a reasonable accounting solution at a reasonably quick period of time,” Ray Pfeiffer, a professor at Simmons University said on Aug. 18, 2022. “All of the delays happen when they first expose a proposal to the public, and if that initial reaction is positive things can move really quickly – but it’s almost never uniformly positive because there are just so many different points of view,” he said.

Earlier this year in May, the FASB’s seven board members agreed to add a broad project to its technical agenda on accounting for and disclosure of digital assets, including crypto, after it received strong requests to develop the guidance. But FASB projects can take years to complete – as long as 15 – depending on the magnitude of the topic because of the due process the board has to follow to establish generally accepted accounting principles (GAAP) that work well in the U.S. capital marketplace.

Snags happen more often with broader projects than narrower ones. “One pattern has been to propose something comprehensive, but then in response to a lot of push back, breaking the project into pieces with just disclosure as a first step and then issues of recognition, measurement, and/or presentation in other separate parts of the project,” said Pfeiffer, a former FASB staff member. “And so I can envision something like that happening with these emerging issues as well.”

The move to develop accounting rules for crypto assets comes at a critical time for the Bitcoin and Ethereum market which saw values recently tumble – by trillions of dollars – fast. The topic has drawn tons of media coverage and tweets due in part to celebrities like Matt Damon, LeBron James, Jamie Foxx, Ashton Kutcher, Gwyneth Paltrow and Reese Witherspoon, among others, encouraging consumers to invest in them.

Currently, digital assets, including cryptocurrencies, are accounted for as intangible assets, which means that they are reported on the balance sheet at historical cost and then whenever the price goes down they are deemed impaired. But that impairment cannot be recovered and therefore when the price goes back up nothing can be done in financial reports to reflect that. Some have complained that current accounting rules do not accurately reflect the underlying economics for items like Bitcoin which are highly volatile. The FASB has therefore been asked to consider developing rules that would enable crypto to be recognized at fair value so that both losses and gains can be recognized.

August 15, 2022 - Inflation Reduction Act Inches Into FASB Waters Over Book Income Tax

The FASB, the nation’s main accounting rulemaker, could have congressional lobbyists nipping at its heels over a minimum tax rule in the Inflation Reduction Act that would be based on book income—and the accounting profession is up in arms about it.

This would be the first corporate minimum tax based on U.S. GAAP book income standards since the 1980s.

“This is an interesting policy in that it has a piece of financial accounting in it which the tax lawyers and the tax economists know relatively little about,” Jeffrey Hoopes, associate professor, at the Accounting University of North Carolina, said on Aug. 12, 2022.

“If financial accounting income is included in the tax base, when the FASB is trying to decide on rules that might change financial accounting components that have taxable income, there are implications for companies and they are going to be lobbying the FASB to try to get certain outcomes,” he said. “That’s not a position we want to be in. We want the FASB just to be as independent

as possible, and this puts a little bit more pressure on the FASB.”

The accounting profession is unanimous in its concerns over the rule, sending a letter to congress last year with about 300 academic signatures, which included former FASB board members, Hoopes added.

Others agree.

“What is concerning at this point is that tying the new minimum tax to financial statement income creates incentives for companies to report lower book income, which may be at odds with the overall purpose of financial statements (and the goal of the FASB) to be a source of information that is useful to current and potential investors and creditors,” Mary Cowx, Assistant Professor at the W. P. Carey School of Accountancy at Arizona State University, said on Aug. 12.

The Inflation Reduction Act of 2022, a $700 billion three-pronged bill on healthcare, climate, and tax, would require companies that report over $1 billion in book income to pay a 15 percent minimum tax rate on that book income, which they may already be satisfying. But for those with over $1 billion in earnings that may have taken certain credits or deductions that lower their tax rate below 15 percent of their book income, they may be subject to additional tax liability.

The tax in question starts with adjusted financial statement income, tax professionals said. And financial statement net operating losses can be carried forward and reduce financial statement income for purposes of the tax. In addition, minimum tax liability can be reduced by general business credits. Moreover, companies are able to use accelerated depreciation (under the internal revenue code) in calculating financial statement income for the minimum tax.

“FASB doesn’t literally have to do anything in response to the bill, but things they do will have an impact,” Kyle Pomerleau, a senior

fellow at the American Enterprise Institute (AEI), said on Aug. 12.

The legislation, however, signals that congress is effectively outsourcing a portion of the tax base to FASB, he said. “Changes they make to financial accounting rules will have a direct impact on federal revenue collections; congress may take more interest in FASB’s work because of this and may lobby for or against certain changes.”

July 25, 2022 - New Accounting Disclosure Rules for Supplier Finance Programs Will Take Effect Next Year

Companies that use supplier finance programs to buy goods and services will need to start disclosing the key terms of those programs, including payment terms, starting Jan. 1, 2023, the nation’s accounting rulemaker said.

The disclosures will reveal the timing of each payment and the basis for it, according to FASB decisions on July 20, 2022. Companies will be required to also disclose assets pledged as security or other forms of guarantees provided for the committed payment to a finance provider or intermediary.

“I think by clarifying payment terms including payment timing, we really are telling preparers ‘if it’s 90 days, we need it for 90 days; if it’s 180 days, we need 180 days’ – and that’s critical information because that’s the information, in my view, that users are going to track over time,” FASB member Fred Cannon said. “I also believe that the assets pledged as securities is an important indicator especially for debt investors to understand if there’s been added support for these programs,” he said.

A new standard will be issued in the fall.

Supplier finance programs, also referred to as reverse factoring, structured payables, payable finance, and vendor payable programs, have increased in popularity but

ACCTFAX

carry hidden risks.

Programs vary, but operate between three parties, each of which benefit. A typical program enables a company to work with a finance provider, i.e. an intermediary, to buy goods or services from multiple suppliers. The buyer arranges with the intermediary to pay the suppliers on its behalf. The buyer settles with the intermediary and pays a fee, which can also be delayed. This enables the buyer to have more cash on hand, which in turn improves its working capital. Suppliers can also benefit if the intermediary pays early.

Investors and other financial statement users have said that because there are no specific disclosure requirements in U.S. GAAP for such programs, companies provide skimpy disclosures, if any.

In voting to issue the new rules, FASB members said they believe it will significantly improve the information investors get at no major cost for companies. However, the guidance will not be converged with IFRS Accounting Standards, though Big Four accounting firms – that typically service multinational companies – brought the topic to the board.

The FASB will therefore monitor the IASB’s project, the discussions indicated. “This was raised to us by practitioners, and users were on board with them,” FASB Chair Richard Jones said. While it is important for the board to learn from the IASB efforts on its more broadly scoped project, the U.S. GAAP codification has “disclosures related to debt financings including assets that have been pledged [which] it would still be applicable if you had a debt financing, which is similar to what the IASB is looking at,” he said. The discussions wrapped up redeliberations on Proposed Accounting Standards Update (ASU) No. 2021-007, Liabilities— Supplier Finance Programs (Subtopic 40550): Disclosure of Supplier Finance Program Obligations, which was issued in December 2021 for public comment.

In voting to finalize the proposal, the FASB also considered but decided that no special consideration will be given to private companies because new recognition or presentation requirements are not being created. Moreover, the programs often would be supported by technology that makes the relevant information required to be disclosed readily accessible, according to the discussions.

For fiscal-year reporters, the standard would apply retrospectively beginning after Dec. 15, 2022, except for the annual roll-forward information, which would be required prospectively in fiscal years beginning after Dec. 15, 2023.

During the year of adoption, when the amount of the obligation outstanding is disclosed in the first interim period, the information of the key terms of the programs and the balance sheet presentation of the program obligations should also be disclosed.

July 6, 2022 - FASB Eyeing International Rules to Revise the Definition of a Derivative

The FASB on June 29, 2022, signaled a strong interest in making changes to the definition of a derivative, including taking from the version used under international financial reporting standards (IFRS). No decisions were made.

“There’s been evolving practice over time in terms of thinking about where that definition might apply to contracts that I think people might have thought traditionally weren’t in scope,” FASB Vice Chair James Kroeker said.

“And I would even look at things like variable consideration in revenue, some of those things when the holder or the person making that payment has the transaction, I think people say are derivatives,” he said. “Well are those also derivatives for the revenue recipient or is there a scope exception and I think I would look first to the scope exception under IFRS that probably

more broadly or more clearly articulates that ‘if it’s basically a performance metric of one of the two parties to the contract that you would think about those types of things deferentially’ and I think there’s good reason for that so I would look at that.”

June 27, 2022 - Intangibles’ too Broad to Tackle Holistically, Targeted Disclosures Possible, FASB Signals

The FASB will not pursue adding a holistic project to its technical agenda on intangibles, finding the topic delves into a variety of issues that would make it a tough and fruitless endeavor.

Board members on June 22, 2022, said they would, however, be willing to do a targeted disclosure-only project on intangibles, if anything. No decisions were made.

“I don’t think recognition and measurement comprehensively is likely to be a fruitful project and I don’t think disclosure comprehensively is likely to be any more fruitful because of the different types of items that we’re talking about,” FASB Vice Chair James Kroeker said.

Research done to date by FASB staff on intangibles could be used to inform the board on other projects such as disaggregation of income statement expenses, and on software costs, according to the discussions.

“A broad-based technical agenda item on recognition and measurement of intangibles, I don’t think that’s achievable,” FASB member Fred Cannon said. “And it’s not achievable probably for a really good reason, that is intangibles are very diverse – everything from films to web applications, to goodwill, to human capital – there is a great diversity of accounting for these different things in large part because they’re so diverse,” he said. “And I don’t think we’re ever going to get to something meaningful for users on a broadbased intangible line item either recognition or even disclosures, so I strongly support

using this project as informative or potentially some discrete items.”

June 21, 2022 - Citing No Case for Change, FASB Drops Project to Fix Acquisition Accounting Rules

The FASB on June 15, 2022, unanimously voted to drop its project aimed at improving the accounting for asset acquisitions and business combinations, stating the case for rule changes had not been made

The five-year-old project aimed to narrow differences between acquisition models.

Staff’s latest research had been on potential alternatives for the initial and subsequent accounting for contingent consideration arrangements in a business combination, according to the discussions.

“I think that one of the most important objectives was to be able to narrow the differences, and I don’t think that we’ve heard a resounding need to change acquisition accounting here for some of those items,” FASB member Susan Cosper said. “And so with that in mind I think that some of the other areas that were posed as part of the [invitation-to-comment] feedback are clearly able to be subsumed into other projects,” she said. “I don’t think the feedback in the [invitation-to-comment] process was overwhelming either in terms of continuing with this project and so as I think about the board’s priorities I would vote to drop this project.”

Cosper was referring to Invitation-toComment ITC) No. 2021-004, Agenda Consultation, which the board issued in June 2021 to solicit public comment about its fiveyear technical agenda for 2022 to 2026.

The ITC received lukewarm responses on the topic, according to meeting papers.

The project was added to the board’s technical agenda in August 2017 as Phase 3 of definition of a business, following the completion of Phase 1 and Phase 2.

Patronage or Non-patronage? The Internal Revenue Service provides guidance on the determination of patronage for two rural telephone cooperatives.

By Michael E. Fincher & Connor Meinke

Introduction

TAXFAX EDITOR

George W. Benson Counsel

McDermott Will & Emery LLP

444 West Lake Street, Suite 4000 Chicago, Illinois 60606-0029 tel: (312) 984-7529 fax: (312) 984-7700 e-mail: gbenson@mwe.com

GUEST WRITERS

Michael E. Fincher

Managing Director

Deloitte Tax LLP

50 South Sixth Street, Suite 2800 Minneapolis, MN 55402 tel: (612) 397-4144 fax: (612) 692-4144 e-mail: mfincher@deloitte.com

Connor Meinke

Summer Intern, Deloitte Tax LLP

50 S. Sixth Street, Suite 2800 Minneapolis, MN 55402

During the first half of 2022, the Internal Revenue Service (the “Service”) released two private letter rulings (“PLRs” or a “PLR”) that addressed unique situations impacting rural telephone cooperatives. In the first PLR, the Service concluded that a portion of a gain realized by a consolidated corporate subsidiary of the cooperative could be excluded from consolidated gross income if properly allocated to the cooperative’s members.1 In the second, the Service concluded that income from the cooperative’s investment in both rural service area entities and metropolitan statistical area entities attributable to securing cellular services for its members is patronage income.2 In both PLRs, each cooperative was previously granted exemption under section 501(c)(12) of the Internal Revenue Code but was no longer receiving eighty-five (85) percent or more of its income from members.3 As such, each rural telephone cooperative was operating as a taxable cooperative corporation. This article provides an overview and analysis of each ruling and a few observations based on the facts and analysis included within each ruling.

1 See PLR 202214004 (April 8, 2022).

2 See PLR 202224003 (June 17, 2022).

3 Unless otherwise indicated, all “section” references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Treas. Reg. §,” “Prop. Treas. Reg. §,” and “Temp. Treas. Reg. §” references are to the U.S. Department of the Treasury (“Treasury”) regulations promulgated or proposed thereunder, respectively, by the Treasury and the Internal Revenue Service (the “Service”), both as in effect through the date of this article.

Overview of PLR 202214004

In PLR 202214004, the taxpayer is a rural telephone cooperative that is the parent of an affiliated group filing a consolidated federal income tax return with a calendar taxable year (“Coop Parent”). Coop Parent, either directly or through its subsidiaries, provides retail telecommunication services to its members and wholesale (i.e., resale) services to nonmembers. Although the number of subsidiaries of the group is unclear, the PLR indicates that one subsidiary (defined as “Consolidated Subsidiary”) “holds nonregulated telecommunication assets for the benefit of the cooperative and in furtherance of the cooperative’s telecommunication services.” Additionally, it appears that Consolidated Subsidiary provides telecommunication services to the members of Coop Parent and to non-member customers.

To grow its business and further serve the members of Coop Parent, Consolidated Subsidiary entered a partnership (the “Partnership”). Partnership was originally formed by Consolidated Subsidiary and one or more other rural telephone companies (defined as the “Founding Partners” within the ruling). Partnership was formed to leverage and combine the Founding Partners’ existing fiber optic networks into a broadband transport network they could use to connect their local exchange networks to major cities and deliver broadband telephone and internet services to customers in their respective service areas. During its operation, Partnership contracted with a limited liability company (defined as “Limited Liability Company B,” hereafter “LLC B”) to manage and operate its growing broadband telecommunications network on a day-to-day basis.

Sometime later, LLC B experienced

a change of control, and the Founding Partners no longer believed their interests and objectives were aligned with those of LLC B. Accordingly, the Founding Partners, including Consolidated Subsidiary, agreed to sell their equity interests in Partnership and the related broadband networks to LLC B. At that point in time, Consolidated Subsidiary owned a direct interest and an indirect interest (through its ownership of another joint venture) in Partnership. Eventually, Consolidated Subsidiary sold both the direct and indirect ownership in Partnership and realized a gain. According to the PLR, Coop Parent plans to use the sale proceeds to build out its local exchange network, improve services to its members and other customers, and focus on its core mission of bringing state-of-the-art telecommunications services to homes and businesses in the rural communities it serves.

The Service held that a portion of Consolidated Subsidiary’s gain from the sale of its direct and indirect ownership in Partnership is excludable from the determination of Coop Parent’s consolidated gross income provided the income is properly allocated to its members. The portion of the gain that constituted patronage-sourced income, and therefore excluded from the determination of the taxable income of Coop Parent, is the portion allocable to the members’ use of Partnership’s network.

In reaching this conclusion, the Service first provides an overview and legislative history with respect to rural telephone cooperatives, specifically with respect to the enactment of Subchapter T in the Revenue Act of 1962.4 In general, the legislative history provides that nonexempt telephone cooperatives (and nonexempt electric cooperatives, for that matter) are subject to pre-1962 cooperative law and therefore not governed by Subchapter T. Specifically, the

PLR states,” [w]hile Subchapter T does not control the taxation of nonexempt telephone cooperatives, its foundations rest upon pre1962 cooperative tax law. As a result, there are certain basic parallels between the tax treatment of nonexempt utility cooperatives and treatment of other cooperative organizations under Subchapter T. Therefore, to the extent that Subchapter T reflects cooperative taxation as it existed prior to 1962, it is in [sic] instructive resolving certain issues facing rural telephone cooperatives.”

Interestingly, before 1962, the definition of patronage-sourced income included profits realized on transactions with patrons and for patrons.5 Since 1962, the Code, case law and legislative history have consistently applied a “with or for” definition of patronagesourced income (i.e., business done with or for patrons).6 It is not clear from the ruling whether the Service relied upon the pre- or post-1962 definition of patronage-sourced income, or whether such difference mattered in this situation.

Since the Code does not define patronagesourced income for nonexempt telephone cooperatives, the PLR discusses potentially applicable guidance to determine whether

these gains would be excluded. The PLR discusses the following guidance: (i) Puget Sound Plywood, Inc. v. Commissioner;7 (ii) Farmers Cooperative Co. v. Birmingham;8 (iii) Pomeroy Cooperative Grain Co. v. Commissioner;9 and (iv) section 1388(a) and the related regulations under Treas. Reg. § 1.1388-1(a)(2)(ii) as it relates to “operating on a cooperative basis,” and Rev. Rul. 69-57610 and Farmland Industries, Inc. v. Commissioner11 with regard to the definition of patronage income and the “directly related test.”

In closing, the PLR provides that “since the Partnership was used to provide telecommunication services to [Coop Parent’s] members, the sale of these investments satisfies the directly related test and the portion of gain that is allocable to [Coop Parent’s] members use of Partnership’s network (member portion) of the gain is patronage sourced income.” The fact that Consolidated Subsidiary is treated as generating patronage income, might be important for future guidance. It appears, though not explicitly discussed, that the Service was willing to “look through” to the underlying activities of Consolidated

5 See G.C.M. 12,393, XII-2 C.B. 398, 398-399 (1933) (“distributions...made from profits on business transacted with or for others than the distributees [that is, with or for others than the patrons of the cooperative]” failed to qualify for the patronage deduction); I.T. 1499, I-2 C.B. 189, 191 (1922) (holding that a cooperative could deduct the amounts that it returned to its patrons “whether members or nonmembers, upon the basis of purchases or sales, or both, made by or for them”); Colony Farms Cooperative Dairy, Inc. v. Comm’r, 17 T.C. 688, 692 (1951) (upheld the right of a taxable cooperative “to exclude from its gross receipts earnings upon business done for or with its members”); Tax Treatment of Earnings of Cooperatives: Hearings Before the House Committee on Ways and Means, 86th Cong. 8 (1960) (Assistant Treasury Secretary Glasmann indicated that, prior to enactment of subchapter T, “[i]ncome derived from business carried on with or for patrons is taxable at the cooperative level unless pursuant to a pre-existing obligation, it is paid or allocated as a patronage refund in the year in which earned.”).

6 Section 1388(a). Also see Mississippi Valley Portland Cement Co. v. United States, 408 F.2d 827, 831 n. 7 (5th Cir. 1969) (“the statutory [subchapter T] and the preexisting judicial expositions [pre-1962 tax law] of the necessary elements of a patronage dividend are identical”); 108 Cong. Rec. 18,322 (1962) (In a floor colloquy held between senators Kerr and Magnuson at the time subchapter T was being considered by the Senate, Senator Kerr indicated that, under then current law, patronage-sourced income included income derived in connection with business done with or for the patrons of the cooperative.).

7 Puget Sound Plywood, Inc. v. Commissioner, 44 T.C. 305 (1965).

8 Farmers Cooperative Co. v. Birmingham, 86 F, Supp 201 (N.D. Ia. 1949).

9 Pomeroy Cooperative Grain Co. v. Commissioner, 31 T.C. 674 (1958), acq., AOD 1959-2 C.B. 6.

10 Rev. Rul. 69-576, 1969-2 C.B. 166.

11 Farmland Indus. v. Comm’r, 78 T.C.M. 846, 864 (1999), acq., AOD 2001-03.

Subsidiary such that they were conducted on behalf of Coop Parent (perhaps under an agency relationship), or that Consolidated Subsidiary was itself operating on a cooperative basis. Again, this level of detail was not included in the redacted ruling. There are other PLRs involving both pre-Sub T and Subchapter T cooperatives in which the Service reached a similar conclusion by either “looking through” the corporate subsidiary or was able to reach a conclusion that the subsidiary was itself operating on a cooperative basis.12 Perhaps this fact contributed to the need for Coop Parent to seek the ruling in the first place.

Overview of PLR 202224003

The taxpayer in PLR 202224003, also a taxable rural telephone cooperative, provides telecommunications and information services to its members in various counties across two states. According to the PLR, the cooperative recognized that other telephone companies began providing similar cellular service and could impact its existing customer base. In

addition, because of these new competitors, it could “potentially leave the cooperative with stranded investments in its wireline infrastructure. To safeguard its core wireline business and offer new cellular technology to its members, the cooperative decided to invest in new cellular technologies.”

Over a period of years, the cooperative made investment in both rural service area entities and metropolitan statistical area entities (collectively, the “RSA/MSA Entities”) to secure spectrum licenses which allowed the cooperative to provide cellular services to its members. For federal tax purposes, the cooperative historically characterized the income from the RSA/MSA Entities as nonpatronage; however, after consulting with its tax advisors the cooperative determined that these transactions would, more appropriately, be characterized as patronage income.

The Service provided an analysis in this PLR that was substantially similar to the analysis in PLR 202214004 (described in greater detail above), and further held that the income from

12 See e.g., PLR 201507004 (June 12, 2015) (the consolidated group’s “gain on sale of cellular-phone spectrum, which was purchased and sold by [the corporate subsidiary] in furtherance of [a pre-Sub T c]ooperative’s cooperative function, is patronage-sourced income and, therefore, excludable under cooperative tax laws applicable to taxable rural telephone cooperatives.”). Also see PLR 200209024 (March 1, 2002), PLR 9547015 (Nov. 24, 1995), and PLR 9443009 (July 19, 1994). Each of these rulings involved a Subchapter T cooperative that wholly owned a subsidiary that was performing activities on the behalf of the cooperative parent. After a rather lengthy analysis, the Service in each PLR held that the subsidiary itself was operating on a cooperative basis with the cooperative parent being the sole member.

13 Note that the Taxpayer requested the following ruling, which is a bit different than the ruling the Service provided: To the extent Cooperative’s income from RSA/MSA Entities, which were organized for the purpose of providing cellular service to its patrons, is attributable to securing cellular service for its patrons, such income is classified as patronage-sourced income. 14 See, e.g., PLR 201507004 (Feb. 13, 2015) (gain on the sale of the spectrum by the cooperative’s non-cooperative subsidiary); PLR 201515012 (April 10, 2015) (cooperative’s gain on the sale of the cellular-phone spectrum); PLR 201524002, PLR 201524003 and PLR 201524004 (June 12, 2015) (each member-cooperative partner requested a ruling that its distributive share of partnership income from and LLC’s sale of spectrum constituted patronage sourced income if properly allocated to its member-patrons); PLR 201123038 (Mar. 18, 2011) (sale of stock in corporation, which held interests in a limited partnership that held spectrum and made cellular telephone technology available to members); PLR 200907014 (Oct. 23, 2008) (sale of general partnership interest that held spectrum and developed and operated the cellular telephone system); PLR 200627007 (Mar. 7, 2006) (sale of stock in a joint-venture corporation that held spectrum and constructed and operated the cellular telephone system); PLR 200404003 (Oct. 10, 2003) (cooperative’s sale of spectrum); and PLR 200239029 (Sept. 27, 2002) (gain from the sale of stock in corporate joint venture that was organized to design, construct, and manage a personal communications services network and hold the spectrum license, constituted patronage sourced income).

Also see, Gain from Sale of Cellular-Phone Spectrum Considered Patronage Sourced Income for Rural Telephone Cooperatives – The Cooperative Accountant, Fall 2015, by: Michael E. Fincher, Matthew R. Wilson, and Anna J. Borden; Copyright © 2015 Deloitte Tax LLP.

RSA/MSA Entities attributable to securing cellular service for its members is patronage income. Specifically, the PLR provides, “[s] ince the RSA/MSA Entities were used for the purpose of securing cellular service for Taxpayer’s patrons, income from these investments satisfies the directly related test. The portion of income that is allocable to Taxpayer’s patrons’ use of the RSA/ MSA Entities’ networks is directly related to securing cellular service for Taxpayer’s patrons and is patronage sourced income, which may be excluded from Taxpayer’s income if properly allocated to Taxpayer’s patrons.”13 The conclusions reached in this ruling are consistent with others in which the Service reached similar conclusions when rural telephone cooperatives were allowed to treat the gain on the sale of cellular spectrum as patronage income.14

Given the cooperative historically treated

the income from the RSA/MSA Entities as nonpatronage, it would be interesting to know whether the cooperative will be able change its original characterization via an amended return or otherwise. Although this topic was not explicitly addressed within the PLR, generally a Subchapter T cooperative would not be able to change the patronage allocation through amending a prior year return.15 Whether the payment period rules of section 1382(d), or an equivalent rule, applies to a pre-Sub T cooperatives is less clear. Based on the court’s holding in Santel Communications Cooperative, Inc. vs. U.S. (“Santel”)16, although not free from doubt, it may be possible to change a prior year patronage allocation, allocate the updated amount to the members, and amend a preSub T cooperatives tax return, provided the statute of limitations under section 6511 has not passed.17

15 Section 1382(d) requires the determination, allocation, and / or payment of patronage is completed during the period beginning with the first day of the taxable year and ending with the fifteenth day of the ninth month following the close of the taxable year.

16 Santel Communications Cooperative, Inc. vs. U.S. (U.S. Dist. Court, D. South Dakota, March 12, 2010). Much like the two cooperatives from the two PLRs discussed above, Santel provided telephone services to its members. Nine years after Santel purchased cellular licenses and formed three corporations to hold the licenses and related business operations, Santel sold its stock in the three corporations and realized a capital gain. At that time, the Service maintained the position that capital gains were per se nonpatronage (See Former Treas. Reg. § 1.1382-3(c)(2) that defined nonpatronage-sourced income to include income derived from the sale or exchange of capital assets).

One year later, the court in Farmland Industries, Inc. v. Commissioner (cited by both PLRs discussed above) rejected the Service’s per se rule, noting that Former Treas. Reg. § 1.1382-3(c)(2) was called “hopelessly equivocal,” stating: [W]e decline to abandon the directly related test that has been used by this and other courts to distinguish patronage from nonpatronage items and to adopt [the Service’s] per se nonpatronage rule for capital gains and losses. Accordingly, in this case our task is to determine whether each of the gains and losses at issue was realized in a transaction that was directly related to the cooperative enterprise, or in one which generated incidental income that contributed to the overall profitability of the cooperative but did not actually facilitate the accomplishment of the cooperative’s marketing, purchasing, or service activities on behalf of its patrons.

The court ultimately ruled that the directly related test applied for purposes of characterizing capital gains as patronage or nonpatronage-sourced income. On March 27, 2001, the Service issued a formal memorandum announcing its acquiescence with the Tax Court's finding in Farmland Industries, Inc. v. Commissioner (1999 Tax Ct. Memo 443 (1999)).

As a result of the Service acquiescence in Farmland, Santel allocated $3.9 million of the gain from the 1998 transaction as part of its 2000 patronage allocation and excluded that amount from its 2000 tax return. With this exclusion Santel reported a net operating loss of $3.7 million in 2020, which it carried back under the normal carryback procedures. The Service argued, and the court agreed, that 2000 was not the correct year for excluding the gain, as the gain was a 1998 transaction, and that Santel should have amended its 1998 return to claim the exclusion. Unfortunately, the time-period under section 6511 for amending the 1998 return and claiming a refund had passed and therefore, Santel was barred from doing so.

17 Section 6511(a) provides that a claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within three years from the time the return was filed or two years from the time the tax was paid, whichever of such periods expires the later.

While each of the recently issued PLRs reach a conclusion similar to a group of analogous PLRs issued by the Service in 2015 related to the sale of cellar spectrum, each of the rural telephone cooperatives had a unique set of facts.18 Because pre-Sub T cooperatives are principally governed by pre-1962 cooperative law, and not directly by Subchapter T of the Code, it’s no wonder these two cooperatives found value in obtaining a PLR to ensure the appropriate tax treatment for the cooperative as well as its members.

Copyright © 2022 Deloitte Development LLC. All rights reserved. This article contains general information only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this article.

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Taxation of Credit Unions

By George W. Benson

Credit unions are “cousins” to the kinds of Subchapter T cooperatives that are serviced by members of the National Society of Accountants for Cooperatives. They are member-owned and controlled and dedicated to providing a service to their members. Credit unions are, however, subject to a very different tax regime.

• Those with a federal charter are exempt pursuant to Section 501(c)(1) as government instrumentalities. Their exemption is based on Section 122 of the Federal Credit Union Act (12 U.S.C. § 1768) and extends broadly (but does not cover state and local real property and personal property taxes).

• State-chartered credit unions “without capital stock organized and operated for mutual purposes and without profit” are exempt pursuant to Section 501(c)(14).

Because they are exempt under Section 501(c)(1), federal credit unions do not have to file annual tax returns Form 990. Many years ago, what are now referred to as “exempt” Section 521 farmer cooperatives had a similar status, but that changed in 1951. Federal credit unions are not subject to the unrelated business income tax (“UBIT”) that applies to most kinds of exempt organization. Thus, they were not affected by the new siloing

Gain from Sale of Cellular-Phone

Income for Rural Telephone

The Cooperative Accountant, Fall 2015, by: Michael E. Fincher, Matthew R. Wilson, and Anna J. Borden; Copyright © 2015 Deloitte Tax LLP.

rules applicable to UBIT that were enacted as part of the Tax Cuts and Jobs Act of 2017 (“TCJA”) and to limitations placed upon net operating loss carryovers by the TCJA.

By Barbara A. Wech

In contrast, state-chartered credit unions are required to file annual tax returns on Form 990 and are subject to UBIT.

Income subject to the UBIT bears some similarity to nonpatronage income for nonexempt cooperatives. Generally, UBIT applies to items of income from a trade or business engaged in by an exempt organization that are not sufficiently related to the activities engaged in to accomplish the organization’s exempt purpose. This ultimately is a factual question.

There has not been as much litigation over the scope of UBIT for state-chartered credit unions as there has been as to the scope of nonpatronage income for nonexempt Subchapter T cooperatives. However, two cases were litigated a few years ago. They concluded that income from the sale of various kinds of insurance to members in connection with their loans was not UBIT. See, Community First Credit Union v. United States, 2009-2 USTC ¶ 50,496 (D. Wis. 2009) (credit life and disability insurance and guaranteed asset protection insurance) and Bellco Credit Union v. United States, 735 F. Supp. 2d 1286 (D. Col. 2010) (credit life and disability insurance and royalties from the sale of accidental death and dismemberment insurance). Other kinds of income were also involved in those cases.

After those decisions, the IRS released guidance in the form of a Memorandum for All Exempt Employees dated March 24, 2015, observing:

“Under Treas. Reg. § 1.513-1(d)(2), for the conduct of a trade or business from which gross income is derived to be substantially related to the entity’s exempt purposes, the production or distribution of the goods or the performance of the services from which the gross income is derived must contribute

importantly to the accomplishment of those exempt purposes. Whether activities that produce gross income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved. To determine whether an activity of a credit union is substantially related for purpose of UBIT, each activity and all the facts and circumstances surrounding that activity must be examined to determine the activity’s relation to the organization’s exempt purpose.”

The Memorandum stated that the following kinds of income earned by a state-chartered credit union are not subject to UBIT: sale of checks/fees from a check printing company, debit and credit card program’s interchange fees, interest from credit card loans and sale of collateral protection insurance. On the other hand, income (other than from “a royalty arrangement (rather than payment for a credit union’s services)”) from marketing the following insurance products generally independent of loans to members are subject to UBIT: automobile warranties, dental insurance, cancer insurance, accidental death and dismemberment insurance, life insurance, and health insurance. In addition, ATM “pertransaction” fees from nonmembers are subject to UBIT. Finally, the Memorandum announced that the IRS would follow the two District Court cases in their treatment of credit life and disability insurance, guaranteed asset protection insurance and royalties from selling accidental death and dismemberment insurance.

For years, the banking industry (and, particularly, community banks) has opposed tax exemption for credit unions in general and the special tax treatment of federal credit unions. It has actively lobbied Congress to change those rules. An example of this opposition is a recent letter to the Chairmen and Ranking Members of the tax writing committees of Congress dated February

28, 2022 asking that Congress “require federal credit unions to file IRS Form 990 to provide transparency into their tax-exempt expenditures.”

The credit union industry strongly opposes efforts to change the tax status of credit unions. For instance, the National Association of Federal Credit Unions states that “preserving the credit union tax exemption continues to be our top priority.” See, https://www.nafcu.org/cutaxexemption.

The TCJA included a new Section 4960 imposing a 21% excise tax on exempt organizations paying compensation in excess of $1 million to top executives. Prior TAXFAX columns have described how this section applies to Section 521 cooperatives (though few, if any, pay top executives more than $1 million).

That section applies generally to organizations exempt under Section 501(a). That clearly sweeps in state-chartered credit unions. Federal credit unions are also exempt under that section so, at least on the surface, they appear subject to the new excise tax. However, there may be arguments that the statutory exemption contained in the Federal Credit Union Act is broad enough to cover the new excise tax.19

When the proposed Section 4960 regulations were released, some other government instrumentalities with similar statutory exemptions argued that their exempt status should extend to Section 4960. The preamble to the final regulations states that the Treasury and the IRS are continuing to study “whether section 4960 should apply to Federal instrumentalities for which the enabling acts provide for exemption from all current and future Federal taxes. Until further

guidance is issued, a Federal instrumentality for which an enabling act provides for exemption from all current and future Federal taxes may treat itself as not subject to tax under section 4960 as an ATEO [applicable tax-exempt organization] or related organization.” T.D. 9938 (January 19, 2021), emphasis added. The Federal Credit Union Act’s exemption does not use the words “all current and future Federal taxes,” but it does provide for exemption “from all taxation now or hereafter imposed by the United States or by any State, Territorial, or local taxing authority” with several identified exceptions. However, for now, it appears that many federal credit unions are proceeding under the assumption that they are subject to Section 4960. It will be interesting to see whether any federal credit union potentially subject to tax as a result, will assert that it is exempt from that tax.

This new excise tax is reported on Form 4720, Schedule N. For a state-chartered credit union, this form is to be filed along with its Form 990. Federal credit unions were concerned that they might be required to begin filing Forms 990 to report any liability

19 How broadly that exemption and other similar exemptions for federal instrumentalities extend has been the subject of litigation over the years. On its face, the exemption in the Federal Credit Union Act is very broad, but some courts have found exceptions. For instance, the imposition of a New York mortgage recording tax on federal credit unions has been upheld by its highest state court. Hudson Valley Federal Credit Union v. New York, 980 N.E.2d 473 (N.Y. 2012). Last year, that court refused to reconsider the holding in that case, denying a motion for leave to appeal in a class action case challenging imposition of the tax on federal credit unions and their customers. See, O’Donnell & Sons, Inc. v. New York, 175 N.E.3d 1254 (N.Y. 2021). The taxpayers in O’Donnell recently filed a petition for a writ of certiorari asking the U.S. Supreme Court to hear an appeal in that case.

The credit union industry strongly opposes efforts to change the tax status of credit unions. For instance, the National Association of Federal Credit Unions states that “preserving the credit union tax exemption continues to be our top priority.”

TAXFAX

to this new excise tax. It has been clarified that is not the case. If subject to the tax for a year, federal credit unions may simply file a Form 4720 for that year by 15th day of the fifth month after their fiscal year end (May 15 for calendar year organizations) in accordance with instructions to that form.

There is no explanation for the drop in reported returns for 2019.

IRS 2021 Data Book

By George W. Benson

As in the past, this year’s IRS Data Book provides some information as to tax returns (Form 1120-C) filed by Subchapter T cooperatives. I, Publication 55-B (May 2022).

The Data Book aggregates Form 1120-C returns with other Form 1120 returns in the information it provides regarding the number of returns filed for fiscal years 2020 and 2021. So it does not reveal the number of cooperative returns filed in those years.

It does continue to list Form 1120C returns separately in a series of tables showing audit rates for the returns filed for the years 2011 through 2019 for each year. There have been anecdotal reports of very few audits in recent years, and the tables bear that out:

Return Returns Filed Audited (%)

2011 8,963 0.4

2012 9,127 0.4

2013 9,347 0.3

2014 9,395 0.3

2015 9,504 0.3

2016 9,475 0.2

2017 9,330 0.2

2018 9,324 0.1

2019 8,612 *

*less than 0.5%

To put this information in perspective, it should be compared with the audit rate of regular corporate returns, which is much higher. For companies with balance sheet assets of $50 million to $1 billion, the audit rate for returns filed in 2018 was roughly 5%. It was 11.3% for corporations with assets of between $1 billion and $5 billion, 26.0% for corporations with assets between $5 billion and $20 billion, and 52.3% for corporations with assets greater than $20 billion.

The Data Book provides several other snapshots of audit activity. It shows that there were 24 examinations of cooperative returns which were closed during the fiscal year ended September 30, 2021 (“FYE 2021”), all of which were field audits. These examinations collectively resulted in proposed deficiencies of $14,839,000. Detail is not provided on how much of this was agreed and how much unagreed. (Note this information is of audits closed. The audits likely covered returns originally filed in a variety of prior years.)

There were 15 examinations of amended returns closed during FYE 2021. Of these, 7 resulted in denied refund claims totaling $1,753,000 (what the Data Book describes as “protection of revenue base”), and 8 resulted in recommended refunds totaling $27,853,000. While the Data Book does not say, it is likely that the successful refund claims largely involved net operating loss carrybacks.

The other bit of information contained in the Data Book relates to closures of Section 521 applications during FYE 2021. It reveals that no Section 521 application was denied during the year. However, information as to the number of requests processed and approved during the year has been redacted, and without that information knowing that no request was denied is not very useful.

NOTE: We would like to acknowledge and thank NCFC for allowing us to reproduce these articles below from their 2021 Legal, Tax, and Accounting Subcommittee Reports

In our report, we will address the following developments during the year:

A. Update on Section 199 cases

B. New Section 199A

C. Section 163(j) – Final Regulations

D. PPP Loans and impact on Cooperatives

A. Update on Section 199 Cases:

There were several issues that arose with the application of Section 199 with many cooperatives. One involved the fact that many grain cooperatives did not initially understand that their grain check payment to the member/farmer was a “per unit retain paid in money” (PURPIM) under Subchapter T. When the IRS National Office issued a private letter ruling to one large grain marketing and supply cooperative, many other grain cooperatives took note, and began to amend their returns to take the Section 199 deduction (aka Domestic Production Activities Deduction

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

Reprinted by permission –Selected Articles from 2021 NCFC Legal, Tax and Accounting Subcommittee Reports

or DPAD). The IRS did not approve of these amendments, and began auditing the returns it found. When the IRS denied the claim because it believed that the grain check could not be a PURPIM if the member and cooperative did not understand that at the time, the cooperatives protested. IRS Appeals ultimately offered a settlement that almost all cooperatives impacted accepted. However, Ag Processing filed suit in Tax Court on several issues, and one of the issues is whether a cooperative can go back and correct its original treatment of grain payments. This case has been decided in Tax Court.

The other major issue that has persisted is whether nonexempt cooperatives are required to do two DPAD computations (one for patronage activities and another for nonpatronage/nonmember activities). The IRS says that the cooperative must do two because of the decision in the Farm Service case. Some cooperatives disagree and do a single computation. Others disagree with the IRS, but do not want to run the risk of being wrong, particularly where they are passing through large amounts of DPAD to their

TCA SMALL BUSINESS FORUM

members. Two cases have been decided in Tax Court this year involving this issue – Ag Processing and GROWMARK.

In the case Ag Processing Inc., a Cooperative and Subsidiaries, Petitioner v. Commissioner of Internal Revenue, Respondent, Docket No. 23479-14 (issued October 16, 2019), Tax Court Judge Elizabeth Paris ruled payments AGP made to its members (and similar payments it received from a cooperative of which it was a member) are per-unit retains paid in money (PURPIMs) and should be treated as such in computing its section 199 domestic production activities deduction (DPAD).

Judge Paris further ruled that section 199(d)(3) does not require separate DPAD computations for patronage and nonpatronage activities. However, once DPAD is computed it must be allocated between patronage and nonpatronage activities.

Finally, Judge Paris ruled on the issue of whether AGP’s expanded affiliated group may have a net operating loss (NOL) if its DPAD -- after allocating to its patronage and nonpatronage accounts -- exceeds its taxable income. The judge concluded reg. section 1.199-7 does not apply, so under section 172(d)(7) DPAD may not be used to create or increase an NOL.

In the case GROWMARK Inc. & Subsidiaries, Petitioner v. Commissioner of Internal Revenue, Respondent, T.C. Memo 2019-161 (issued December 11, 2019), Tax Court Judge Elizabeth Paris ruled that section 199(d)(3) does not require separate domestic production activities deduction (DPAD) computations for patronage and nonpatronage activities. However, once DPAD is computed it must be allocated between patronage and nonpatronage activities.

Judge Paris further ruled that because the Schedule G allocation is done pursuant to subchapter T (not section 199), the taxpayer

should allocate the aggregated DPAD on its Schedule G using the same method it used for other Schedule G allocations.

GROWMARK had argued that its DPAD should be allocated on the basis of its qualified production activities income (QPAI).

In summary, these two cases conclude the following:

• DPAD should be determined on an aggregate basis.

• The resulting amount should then be allocated between patronage and nonpatronage.

• Patronage DPAD may not be used against nonpatronage income.

• The cases do not address the reverse situation on using nonpatronage DPAD against patronage income.

The final outcome on these cases is to be determined upon the agreement of the parties to the specific computation methodology. In Ag Processing, the years under exam in the case were 2008 and 2009. Ag Processing computed the DPAD on a total company basis, and then allocated the DPAD to patronage and nonpatronage activities based on their patronage/ nonpatronage percentages in those years. This put more DPAD to their nonpatronage activities in those years. The IRS has argued that the allocation of the DPAD should be based on QPAI (Qualified Production Activities Income). This would put more of the DPAD on the patronage side in years when nothing can be allocated to the members. GROWMARK will have a similar issue with the IRS when the energy credit portion of their case is finally resolved. As they say, the devil is in the details.

While these cases relate specifically to prior Section 199, it is expected that the decisions will play a role in how the new Section 199A(g) is handled by cooperatives. The current Final Regulations for Section 199A(g) take a “no netting” position for

DPAD, specifically stating that patronage DPAD cannot be used against nonpatronage income, and nonpatronage DPAD (of an exempt cooperative) may not be used against patronage income. In addition, the Final Regulations state that nonexempt cooperatives will do a patronage-only DPAD computation, without nonpatronage Qualified Production Activities Income (QPAI) and wages. It also states that exempt cooperatives will do separate patronage and nonpatronage computations. Both Ag Processing and GROWMARK cases state that cooperatives are not required to do separate computations. The Ag Processing approach is inconsistent with the approach taken by the Proposed Regulations for exempt cooperatives, and simply exclude nonpatronage items for nonexempt cooperatives. As Treasury and the IRS are still working on the revisions to the Proposed Regulations for Section 199A(g), we will have to wait to see what they do in response to these cases.

B. New Section 199A: Section 199 was repealed effective December 31, 2017. New Section 199A(g) was structured to allow agricultural and horticultural cooperatives to continue to use the rules of old Section 199 to compute a benefit similar to the old Section 199 amount. The rules allowed the cooperative to pass-through all, some, or none of the new Section 199A(g) deduction to the members, but the members filing individual or pass-through entity returns (such as partnership or S corporation) would have to adjust their own Section 199A(a) computation. The rules also indicated that a C corporation member who received a passthrough of the 199A(g) deduction could not use it in computing the C corporation’s tax.

Congress gave Treasury the authority to write regulations to address issues in the new Section 199A, including Section 199A(g).

Over the course of the last 18 months, Treasury and the IRS have issued a number of proposed and some final regulations in this area. The Proposed Regulations for Section 199A(g) were issued in June 2019. The Treasury Department did not act on the final regulations for Section 199A(g) until January 14, 2021 after OMB’s Office of Information and Regulatory Affairs (OIRA) completed its review of the final regulations on January 8, 2021. The Treasury Department and OMB were working to issue the final regulations related to the Tax Cuts and Jobs Act prior to the change in the Administration. Thus, the final regulations for Section 199A were published in the Federal Register on January 19, 2021. A copy of NCFC’s Analysis of the Final Section 199A(g) Regulations and Action Steps memo is attached to our report.

We are highlighting a few areas of discussion that have been raised in our Subcommittee discussion:

• The definition of “patronage” in the Regulations

• The Regulations dropped the “bucketing of losses” concept

• The Preamble in the Regulations discusses “book/tax” and restored the language in the old Section 199 regulations

NCFC’s goal remains preventing a tax increase on farmers and ranchers at a time when they can least afford it and work done by many of our members has been critical in making that case. A summary of NCFC’s Analysis of Final Section 199A(g) Regulations and Action Steps is attached. Issues that have been raised by LTA members of our Committee include:

• What are the implications to a cooperative that is using the federal tax basis for the provisions of the TCJA of 2017, including Section 199A, interest expense limitations, bonus depreciation and other depreciation issues, and new meals and entertainment limitations?

TCA SMALL BUSINESS FORUM

• What are cooperatives doing to communicate the new Section 199A changes to their members? An additional aspect to this issue is the fact that the new Section 199A pass-through 199A(g) deduction cannot be used by “C” corporation members. Many cooperatives have considered ways to identify those members, but have mostly decided not to attempt to do so as the members can change their status at any time, and so it is difficult to make use of the information. Cooperatives are trying to be sure their membership understands that the Section 199A(g) deduction cannot be used by a C corporation member.

• What is being done on cooperative Form 1099-PATR, particularly with new box 7 for “qualified payments”?

• Many more cooperatives allocated their old Section 199 deduction (DPAD) to their members before December 31, 2017 in order to ensure that it may be used by members. The amended law passed in March 2018 was made retroactive to January 1, 2018, but it did allow the cooperative to compute and pass through its old DPAD after the end of its fiscal year, and the members are allowed to claim it. There are a number of issues that have been raised by this situation.

v There was no guidance in the old regulations on how these early allocations would be done. There is a wide variety of approaches that have been taken. What will be the IRS/ Treasury reaction to this situation?

v Now that more cooperatives have accelerated the deductions, many cooperative managers and tax practitioners believe that the members will want this to continue. So now it may be helpful to have some guidance or discuss the issue more openly in our cooperative meetings to develop some guidelines.

v Cooperatives may also be interested in advising their members earlier in the year about the likely amounts that will be distributed to facilitate the members’ tax planning.

C. Final Regulations under Section 163(j) –Implications for Cooperatives: On July 28, 2020, the Treasury Department released final regulations with guidance on applying the limitations on the deductibility of

business interest expense (BIE) under IRC Section 163(j) (the Final Regulations), which was significantly modified by the Tax Cuts and Jobs Act (TCJA) and then temporarily modified by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Final Regulations provide guidance on what constitutes interest for purposes of the limitation, how to calculate the limitation, which taxpayers and trades or business are subject to the limitation, and how the limitation applies in certain contexts (e.g., consolidated groups). The final regulations were published in the Federal Register on September 14, 2020 and contain minor editorial changes. In response to questions from taxpayers and practitioners, the final regulations published in the Federal Register clarify that taxpayers may rely on the final regulations for any taxable year beginning after December 31, 2017, provided that certain conditions are met.

· Background IRC Section 163(j) limits the deduction for business interest expense for tax years beginning after December 31, 2017, to the sum of

• the taxpayer’s business interest income (BII),

• 30% (or 50%, as applicable) of the taxpayer’s adjusted taxable income (ATI), and

• the taxpayer’s floor plan financing interest.

It is important to note that the 30% limitation applies to taxpayers for years

beginning after January 1, 2021 (i.e. for 2021 tax returns). The limitation has been at 50% for the last few years, so this may impact some cooperatives in the calendar 2021 or fiscal 2022 year. The depreciation adjustment will end in the calendar 2022 or fiscal 2023 year.

Business interest expense (BIE) is interest that is paid or accrued on indebtedness that is properly allocable to a trade or business. The IRC Section 163(j) limitation does not apply to certain trades or businesses, such as an electing real property trade or business, an electing farming business and certain activities of regulated utilities. Certain activities, such as performing services as an employee, are excluded from being a trade or business. The business interest expense limitation also does not apply to certain small businesses whose average annual gross receipts for the three preceding years are $26 million or less. The $26 million threshold applies for the 2020 tax year and will be adjusted annually for inflation.

An electing farming business means (1) a farming business (as defined in section 263A(d)(1)) which makes the election, or (2) any trade or business of a specified agricultural or horticultural cooperative (as defined in section 199A(g)(2)) with respect to which the cooperative makes the election. An electing farming business must use the alternative depreciation system, see section 168(g)(1(G). This covers all depreciable assets of the trade or business.

· Selected Significant Changes from Proposed Regulations The final regulations are 569 pages and cover a wide array of issues. This section is focused on only some of the significant changes from the Proposed Regulations, and particularly ones that impact cooperatives. There are likely to be some issues that will impact your cooperative that are not covered here. Therefore, it is recommended that the reader review the Final Regulations in their entirety.

The most important for cooperatives is Treas. Reg. 1.163(j)-4(b)(6) which provides for purposes of computing its ATI, a cooperative’s tentative taxable income is not reduced by the amount of any patronage dividend under Section 1382(b)(1) or by any amount paid in redemption of nonqualified written notices of allocation distributed as patronage dividends under section 1382(b) (2), any amount described in section 1382(c), or any equivalent amount deducted by an organization that operates on a cooperative basis but is not subject to taxation under sections 1381 through 1388. This is a positive addition for cooperatives that was requested by NCFC. The Final Regulations are careful to only allow an add-back for patronage dividends as defined in Section 1388(a), and not for per-unit retain amounts under Section 1382(b)(3) or (4), either paid in money or written notices of allocation. Cooperatives should note this difference and determine the impact on their situation. The rules also apply to those cooperatives that operate under pre-Subchapter T rules, such as certain rural electric and rural telephone cooperatives.

Treas. Reg. 1.163(j)-9 discusses the rules related to the election allowed for certain excepted trades or businesses, including agricultural and horticultural cooperatives and small businesses with less than $26 million in average annual gross receipts in 2020 (indexed for inflation). These small businesses can include other types of cooperatives. The election applies to the taxable year in which the election is made and all subsequent taxable years. The election is irrevocable. The taxpayers making this election must use the alternative depreciation system for certain types of property under section 163(j)(11) and cannot claim the additional first year depreciation deduction under section 168(k) for those types of property. The Final Regulations contain information on the time and manner

of making the election and the information to be included in the election statement. The election automatically terminates if a taxpayer ceases to engage in the electing trade or business. Example 1 of the Final Regulations illustrate the importance of determining and identifying the electing trade or business. In this example, a sole proprietor farmer had two trades or businesses – a dairy and orchard. He made the election only for the dairy.

Many cooperatives with inventories will be positively impacted by one of the significant changes from the 2018 Proposed Regulations. The Final Regulations permit depreciation, amortization or depletion that is capitalized into inventory under IRC Section 263A to be added back to TTI when calculating ATI for that tax year. This addback is allowed for taxable years beginning before 2021. In this regard, the Final Regulations allow taxpayers that previously chose to follow the 2018 Proposed Regulations to follow the Final Regulations.

The Final Regulations contain changes in the definition of “interest”, expanded anti-avoidance rules, changes related to the CARES Act, and the relationship to other tax provisions that affect interest deductions. There are other rules in the Final Regulations that may impact cooperatives that are part of a consolidated group or have investments in partnerships.

In December 2020, the Treasury Department issued final regulations addressing some additional areas under Section 163(j), specifically the application of the limitation in contexts involving passthrough entities, regulated investment companies (RICs), and controlled foreign corporations. The regulations also provide guidance regarding the definitions of real property development and syndicate. Cooperatives with these types of issues should review them for guidance.

Most cooperatives that the Subcommittee

has discussed this with say that the Section 163(j) limitation will be a much bigger issue in 2 years when the limitation is based on Earnings before Taxes only, rather than now where the limitation is based on Earnings before Interest, Depreciation and Taxes.

Congress was considering major changes to the tax law this Fall. One of the items under consideration is limiting the carryover period for the interest expense limitation to just 5 years. Currently the law allows an unlimited carryover period. While Congress failed to pass new tax law this fall, this is another area to watch.

D. PPP Loans and Impact on Cooperative’s Patronage Dividend:

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 created a government loan program called the Paycheck Protection Program (PPP). Farmer cooperatives that meet the size criteria under the program (generally under 500 employees for PPP) are eligible. PPP provides $349 billion for small business loans to cover qualified payroll costs, rent, utilities, and interest on mortgage and other debt obligations. The loan amounts will be forgiven as long as:

• The loan proceeds are used to cover payroll costs and most mortgage interest, rent, and utility costs over the covered period (8-weeks or 24-weeks) after the loan is made; and

• Employee and compensation levels are maintained.

There are many issues related to the PPP program that are being addressed by other Subcommittees. In our report, we will focus on whether the PPP loan amount that is forgiven is considered patronage income, and what the results will be for a cooperative’s patronage dividend deduction where the cooperative is using the book (GAAP) method of paying patronage, the

tax (federal income tax) method of paying patronage, or a hybrid method of paying patronage.

In December 2020, Congress passed the SECURE Act which, among other things, confirmed that expenses paid by a taxpayer that are used to justify the taxpayer’s PPP loan forgiveness are deductible on the taxpayer’s federal income tax return. (N.B. The state tax treatment is dependent on each state’s tax law.)

For book (GAAP) purposes, the PPP loan forgiveness is recognized as income when the loan is forgiven, or when it is clear that the borrower has met the conditions for forgiveness under the law. The expenses that were used to support the forgiveness are also deductions for GAAP purposes. So there is a net zero effect of the loan forgiveness for GAAP purposes on net income. For federal income tax purposes, the PPP loan forgiveness is not recognized as income when the loan is forgiven. The expenses that are used to support the forgiveness are also deductions for federal income tax purposes. So there is a net loss effect on the loan forgiveness for federal income tax purposes on net income.

For example, assume the cooperative has $1,000,000 in GAAP and federal income tax income before getting a PPP loan. It gets a PPP loan of $1,000,000 in 2020, and incurs $1,000,000 in qualified PPP expenses in the applicable forgiveness period. The GAAP and federal income tax income for the cooperative would be as follows:

The cooperative using the book (GAAP) method of paying patronage needs to determine how much of the income is related to patronage, and then consider the need for reasonable reserves and potential issues related to the SBA’s audit of their PPP loan forgiveness documentation. After considering these factors, a patronage dividend can be issued at the direction of the Board.

The cooperative using the federal income tax method of paying patronage does not have any income to distribute because the PPP loan forgiveness is not considered federal taxable income but the expenses used to support the loan forgiveness are deductible.

Since the pandemic started so quickly and the government’s response with the PPP loan program has had many issues, it is unlikely that any cooperative boards were able to make adjustments to their patronage computations before the beginning of the cooperative’s tax year. Even those with a hybrid method or those that allow the board to adjust the patronage computation would still have to do it before the beginning of the tax year.

GAAP Fed Tax Income

GAAP and Federal Tax Income $1,000,000 $1,000,000

PPP loan forgiveness income $1,000,000 $ 0

PPP loan expenses ($1,000,000) ($1,000,000)

Net income for patronage purposes $1,000,000 $ 0

For the cooperative that is on the book basis and wants to pay out the PPP as part of their patronage dividend, a note of caution has been raised by our Subcommittee members. The concern of some practitioners is how an SBA audit of the PPP application would look at the payout of the PPP funds to members as a patronage dividend. The question may be raised as to whether the PPP funds are really patronage income. While there are certainly strong arguments as to the patronage character of the PPP funds, it may be an issue that would be costly to resolve with the SBA.

Published March 10, 2021

Chad Davis, CPA (Canada), had been successfully working remotely for years when the coronavirus pandemic forced many accounting firms to go fully remote. He and Josh Zweig, CPA (Canada), founded LiveCA, a fully virtual accounting firm in Canada in 2013. Zweig was focused on tax and Davis on technology, so the two meshed well, especially since neither of them wanted to work from a brick-and-mortar office.

“We spent two days in the woods, camped, and emerged with a handshake and a new company,” Davis said.

Eight years later, LiveCA is thriving, employing about 80 people, and handling both Canadian and American clients. Adventurous Zweig, originally from Toronto, travels the world and works from various posts. Davis, from Nova Scotia, works full time from his large RV, which he shares with his wife, two children, and two dogs.

In January 2021, Davis was sitting in his RV office in a beautiful part of Canada. “I’m in a campground on Vancouver Island in British Columbia and came here to isolate for the

winter,” he said. Meanwhile, Zweig was caught in a lockdown in Argentina.

Davis and Zweig have been at the forefront of a trend the pandemic accelerated.

Only 4% of 223 CPA firms polled in the summer of 2020 said they were fully virtual heading into the pandemic, according to research by ConvergenceCoaching, a U.S. company offering training services to the public accounting profession. About three-fifths (61%) of the firms said they had some remote talent, and 27% said they had been strictly in-office pre-coronavirus.

Once the pandemic ends, 81% of firms expected an increase or a significant increase in remote working among their employees, the survey said. Nearly one-third (30%) projected reducing their office footprint post-pandemic.

The coronavirus has changed the business landscape significantly. Many accounting firm leaders, who were once reluctant to allow employees to work from home or other locations, now realize the value of a remote workforce, especially when it comes to recruiting and retaining talent. But working remotely can also create challenges, such as communicating with and managing

employees, setting up necessary technology, and establishing and enforcing processes and policies for a virtual working environment.

9 ways to make remote working successful

What does it take for accountants to thrive when working virtually? Does it require changing interaction styles with clients or prospective employees?

“Networking is about building relationships, and whether this is face-to-face or online, it’s about getting people to connect with you, and we do this through our personality, our behavior, and our communication,” said Sue Tonks, a UK-based leadership coach and entrepreneur, at the online 2020 AICPA & CIMA Women’s Global Leadership Summit in November.

However, people only have three seconds to create an effective first impression when communicating with others online, Tonks said. “All people can see of you is a rectangular box,” she said about Zoom and other online platforms. “This is our stage.”

Other challenges include feeling isolated, tired, or lonely; lacking motivation; dealing with distractions, often from children or barking dogs; and cohabitating with family, all day, every day.

“The dynamic of being together 24/7 is a big shift for a lot of people and has caused a lot of struggles,” said Rohit Bhargava, founder of the Non-Obvious Company and author of seven books, including The Non-Obvious Guide to Virtual Meetings and Remote Work, published in 2020 (second edition coming in March 2021). Bhargava has shared his insights with organizations such as Microsoft, the World Bank, and JPMorgan Chase & Co.

The future of work, he predicts, will be a hybrid of remote and in-office work, and thus it’s imperative that people know what it takes to flourish in a remote environment. Bhargava, Tonks, and Davis offered the following tips for prospering in a virtual world:

Take up technology. “Embrace technology and learn how to be effective,” Bhargava said. When the pandemic started, he watched YouTube videos about lighting and setting

up a professional home studio and soon after upped his video quality, which helped his business tremendously.

Also, use video and invest in a good microphone and internet package, Davis said. “There’s nothing worse than slow internet or low-quality sound,” he said.

It’s also important for organizations to set up policies that govern in-home technology setups. Davis suggests focusing first on tasks such as “password management, VPN usage, encryption, and what can and can’t be on your personal devices.” From there, move on to more firm-specific policies that address equipment ownership, internet speed requirements, and minimum-security practices. “Then move on to education and safe usage practices with every employee,” he said.

Refine your routine. Don’t start your day reading email for hours, because your day can quickly unravel. “When you wake up, center yourself, do deep breathing, and think about what your priorities for the day are going to be,” Bhargava advised. If you still want to check email first thing during your morning cup of coffee, then cap it to an hour. “Literally set yourself an alarm,” he said. Then, move on.

Be candid. Expect that noises — children, dogs, or the weed-whacking gardener — can occur when you’re working remotely, but be truthful about other things that could impact a video or phone chat. “If I had bad Wi-Fi, I will tell [clients] what I’m doing and not try to hide it, and normally it creates a more positive spin on the conversation,” Davis said.

In addition, spell out your weaknesses to customers or others, which can naturally build trust. “That realism and truth helps speed up the relationship-building portion of an online relationship,” he noted.

Be flexible and cognizant of communication styles. To build rapport, adapt your communication style to the person you are connecting to, Bhargava said. Determine which method garners the quickest response, and use that mode for that specific person. However, be cognizant that misinterpretation can occur if you send something off too

quickly without much thought. “Be aware of the potential for misunderstanding in digital communications, and address them through a personal conversation instead of solely relying on email,” he advised.

Davis’s firm has dealt with “communication sensitivity” for years, and this issue is a continual work in progress. “Sometimes communication issues can be avoided with more effective incentive structures and procedures that tend to be the source of communication breakdowns,” he said. “So, we’ve taken a more ‘root-cause’ approach to communication over the years.”

Be punctual. LiveCA started using Zoom in 2015, and the cameras have always been on, Davis said. But building relationships virtually differs from doing so face to face. “Meetings start on time and end on time, and that has taught me to be a more functional communicator and to make sure we address the issues early and set expectations,” he noted.

According to Davis, being a functional communicator “means that you’re more aware of the outcome that’s required for that meeting, and if you don’t get to address something, you effectively communicate the repercussions towards the end of the call to get back on track,” he said. “This is the opposite of intuitive communication that’s more free-flowing and may not get to a resolution within that scheduled time frame.

“I’ve found working remotely emphasizes more respect for people’s time and, without the functional side of communication, it’s really hard to replicate and delegate processes as you grow,” Davis added.

Sparkle. Since you only have three seconds to make an impression online, make it count. “Just smile,” said Tonks in her presentation. “It’s warm, friendly, open, approachable.” Also, make eye contact as if you were face-to-face, pay attention to what others are saying, and don’t fidget, she said.

Introduce yourself effectively. Tonks uses a technique, the “pause and effect,” which works especially well when you’re on a conference call with multiple people and want to be noted.

State your first name, then pause, then state your first name again, and “then with effect and gusto and confidence, your surname,” she said. “So, my name is Sue [pause], Sue Tonks.”

In addition, she stated, be specific when telling people what you do for a living. Don’t just say you’re a mergers-and-acquisitions consultant. Instead, she advised, say, “You know when major organizations want to buy out the other organizations? I help major international companies find the right partners, and as a result, they merge seamlessly.”

Ask questions and follow up. When speaking with others online, ask questions. “Be visible. Don’t be invisible,” Tonks said. To stand out, she advised, take notes and mention people’s names on the chat. Say something like, “Oh, that was a really good point, Joe.”

Also, realize your commonalities to kick off a conversation: You all live somewhere and have traveled; you’ve all been invited to an online event by the same person or organization; you’re all headed into the weekend or a holiday break; and you all have to deal with the weather, she said. And once you meet someone who can help your business or career, follow up. Ask if you can email them or connect on LinkedIn. “If you ask permission, you will never be a pest,” she noted.

Be yourself. We’ve all been taught to act certain ways in professional environments, but the pandemic has changed the landscape, allowing people to be more individualistic in their approach to business communication and to work from almost any locale. The pandemic has had a life-altering effect on everyone, Davis said.

“The things that make you unique will attract the right customers to you,” he said, adding, “embrace your homeschooling kids who barge into your call, pet the dog that wants attention, and don’t be afraid to sneak a quick snack. The pandemic has had a life-altering effect on everyone, and we’re all human at the end of day.”

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES

STATEMENTS OF FINANCIAL POSITION

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF FINANCIAL POSITION

CURRENT ASSETS

DECEMBER 31, 2021 AND 2020

DECEMBER 31, 2021 AND 2020 ASSETS

2021 2020

Cash and Cash Equivalents 1,081,120$ 442,803$

Investments 734,486 1,289,602

Accounts Receivable 2,375

Prepaid Expenses - 8,216

TOTAL $ 1,817,981 $ 1,740,621

LIABILITIES AND NET ASSETS

CURRENT LIABILITIES

Accounts Payable 22,956$ 15,805$

Chapter Dues Payable 15,155 11,045

RDU Seminar Deposits 19,639 19,639

Deferred Income 3,999 36,750

ECC Funds Held for Chapter 68,764 66,389

Total Current Liabilities 130,513 149,628

NET ASSETS WITHOUT RESTRICTIONS 1,687,468 1,590,993

TOTAL 1,817,981$ 1,740,621$

The accompanying notes are an integral part of these financial statements.

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES

STATEMENTS OF ACTIVITIES

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF ACTIVITIES

YEARS ENDED DECEMBER 31, 2021 AND 2020

YEARS ENDED DECEMBER 31, 2021 AND 2020

2021 2020

REVENUES

Membership Dues 252,226$ 230,875$

Revenues from Events: Conference 97,675 107,403 Seminars 1,181 2,609

Publications - 500 Investment Income 87,346 59,833

Total Revenue 438,428 401,220

EXPENSES

Program Services: Conference 49,251 20,098 Publications 37,188 45,653 Seminars 3,026 2,032 Member Engagement 26,500 32,543 Committee Expenses 24,060 30,355

Total Program Services Expenses 140,025 130,681

Administrative Services: Member Services 39,256 47,355 Management Fee 117,060 117,060

Meetings and Travel 38,890 1,016 Investment Fees 6,722 6,795

Total Administration Services Expenses 201,928 172,226

Total Expenses 341,953 302,907

CHANGE IN NET ASSETS 96,475 98,313

NET ASSETS WITHOUT RESTRICTIONS - BEGINNING OF YEAR 1,590,993 1,492,680

NET ASSETS WITHOUT RESTRICTIONS - END OF YEAR 1,687,468$ 1,590,993$

The accompanying notes are an integral part of these financial statements.

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES

STATEMENTS OF CASH FLOWS

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2021 AND 2020

YEARS ENDED DECEMBER 31, 2021 AND 2020

2021 2020

CASH FLOWS FROM OPERATING ACTIVITIES

Change in Net Assets 96,475$ 98,313$ Adjustments to Reconcile Change in Net Assets to Net Cash Provided (Used) by Operating Activities:

Net Realized and Unrealized (Gain) Loss on Investments (56,603) 71,877

Accounts Receivable (2,375) 4,582

Prepaid Expenses 8,216 6,143

Accounts Payable 7,151 10,289

Chapter Dues Payable 4,110 5,980

Deferred Income (32,751) (19,650)

ECC Funds Held for Chapter 2,375 66,389

Net Cash Provided by Operating Activities 26,598 243,923

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from Sales of Investments 666,910 442,409 Purchase of Investments (55,191) (406,844)

Net Cash Provided by Investing Activities 611,719 35,565

NET CHANGE IN CASH AND CASH EQUIVALENTS 638,317 279,488

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 442,803 163,315 1,081,120$ 442,803$CASH AND CASH EQUIVALENTS - END OF YEAR

The accompanying notes are an integral part of these financial statements.

FOR COOPERATIVES

TO FINANCIAL STATEMENTS

2021 AND 2020

SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES

FINANCIAL STATEMENTS

1. NATURE OF ORGANIZATION:

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

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

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

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

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of the Statement of Cash Flows, cash and cash equivalents consist of checking, savings, and money market funds. NSAC considers all investments with maturities of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a provision for bad debt expense and an adjustment to an allowance account based on its assessment of the current status of individual accounts. An allowance was not considered necessary as it was immaterial to the financial statements.

FINANCIAL

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO FINANCIAL STATEMENTS

31, 2021 AND 2020

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Revenue Recognition

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

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

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

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

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

Investments

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

Income Taxes

NSAC is exempt from federal income taxes under Section 501(c)(6) of the Internal Revenue Code. However, income from activities not directly related to an organization’s tax-exempt purpose is subject to taxation as unrelated business income. For the years ended December 31, 2021 and 2020, NSAC had not engaged in activities deemed unrelated to its exempt purposes.

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

Currently, the tax years ended December 31, 2020, 2019 and 2018 are open and subject to examination by taxing authorities.

NOTES TO FINANCIAL STATEMENTS

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES

DECEMBER 31, 2021 AND 2020

TO FINANCIAL STATEMENTS

31, 2021 AND 2020

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued): Expense Allocation

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

ECC Funds Held for Chapter

ECC Funds Held for Chapter represent cash held by the Organization on behalf of an unrelated entity. These funds will be returned to the entity upon their request.

3. CONCENTRATIONS OF CREDIT RISK:

NSAC maintains cash balances with Fifth Third Bank and Morgan Stanley Smith Barney. The balances at Fifth Third Bank are insured by the Federal Deposit Insurance Corporation up to $250,000. At December 31, 2021 and 2020, the uninsured Fifth Third balances totaled $23,149 and $25,226, respectively. NSAC also maintains investments and money market funds at Morgan Stanley Smith Barney. These funds are insured under the Securities Investor Protection Corporation which protects the investor only in the event of fraudulent broker activity. At December 31, 2021 and 2020, uninsured investment and money market balances totaled $1,539,958 and $1,459,394, respectively.

4. INVESTMENTS:

Investment values as of December 31, 2021 and 2020 were as fol lows:

2021

Unrealized

Fair Value Cost Value Gain (Loss)

Exchange-Traded and Closed-End Funds $ 273,516 $ 190,529 $ 82,987

Common Stocks 0 0 0

Government Securities 460,970 468,232 (7,262)

Total $ 734,486 $ 658,761 $ 75,725

2020 Unrealized Fair Value Cost Value Gain (Loss)

Mutual Funds $ 312,530 $ 279,083 $ 33,447

Exchange-Traded and Closed-End Funds 279,550 236,177 43,373

Common Stocks 120,710 80,000 40,710

Government Securities 576,812 579,161 (2,349)

Total $ 1,289,602 $1,174,421 $ 115,181

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2021 AND 2020

NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2021 AND 2020

4. INVESTMENTS (Continued):

The following schedule summarizes the investment income in the statement of activities for the years ended December 31, 2021 and 2020:

2021 2020

Interest, Dividends and Capital Gain Distributions

$ 30,743 $ 131,710

Net Realized and Unrealized Gains (Losses) 56,603 (71,877)

Total Investment Income $ 87,346 $ 59,833

5. RELATED PARTY TRANSACTIONS AND MANAGEMENT CONTRACT:

A management services company, Advanced Management Concepts, Inc. (AMC), serves NSAC under a formal management agreement which was in effect through March 31, 2013. The agreement now automatically renews annually unless terminated by either party. Management fees were $117,060 and $117,060 for the years ended December 31, 2021 and 2020, respectively.

NSAC also reimburses AMC on a monthly basis for administrative costs such as postage, telephone, printing and reproduction. The Executive Director of NSAC is an employee and part owner of AMC.

6. SUPPLEMENTARY CASH FLOW INFORMATION:

No cash was paid for interest or income taxes for the years ended December 31, 2021 and 2020.

7. AVAILABILITY AND LIQUIDITY:

The following represents the Organization’s financial assets at December 31, 2021 and 2020:

2021 2020

Financial assets at year-end: Cash and Cash Equivalents

$1,081,120 $ 442,803

Investments 734,486 1,289,602

Accounts Receivable 2,375 0

Total Financial Assets 1,817,981 1,732,405

Less amounts not available to be used within one year:

Net assets with donor restrictions 0 0

Less net assets with purpose restrictions to be met in Less than a year 0 0 Financial assets available to meet general expenditures

Less than a year

$1,817,981 $ 1,732,405

COOPERATIVES

FINANCIAL STATEMENTS

SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO FINANCIAL STATEMENTS

7.AVAILABILITY AND LIQUIDITY (Continued):

NSAC’s goal is to generally to maintain financial assets to meet 90 days of operating expenses. As part of its liquidity plan, excess cash is invested in short-term investments, including money market accounts and various publicly traded exchange-traded and closed-end funds, commons stocks, government securities, and mutual funds.

8.FAIR VALUE MEASUREMENTS:

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

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

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

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

NSAC has determined that the only material financial assets or liabilities that are measured at fair value on a recurring basis and categorized using the fair value hierarchy are investments. For such investments, fair value measurement is based upon quoted prices. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. All investments at December 31, 2021 and 2020 are measured at Level 1 inputs.

9.SUBSEQUENT EVENTS:

Management has evaluated subsequent events through September 16, 2022, the date the financial statements were available to be issued.

The COVID-19 pandemic is having a substantial impact on the economy and normal operations of most entities. The severity of the financial impact of this pandemic on the financial position and long-term operations of NSAC is not known at this time; however, management is taking actions to mitigate any impact of the outbreak to the organization.