The Cooperative Accountant - Summer 2022

1

Summer 2022 | The Cooperative Accountant

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

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

CONTENTS FEATURES 3

From the Editor

4

Trends in Accounts Payable

By Frank M. Messina, DBA, CPA

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

11 ACCTFAX Bulletin Board

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

31 TAXFAX

By George W. Benson; Marlis Carson; Rebecca L. Thoune (Smith), CPA

(806) 747-3806 bmiller@bsgm.com

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

EXECUTIVE COMMITTEE SECRETARY-TREASURER: *Dave Antoni Capitol Chapter KPMG, LLP 1601 Market St. Philadelphia, PA 19103

President David Antoni, CPA KPMG, LLP

(267) 256-1627 dantoni@kpmg.com

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

Vice President Eric Krienert, CPA Moss Adams LLP

*Indicates Executive Committee Member

Treasurer NATIONAL OFFICE Erik Gillam, CPA Kim Fantaci, Executive Director Aldrich CPAs +Advisors Jeff Roberts, Association Executive Tina Schneider, Chief Administrative Officer

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

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

Secretary Kent Erhardt CoBank, ACB

Phil Miller, Assistant Director of Education THE COOPERATIVE ACCOUNTANT

44 Small Business Forum

By Barbara A. Wech, Ph.D.

50 Best Practices: 5 Tips for Becoming a More Effective Leader for a Virtual Workforce

Winter 2018

Immediate Past President Nick Mueting, CPA Lindburg, Vogel, Pierce, Faris, Chartered

At Large April Graves, CPA United Agricultural Cooperative Inc.

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

www.nsacoop.org 2

Summer 2022 | The Cooperative Accountant

From the

Editor

Frank M. Messina, DBA, CPA Alumni & Friends Endowed Professor of Accounting UAB Department of Accounting & Finance Collat School of Business CSB 319, 710 13th Street South Birmingham, AL 35294-1460 • (205) 934-8827 fmessina@uab.edu

As a professor, I like to look back into the past as often times, history tends to repeat itself. So, when was the last time there was major inflation (based on the change in Consumer Price index – CPI)? The last time this large that I could identify was in 1982. We were coming off a whopping 15% in 1980 and the Federal Reserve created massive interest rate hikes which plunged us into a severe recession that would take decades to recover from.

So yes – we are in historic times. Instead of continuing to blame each other, I harp on what seems like the true solution – Cooperation – which is the basis of all we do at NSAC. I’ve said this so many times in my editor’s note that it remains frustrating that no one is listening.

For those conspiracy theorists – The best way to hide what is truly going on in our society is to keep people arguing and disagreeing on other issues in order to try and hide/avoid/deflect the actual truth regarding the reasons for our extreme inflation. So, what is the truth? – I will leave that up to everyone to decide on their own.

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.

3

Summer 2022 | The Cooperative Accountant

The last two years have provided unprecedented challenges in both our personal and professional lives. The worldwide pandemic and subsequent supply chain disruptions have changed the way we approach conducting business, and the accounts payable (AP) function has been similarly impacted. Accounts payable processes and teams have been required to transform and adapt to these events. While accounts payable has historically been viewed as a back-office function, it has been in the forefront of process change since it such an integral part of most businesses. The digital transformation of accounts payable processes of the last several years continued, but the transformation has been accelerated in order to adapt to the new challenges of the day.

Bottomline is a company whose mission is to transform business payments and processes for companies and financial institutions around the world. Corum (2022), of Bottomline, describes the impacts that the pandemic and the supply chain have had on AP activities:

4

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

Covid-19 was the inflection point for corporates to transition from checks to digital payments. Prior to the pandemic, 49% of US companies were paid digitally. Today, that number is around 64%, meaning that only one-third of customers are still relying on paper checks. That number will continue to fall as the cumbersomeness and costs of checks become more evident, and remote work makes them a headache too large to endure. (para. 8) Disruptions caused by the supply chain crisis have hit companies hard this past year. While preventing these disruptions was nearly impossible, they still caused a strain between customers and vendors. All aspects of these relationships will be under scrutiny, and those who can pay quickly and provide additional data to vendors will be on track to mend relationships. (para. 11) This article will describe AP processes, identify critical technologies in AP, and Summer 2022 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM discuss trends in AP. AP processes described Coreintegtator.com (n.d.), an AP automation software provider, notes these are the general steps to invoice processing, in the instance of a non-Purchase Order (PO) invoice: • Receive Invoice • Copy and File Invoice • Invoice Approval • Invoice Payment When processing a PO invoice, an invoice that was provided to cover items purchased on a PO, the key to automating PO invoice processing is in the PO matching.

Coreintegtator.com describes this process as follows: The details should be the same on the PO, the packing slip/receipt and the PO invoice.

Matching the PO to the PO Invoice alone is called 2-way matching. Matching the PO to the PO invoice and the packing slip or receipt is called 3-way matching.

The 3-way matching method is more efficient because it can identify any discrepancies in the three critical PO purchasing documents: purchase orders, order receipts/packing slips, and invoices.

3-way matching of PO invoices saves businesses from overspending or paying for an item that they did not receive.

(Automating PO Invoice Processing section) Coreintegtator.com recommends this PO invoice process be automated for accuracy and efficiency.

Critical technologies in AP Paperwise Symphony, a company providing a process automation platform for small-tomedium sized businesses, has described the six most critical technologies in AP: 1.

5

Intelligent invoice capture

2.

Anytime and anywhere access 3.

Low-code Process Automation 4.

Data and Workflow Visualizations 5.

Collaboration Capabilities 6.

Management System Integration (Paperwise.com, n.d.)

Trends in AP Ardent Partners publishes research for business executives working in procurement, finance and human resources. Ardent Partners, in their strategic planning this year, have identified what they believe will be big trends in accounts payable for 2022.

These have been documented in their recent publication “Accounts Payable 2022: Big Trends and Predictions”: • • • •

COVID-19 lingers on The war for talent escalates AP’s growing impacts More enterprises accelerate AP’s digital transformation • AP data becoming more valuable • Invoice and B2B payment fraud rising • Cash remains king • Holistic AP • B2B payments continue their rapid expansion (Cohen, 2022, p. 8) They go on to make some predictions for 2022, as follows: • Prediction #1 – The hybrid workforce becomes the standard • Prediction #2 – AP managers will develop new, flexible staffing models (and remain in perpetual hiring mode) • Prediction #3 – Adoption of AP automation rises sharply • Prediction #4 – AI will significantly improve productivity • Prediction #5 – AP becomes an intelligence hub • Prediction #6 – AP and Treasury become strategic partners • Prediction #7 – AP will help manage the extended workforce Summer 2022 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM • Prediction #8 – Supply chain finance utilization increases • Prediction #9 – AP continues its upward trajectory (Cohen, 2022, pp. 9-13)

better relationships with stakeholders (employees, vendors, other business partners).

Research and Markets has predicted the following trends:

The global accounts payable automation Research and Markets (2022), a global market is projected to grow significantly market research and analysis firm, has during the period of 2022-2026. The global recently published their report titled “Global accounts payable automation market is Accounts Payable Automation Market: expected to increase due to rapid adoption Analysis By Development Type (On-Premises of cloud services, embedded finance, and Cloud), By Region (North America, APAC, availability of critical financial data, benefits Europe, ME&A and LATAM) Size & Trends over traditional AP process, integration of with Impact of Covid-19 and Forecast up AP with ERP system, and boom in Fintech. to 2026”. This report provides analysis of Yet, the market faces some challenges like global AP automation by value, deployment data security and employees concerns type, and region. It also provides an regarding AP automation. (para. 5) analysis of the pandemic’s impact on the AP automation market. The report indicates Peek (n.d.), of the US Chamber of that AP automation has been a key factor Commerce, defines Fintech as follows: in reducing processing costs and improving efficiency for business operations. Some of Fintech, or financial technology, is the the key process improvements from increased term used to describe any technology that automation include a digital workflow for delivers financial services through software, data entry, coding invoices, invoice matching, such as online banking, mobile payment and workflow invoice approval routing. apps or even cryptocurrency. Fintech is a Radford (2022), of AP Association, notes that broad category that encompasses many automation can help with accounts payable different technologies, but the primary processes in several ways, including: objectives are to change the way consumers • Form filling and businesses access their finances and • Invoice management compete with traditional financial services.

• Record keeping (para. 2) • Invoice reviews and approvals Collins (2022), from Airbase, discusses how digital AP is changing the landscape. Collins notes that digitizing AP processes results in fewer errors, faster processing times, and lower costs. Airbase’s mission is to facilitate company growth and success with its comprehensive spend management platform.

An added benefit is that increased automation makes it easier for information in the system to be audited. Additionally, improved processing times can promote 6

Corum echoes the same concerns regarding instances of fraud, noting they are evolving, and that security and identity management have never been more important: Perhaps this won’t surprise you, but 49% of businesses have suffered a known fraud attack in the last 12 months, and about one-third of these attacks were successful [1]. The savviest criminals are purchasing toolkits from the dark web and customizing Summer 2022 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM them to defeat the technology built to detect and deter. They are requesting ransomware payments in cryptocurrency that does not have the traditional controls and oversight that are present in other payment types. Stepping up your security to be ready for any fraud threat has never been more important than it will be in 2022. (para. 9)

opened a whole new paradigm as some workers have continued the work from home even though the pandemic risk has reduced.

Some remote workers wanted to return to the office, full time or part of the time, and others wanted to remain working from home.

This has created a new hybrid workforce model and has introduced a new set of requirements to accommodate qualified staff in whichever work model best fits each Success in the future will continue to center individual circumstance for both the business around talent retention. With increasing and the worker. The ability to work remotely skilled labor shortages, it will continue to be in AP will continue to rely heavily on software a challenge to attract and retain the talent and digital tools being available for workers necessary to operate an effective and efficient to work from home.

AP team. With increased automation, dayOne of the terms Bonilla introduces is to-day tasks can become simplified. By “Hyperautomation”. He describes this as becoming increasingly digitized, simplified follows: tasks can then offer potentially more “Hyperautomation,” according to Gartner, opportunity for the AP team to become is “a business-driven, disciplined approach problem-solvers and strategic thinkers in that organizations use to rapidly identify, the contributing to overall strategic business vet and automate as many business and plans and goals. AP staff are advised to IT processes as possible,” and a top trend think outside of the box, embrace new for 2022. For accounts payable teams, technologies and processes, and work the evolution of piecemeal automation towards becoming that strategic partner adoption and the transition to a remote or within the business to drive improvements. hybrid workforce are some of the first steps Bonilla (2022), of SWK Technologies, expands in building a pathway to this model. The upon trends in workforce changes as the first next involves reviewing and choosing the item listed in his “7 AP Trends to Watch”: right financial and payment management 1.

2.

3.

4.

5.

6.

7.

Significant Workforce Changes Paperless Payments Takeover Strategic Accounts Payable Workflows More Powerful Data AP Cybersecurity AP Compliance Hyperautomation

Bonilla notes that AP teams have had to contend with “foundational adjustments to talent acquisition and new emerging expectations for practice, culture and even technology used” (para. 2). The work from home shift over the last two years was initiated due to the pandemic, yet now has 7

solutions and determining how they fit within your ideal technology stack while maximizing ROI. (para. 14) Dilmegani (2022), with the high tech industry analyst company AIMultiple, notes that automation is necessary for accounts payable because manual processing of accounts payable is: • expensive since manual processes require labor which is costly • prone to excessive payments: A company can lose up to 4% of the amounts of money paid through invoices because of Summer 2022 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM various errors such as duplicate invoices, fraud, missing early payment discounts and not noticing price hikes.

• leads to dissatisfied employees and suppliers: No one likes a slow manual process. (para. 1) One trend in implementing increased automation is towards the use of Artificial Intelligence (AI). Oracle (n.d.) explains AI as follows: In the simplest terms, AI (which stands for artificial intelligence) refers to systems or machines that mimic human intelligence to perform tasks and can iteratively improve themselves based on the information they collect.

AI is much more about the process and the capability for superpowered thinking and data analysis than it is about any particular format or function. Although AI brings up images of high-functioning, humanlike robots taking over the world, AI isn’t intended to replace humans. It’s intended to significantly enhance human capabilities and contributions. That makes it a very valuable business asset. (para. 1) Dilmegani identifies AI applications for AP automation, noting that these tasks lend themselves well to the application of AI: • Repetitive tasks – these include things like data entry, invoice matching, invoice routing, invoice filling and retrieval.

• Machine learning algorithms with the support of business rules can identify and extract required data from documents, input data into required documents, link data for exceptions resolution, route documents to the appropriate individuals for validation and exceptions handling.

• Categorization of documents sent along with invoices - Invoices can be sent bundled with contracts and invoice 8

recipients can also receive documents like credit notes or payment reminders.

Combination of Optical Character Recognition (OCR), Natural Language Processing (NLP), and machine learning enable businesses to extract relevant data, understand the context, and categorize these documents. Automation of this process enables businesses to transform their documents into digital systems and ease search functionality. (para. 3-5) Additional areas where AI can be beneficial is with data analytics, in analyzing large sets of data and identifying patterns of expenditures that can assist with financial and cash forecasts. AI can also play a key role in identifying fraud or errors in invoice processing because it can find patterns in invoices of non-standard behavior, and flag them for further human analysis or decisionmaking. Dilmegani identifies various types of fraud found in accounts payable processes: • Invoice fraud: Involves a fraudster sending an invoice as one of the company’s existing suppliers or pretending to be a new supplier. The invoice includes the bank account details of the fraudster.

• Billing scheme: The fraud type that involves employees generating false payments that will be paid to themselves.

• Check tempering: Check fraud involves a person attempting to make a transaction using a check that has been faked, stolen, altered, or invalid.

• Expense reimbursements: A fraudulent payment scheme in which an employee makes a claim for reimbursement of false or exaggerated business expenses.

Expense reimbursement fraud can be occurred due to mischaracterized expenses, overstated expenses, fictitious expenses, double claims, automated clearing house (ACH) fraud. ACH fraud Spring 2022 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM involves any unauthorized funds transfer that occurs in a bank account.

• Kickback Schemes: A form of negotiated bribery in which a commission is paid to the bribe-taker in exchange for services rendered. (para. 5-7) Because AI can assist in identifying fraud or error, it becomes a valuable tool for auditors.

While this is not the only application of AI that can assist in audits, it is one of the many AI functions that can be very helpful. There are AI software applications available for this use.

Summary There is no more status quo in AP. The way things have been done in the past is staying in the past, and new and emerging technologies are driving substantial change in AP processes. Automation and digitization are no longer just for the large companies that handle high volumes of information but are now things to be embraced by companies of all industries and all sizes. Automation is no longer something nice to have. Instead, it is becoming something necessary in order to remain efficient, cost-effective, and to remain relevant in today’s dynamically changing environment.

Marketreportsonline.com (n.d.) offers an Executive Summary of the Research and Markets report previously reference in this article, “Global Accounts Payable Automation Market…”, as follows:

Accounts Payable Automation can be segmented on the basis of component (Software, Solutions and Hardware); deployment type (On-premises and Cloud), and by application (BFSI, Telecom & IT, Healthcare, Retail & Consumer Goods, and Others).

(Executive Summary section, para. 2) As accounting and finance professionals, it is recommended that AP trends be addressed in relation to the needs of your individual organization. A structured approach to “Change Management” in AP processing is advised. Even if complete overhaul or transformation is not the goal, an organized and methodical approach to identifying what incremental solutions might be best for your organization is recommended.

Medius.com (2022) offers a suggested path towards driving change, no matter how small or large the change might be. They note that John P. Kotter is one of the foremost speakers on the topics of change and has developed an eight-step model to manage it.

1) Build a need for change: a) Establish a sense of urgency, and b) form a guiding coalition 2) Change direction: c) Create and d) communicate a vision for change 3) Change behavior: e) Empower others to act on the vision and f) create short-term wins 4) Sustain change: g) Build more best practices and h) institutionalize new approaches

References Bonilla, H. (February 16, 2022). Top Accounts Payable Trends to Expect in 2022 & Beyond.

Retrieved May 22, 2022 from the following website: https://www.swktech.com/top-accountspayable-trends-to-expect-in-2022-beyond/ Cohen, B. (January 2022). Accounts Payable 2022: Big Trends and Predictions. Ardent Partners. Retrieved May 22, 2022 from the following website: https://www.medius.com/ resources/ardent-partners-2022-report/ 9

Summer 2022 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM Collins, D. (January 7, 2022). 7 accounts payable trends you can’t ignore in 2022. Retrieved May 22, 2022 from the following website: https://www.airbase.com/blog/7-accounts-payabletrends-you-cant-ignore-in-2022 Coreintegrator.com. (n.d.). What are the Invoice Processing Steps? Retrieved May 22, 2022 from the following website: https://coreintegrator.com/invoice-processing-steps/ Corum, J. (February 3, 2022). AP automation trends to watch in 2022. Retrieved May 22, 2022 from the following website: https://www.bottomline.com/thought-leadership/corporatepayments-and-payables/ap-automation-trends-to-watch-in-2022 Dilmegani, C. (April 25, 2022). 5 AI Applications in Accounts Payable (AP) Processes for 2022. Retrieved May 25, 2022 from the following website: https://research.aimultiple.com/ ap-ai/ Marketreportsonline.com. (n.d.) Global Accounts Payable Automation Market: Analysis By Development Type (On-Premises and Cloud), By Region (North America, APAC, Europe, ME&A and LATAM) Size & Trends with Impact of Covid-19 and Forecast up to 2026.

Retrieved May 25, 2022 from the following website: https://www.marketreportsonline. com/858664.html Medius.com. (May 6, 2022). The importance of change management in your accounts payable transformation roadmap. Retrieved May 22, 2022 from the following website: https:// www.medius.com/blog/change-management-accounts-payable-automation/ Oracle. (n.d.). What is AI? Learn about Artificial Intelligence. Retrieved May 25, 2022 from the following website: https://www.oracle.com/artificial-intelligence/what-is-ai/ Paperwise.com. (September 15, 2021). The 6 Most Critical Technologies in Accounts Payable. Retrieved May 22, 2022 from the following website: https://www.paperwise.com/ the-6-most-critical-technologies-in-accounts-payable/ Peek, S. (n.d.). What Is Fintech? Definition, Evolution and Examples. Retrieved May 22, 2022 from the following website: https://www.uschamber.com/co/run/business-financing/what-isfintech Radford, J. (April 7, 2022). Digital Accounts Payable Trends to Watch Out for in 2022.

Retrieved May 22, 2022 from the following website: https://ap-association.com/blogs/blog/ digital-accounts-payable-trends-to-watch-out-for-in-2022 Research and Markets. (April 8, 2022). Global Accounts Payable Automation Market Report 2022-2026: Integration of AP with ERP System, Embedded Finance, Boom in Fintech, Benefits over Traditional AP Process. Retrieved May 22, 2022 from the following website: https://www. globenewswire.com/news-release/2022/04/08/2419137/28124/en/Global-Accounts-PayableAutomation-Market-Report-2022-2026-Integration-of-AP-with-ERP-System-EmbeddedFinance-Boom-in-Fintech-Benefits-over-Traditional-AP-Process.html

10

Spring 2022 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM

GENERAL EDITOR Greg Taylor, Shareholder, D. Williams & Co., Inc. 1500 Broadway, Suite 400 Lubbock, TX 79401 (806) 785-5982 gregt@dwilliams.net

By Greg Taylor

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

FASB ISSUES ASU ON TROUBLED DEBT RESTRUCTURING AND DISCLOSURES UNDER THE CREDIT LOSSES TOPIC (TOPIC 326) On March 31, 2022, the FASB issued ASU 2022-02 encompassing changes to the treatment of loans modified as troubled debt restructurings (TDRs). Quoting extensively from the ASU:

origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments— Credit Losses—Measured at Amortized Cost.”

The most important revision concerns issue 1, thus the following extensive quotation from the ASU explains how the main provisions would differ from current GAAP: “Issue 1: Troubled Debt Restructurings by Creditors Current GAAP provides an exception to the general recognition and measurement Issue 1: Troubled Debt Restructurings by guidance for loan restructurings and Creditors The amendments in this Update eliminate the refinancings that an entity determines meets specific criteria to be considered a accounting guidance for TDRs by creditors TDR. Modifications are TDRs, and thus are in Subtopic 310-40, Receivables—Troubled subject to different accounting guidance, if Debt Restructurings by Creditors, while enhancing disclosure requirements for certain they are made to borrowers experiencing financial difficulty and if the creditor has loan refinancings and restructurings by granted a concession. If a modification is a creditors when a borrower is experiencing TDR, an incremental expected loss, if any, is financial difficulty. recorded in the allowance for credit losses Specifically, rather than applying the upon modification. Certain concessions can recognition and measurement guidance be captured only through a discounted cash for TDRs, an entity must apply the loan flow or reconcilable model, and, therefore, refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to discounted cash flow models are required for determine whether a modification results in a measurement of some TDRs. Additionally, new loan or a continuation of an existing loan. specific disclosures are required for TDRs. The amendments in this Update eliminate the Issue 2: Vintage Disclosures— TDR recognition and measurement guidance and, instead, require that an entity evaluate Gross Write-offs For public business entities, the amendments (consistent with the accounting for other loan modifications) whether the modification in this Update require that an entity disclose represents a new loan or a continuation current-period gross writeoffs by year of 11

Summer 2022 | The Cooperative Accountant

ACCTFAX of an existing loan. The proposed amendments would enhance existing disclosure requirements and introduce new requirements related to modifications of receivables made to borrowers experiencing financial difficulty.”

The main provisions of the ASU are: “Issue 1: Troubled Debt Restructurings by Creditors The amendments in this proposed Update would eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings

by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity would apply the loan refinancing and restructuring guidance in paragraphs 31020-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan.

Issue 2: Vintage Disclosures—Gross Writeoffs For public business entities, the amendments in this Update require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses— Measured at Amortized Cost. Gross writeoff information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.”

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

For entities that have adopted the amendments in Update 2016-13, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those 12

fiscal years. For entities that have not yet adopted the amendments in Update 201613, the effective dates for the amendments in this Update are the same as the effective dates in Update 2016-13. The amendments in this Update should be applied prospectively, except as provided in the next sentence.

For the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

Early adoption of the amendments in this Update is permitted if an entity has adopted the amendments in Update 2016-13, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures.

The ASU is available at www.fasb.org PROPOSED ASU CONCERNS REFERENCE RATE REFORM (TOPIC 848) AND DERIVATIVES AND HEDGING (TOPIC 815) On April 20, 2022, the FASB issued an exposure draft of a proposed ASU encompassing disclosures concerning “Deferral of the Sunset Date of Topic 848 and Amendments to the Definition of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate”. The comment deadline is June 6, 2022. In its summary and questions for respondents, the FASB offered this rationale for the proposed ASU: “The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the Board included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. At the time that Update 2020Summer 2022 | The Cooperative Accountant

ACCTFAX 04 was issued, the UK Financial Conduct Authority (FCA) had established its intent that it would no longer be necessary to persuade, or compel, banks to submit to LIBOR after December 31, 2021. As a result, the sunset provision was set for December 31, 2022—12 months after the expected cessation date of all currencies and tenors of LIBOR. In March 2021, the FCA announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 848. Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, the Board decided to defer the sunset date of Topic 848 to December 31, 2024.”

Issue 2: Amendments to the Definition of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate In 2018, the Board issued Accounting Standards Update No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which added the term Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate (SOFR Swap Rate) to the Master Glossary of the Codification. The amendments in Update 2018-16 also permitted a rate that meets the definition of the SOFR Swap Rate to be considered a benchmark interest rate and therefore eligible to be designated as the hedged risk for recognized fixed-rate financial instruments or a forecasted issuance or purchase of fixed-rate financial instruments.

In Update 2018-16, the Board stated that the definition of the SOFR Swap Rate was specific to the OIS rate based on SOFR and that it did not include the forwardlooking, term-based version of the SOFR rate (SOFR term) because no cash or derivative instruments that were indexed to SOFR term existed at that time.

It also was not clear whether a SOFR term rate would emerge in the marketplace.

13

However, the Board also stated that it would monitor the developments of SOFR term and was prepared to consider SOFR term as a benchmark interest rate if and when it emerged in the marketplace. Considering the development of SOFR term, the Board has decided to amend the definition of the SOFR Swap Rate so that it is no longer limited to the OIS rate based on SOFR but would include other rates based on SOFR, such as SOFR term.

Who Would Be Affected by the Amendments in This Proposed Update?

The amendments in Issue 1 of this proposed Update would apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in Issue 2 of this proposed Update would apply to all entities that apply hedge accounting for hedges of interest rate risk of recognized fixed-rate financial instruments and forecasted issuances or purchases of fixed-rate debt under Topic 815.

What Are the Main Provisions? The amendments in Issue 1 of this proposed Update would defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities would no longer be permitted to apply the relief in Topic 848.

The amendments in Issue 2 of this proposed Update would amend the definition of the SOFR Swap Rate to include SOFR term as a U.S. benchmark interest rate under Topic 815.

When Would the Amendments Be Effective?

The amendments for both Issues 1 and 2 in this proposed Update would be effective for all entities upon issuance of a final Update.

The proposed amendments for both Issues 1 and 2 would be applied prospectively.

The proposed ASU, specific queries the board had for respondents, and the proposed effective date information, is available at www.fasb.org Summer 2022 | The Cooperative Accountant

ACCTFAX RECENT ACTIVITIES OF THE PRIVATE COMPANY COUNCIL The Private Company Council (PCC) met on Thursday, April 21 and Friday April 22, 2022.

Below is a brief summary of topics addressed by the PCC at the meeting: • Profits Interests and Their Interrelationship with Partnership Accounting: FASB staff summarized past research (including outreach) and provided its analysis and recommendations on the issue of determining the appropriate scope of guidance for profits interests awards (that is, Topic 710, Compensation— General, or Topic 718, Compensation— Stock Compensation). The staff also highlighted how certain potential solutions might affect public business entities. PCC members recommended that the FASB add a project to its technical agenda to address the issue of determining the appropriate scope of guidance for profits interests awards. They noted that diversity in practice and cost and complexity result from the lack of authoritative guidance that explicitly addresses profits interests, and that the issue potentially affects both public business entities and private companies. Overall, PCC members supported developing illustrative examples to include in the Codification and potentially providing additional educational materials.

• Leases Implementation Issues: PCC members discussed challenges private companies are facing when adopting Topic 842, Leases, including evaluating individually immaterial lease agreements that may or may not be material in the aggregate, allocating costs to lease and non-lease components, and addressing diversity in practice in the accounting for contingent lease incentives. FASB staff and PCC members also discussed (a) whether private companies are expected to elect the practical expedient that allows lessees to combine lease and non-lease 14

•

•

•

•

components and account for the combined component as a single lease component, (b) capitalization thresholds, and (c) the use of leasing software by private companies.

Credit Losses: FASB staff provided an overview of Accounting Standards Update No. 2022-02, Financial Instruments— Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which was issued on March 31, 2022.

PCC members noted that the disclosure requirements provide decision-useful information to investors. The staff also provided background on the Board’s decision not to further defer the effective date for nonpublic entities to apply Topic 326, Financial Instruments—Credit Losses.

PCC members shared their observations on nonpublic entities’ readiness to adopt the current expected credit losses guidance.

Current Issues in Financial Reporting: PCC members discussed practice issues arising from the current business environment. Topics discussed included disclosures about the Paycheck Protection Program and the accounting and reporting for employee retention credits included in the Coronavirus, Aid, Relief, and Economic Security (CARES) Act and subsequent COVID-19-related legislation.

FASB Agenda Consultation: FASB staff summarized the Board’s discussions and decisions made so far resulting from stakeholder feedback received in response to the June 2021 FASB Invitation to Comment, Agenda Consultation (the Agenda Consultation ITC). FASB staff updated the PCC on changes made to the research agenda and the technical agenda and updated the PCC on next steps.

PCC members asked about the Board’s recent removal of the Distinguishing Liabilities from Equity Phase 2 project from the technical agenda, citing continued challenges for private companies in applying the liabilities and equity guidance.

Accounting for Government Grants, Summer 2022 | The Cooperative Accountant

ACCTFAX Invitation to Comment: FASB staff summarized the feedback received on the Agenda Consultation ITC on the accounting for government grants and the objective of the recently added FASB research project. The staff plans to issue an ITC to solicit feedback on whether certain requirements in IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, represent a workable solution for improving the accounting for government grants under US GAAP. PCC members provided feedback on potential areas for the FASB staff to research, including investor preferability for gross versus net presentation, clarifying the scope of government grants, and the recognition and measurement of government grants.

• Accounting for and Disclosure of Intangibles: FASB staff summarized this FASB research project (which includes software costs, internally developed intangibles, and research and development), existing guidance, feedback received on the Agenda Consultation ITC, and next steps. PCC members expressed support for this research project, citing the increased prevalence of intangible assets in private companies and the differences in the accounting treatment of internally generated intangibles and of acquired intangibles. PCC members also noted the complexity and undue costs associated with the accounting for software costs because of the evolving nature of software.

• Accounting for Financial Instruments with Environmental, Social, and Governance (ESG)-Linked Features and Regulatory Credits: FASB staff summarized the background, feedback received on the Agenda Consultation ITC, and next steps of the recently added FASB research project. PCC members discussed their experience with financial instruments with ESG-linked features, noting that it is an emerging area that could become 15

more prevalent for private companies.

PCC members encouraged the Board to monitor how ESG-related activities could affect financial reporting.

• Reference Rate Reform—Deferral of the Sunset Date of Topic 848: FASB staff provided an update on the amendments in the proposed Accounting Standards Update, Reference Rate Reform (Topic 848) and Derivatives and Hedging (Topic 815): Deferral of the Sunset Date of Topic 848 and Amendments to the Definition of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate. The PCC Chair noted that some of her private company clients are starting to transition away from LIBOR and expressed support for the amendments in the proposed Update.

The next PCC meeting is scheduled for Thursday, June 23 and Friday, June 24, 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 May 27, 2022 - Commissioner Peirce Says SEC Proposal Aimed at Tackling Greenwashing in Investment Industry Will Not Work SEC Commissioner Hester Peirce said that the commission’s proposal intended to address greenwashing in investment industry missed the mark. She believes the proposal, if adopted, will not be beneficial to investors but increase compliance burdens for the industry.

While greenwashing by investment advisers and investment companies is a real concern, Peirce—who voted against the proposed rule on May 25, 2022—said that the SEC has the tools to fix the problem: enforcement. And the commission has Summer 2022 | The Cooperative Accountant

ACCTFAX already been bringing enforcement actions against misleading labels on investment products.

“A new rule to address greenwashing, therefore, should not be a high priority,” Peirce said of Release No. 33-11068, Environmental, Social, and Governance Disclosures for Investment Advisers and Investment Companies. Comments are due 60 days after publication in the Federal Register.

Among other things, the commission proposes to require additional disclosures related to environmental, social, and governance (ESG) strategies in fund prospectuses, annual reports, and adviser brochures. Thus, if a fund claims it will achieve a certain ESG impact, for example, there must be a description of the specific impact and summaries of the progress on achieving the impact.

Funds and advisers would generally be required to disclose certain green funds to disclose the greenhouse gas (GHG) emissions associated with their portfolio investments.

Peirce said that she could have supported a proposal to require advisers and funds to answer the following three questions about their ESG products and services: • If you offer products or services you label as some formulation of E, S, or G, what does the label mean with respect to each such product or service?

• What do you do to make your product or service line up with E, S, or G, as you have defined it for that product or service?

• For each such product or service, what—if any—is the cost to investors, including in terms of forgone financial returns of pursuing E, S, or G objectives alongside of or instead of financial objectives?

“This proposal touches on some of these questions but embodies a fundamentally different approach,” Peirce said during the meeting to vote on the proposal. “It avoids explicitly defining E, S, and G, yet implicitly uses disclosure requirements to induce substantive changes in funds’ and advisers’ 16

ESG practices. Investors will pick up the tab for our latest ESG exploits without seeing much benefit.”

On the other hand, the majority of the commission—the vote was 3 to 1—believes that the proposed rules, if adopted, would promote consistent, comparable, and reliable information for investors when they decide to put money in funds that use ESG factors.

“ESG encompasses a wide variety of investments and strategies,” SEC Chair Gary Gensler said. “I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”

Peirce begged to differ.

She criticized the commission’s assumption that investors are driven by ESG matters, not by a desire to get investment returns.

“So the SEC comes to the aid of the ESG-minded investor with a purportedly ‘consistent, comparable, and decision-useful regulatory framework for ESG,’” she said. But “the proposals … will fail of their purpose because they are not so much built on sand as they float on a cloud of smoke, false promises, and internal contradiction.”

Among other problems, Peirce said ESG cannot, nor will they be, adequately be defined. While everyone knows what ESG stands for on a high-level, the cool kids have moved on to EESG, with the first E being employees.

She said that it is understandable for the SEC’s refusal to define ESG. “From a regulatory perspective, the implications of this nod to reality make today’s proposals incapable of enforcement on a practical level,” she said. “How precisely do we envision determining whether a fund has incorporated ESG factors into its investment selection process when we have not defined just what those factors are?

‘I’ll know it when I see it’ is not a practice currently recognized in administrative law.”

Moreover, when the proposal gets specific, Summer 2022 | The Cooperative Accountant

ACCTFAX the proposed metrics are also problematic, she said.

On GHG emission metrics, certain funds would be required to disclose the carbon footprint and the weighted average carbon intensity (WACI) of their portfolio. Funds that disclose that they do not consider GHG emission as part of their ESG strategy would not be required to provide this information.

In Peirce’s view, this will not provide verifiable data that will allow investors to compare across funds because the metrics will be based on estimates, not hard figures.

“Formulating these estimates is about picking and choosing among a selection of data points and models, which is another way of saying that these estimates will differ from fund to fund,” Peirce said. “Rather than get a uniform range of emission statistics, investors concerned with greenhouse gas numbers will have to do a separate assessment of each fund’s process for making up those numbers.

So much for consistency and comparability.”

But advocacy groups applauded the SEC’s rulemaking.

“In the current marketplace, retail investors don’t have a clear picture of what it means to invest in a fund whose marketing says it’s ‘sustainable,’ ‘green,’ or ‘ESG.’ The lack of transparency for investors makes it hard to untangle exactly how environmentallyfriendly some of these products are. These rules begin to change the landscape around ‘green’ investments.

“The SEC’s new rules will help retirement savers understand what is in their portfolios and whether their investments will help them achieve their long-term financial and ethical goals,” Rachel Curley, democracy advocate at Public Citizen, said in a statement. “It’s great to see the SEC tackling these issues of long-term financial returns on multiple fronts – from the climate risk disclosure rule, to enforcement, to this new set of rules on fund portfolios.”

Natalia Renta, senior policy counsel for corporate governance and power for 17

Americans for Financial Reform Education Fund, in a statement, said that the SEC’s proposals aim to promote investor choices and goals.

“For example, if investors choose funds that purport to prioritize worker well-being, climate resilience, or racial equity, they should not find themselves unwittingly investing in companies antagonistic to those priorities,” Renta said.

Separately, the SEC during the meeting also voted to issue a separate proposal that is intended to prevent misleading or deceptive fund names. (See SEC Proposes Rules to Prevent Deceptive Fund Names in the May 27, 2022, edition of Accounting & Compliance Alert.)

May 25, 2022 - U.S. Rulemakers Agree to Develop Broad Accounting Rules for Reporting Environmental Credits The FASB on May 25, 2022, voted unanimously to add a project to its technical agenda that would develop a full package of accounting rules for reporting environmental credits such as those companies get to drive down pollution.

Recognition, measurement, presentation, and disclosure rules should be created for participants in compliance and voluntary emissions programs, as well as by nongovernmental creators of environmental credits, the board agreed.

“Clearly this is a pervasive issue, ESG investment is growing very fast,” FASB member Fred Cannon said. “This is at the intersection between the financial statements and ESG issues,” he said. “I think scoping out certain things make sense, I’m also supportive of addressing all three issues, including the creators which I think may be the fastest growing piece of the puzzle here as we go forward.”

Specific authoritative guidance does not exist for accounting for environmental credits by participants and creators, according to the discussions. This lack of guidance in Summer 2022 | The Cooperative Accountant

ACCTFAX U.S. GAAP has caused significant diversity in accounting for environmental credits, a problem for investors when trying to allocate capital.

The project would target environmental credits that are legally enforceable and can be traded. For example: cap and trade emissions programs, baseline and allowance programs whereby baseline emissions targets are created for participants, renewable energy credits/certificates (RECs), renewable identification numbers (RINs), and carbon offsets. Excluded from the scope of the rules would be the accounting for tax credits, tax incentives, or investments in renewable structures or entities such as partnerships.

Accounting for compliance programs, predominantly cap and trade programs, has been a topic raised to the FASB in the past but did not result in the issuance of authoritative guidance, the discussions indicated.

“I was around when the previous board took the emissions trading schemes off the agenda,” FASB member Susan Cosper said. “I don’t think this is a one sized fits all solution,” she said. “I think there will be different solutions for those that are participants in a compliance program versus those that are participants in a voluntary program.”

The project is timely, coming now that involvement in both compliance and in voluntary programs to reduce pollution and increase the generation and use of clean energy is rapidly evolving.

Heightened interest in environmental, social, and governance (ESG) issues, particularly those related to greenhouse gas emissions associated with the use of fossil fuels, has resulted in the establishment of global government mandates and compliance programs targeted at polluters, board meeting papers explain.

More recently, because of social responsibility concerns and shareholder pressure, many entities have increased participation in voluntary programs intended 18

to drive the production of clean energy from renewable sources (for example, programs to reduce or offset carbon emissions). Common examples of voluntary commitments made by those entities are “carbon neutrality” and “net zero emission.”

Both compliance and voluntary programs have resulted in environmental credits being created that need to be accounted for by both participants and the nongovernmental creators of the credits, FASB staff explained to the board. Additionally, obligations created under those programs may require consideration.

Although no investor respondents to a recent FASB agenda consultation document commented on the recognition and measurement of environmental credits, the SEC’s recent decision regarding disclosure of involuntary use of RECs and carbon offsets for clean energy purposes, “will increase use of these programs and result in additional investor interest in the accounting for these programs,” staff said. Furthermore, financial statement users would benefit from consistent accounting for economically similar programs.

Researching KPIs, Votes Against 11 Topics Separately, chair Richard Jones added a project to the board’s research agenda on financial key performance indicators (KPIs), but Jones and the board voted against adding it and the following 10 items to its technical agenda: • Balance Sheet Classification • Materiality Considerations for Disclosures • Debt Modifications • Fair value measurement disclosures • Backwards tracing for income taxes • Accounting for the sale of a business • Insurance technical inquiry • Equity method of accounting • Stock buybacks • Definition of participating interest in transfers and servicing of financial assets (Topic 860, Transfers and Servicing).

Summer 2022 | The Cooperative Accountant

ACCTFAX May 25, 2022 - More Disclosures Needed on How Companies Minimize Tax Payments Overseas, Analysts Say A FASB advisory panel encouraged the board’s efforts on revising income tax disclosure rules, maintaining investors want to understand how companies move profits to minimize the amount of taxes they have to pay, especially in foreign countries.

Details around cash taxes paid by country and even by state are not consistently provided - and with enough rigor, members of the Investor Advisory Committee (IAC) said on May 24, 2022.

“More is better,” Ronald Graziano, managing director, Global Accounting & Tax Research at Credit Suisse Group, said.

“The more disclosure is better [and] more consistent disclosure around, for example, bucketing certain items like tax reform would be helpful,” he said. “For example, we started with pre-tax earnings by state, by country; tax expense by state, by country; and then taxes paid by state, by country - that’s kind of where I think everyone would get a lot of information out of that.”

“There were also suggestions for by assets – so assets by country, revenue by country, in this way we have all the information to kind of put all the pieces together,” Graziano said, summarizing IAC’s views. “I think although that would be ideal.”

Under current U.S. GAAP, income taxes paid is provided as an aggregated number that is compiled under the current disclosure requirements of Topic 230, Statement of Cash Flows. Financial statement users have asked the board to require information of cash taxes paid at a more granular level such as by jurisdiction or geographic segment or by types of taxes paid such as the base erosion and anti-abuse tax (BEAT) or the global intangible low-taxed income (GILTI).

Furthermore, users suggested disaggregating income taxes paid between current and prior tax seasons.

The discussions come as the FASB has a 19

project to address income tax disclosure rules in targeted areas and is studying whether to require companies to disclose the top jurisdictions in which they pay the most income taxes; and require better information on the effective tax rate reconciliation table so that it includes disclosure by country.

“I wondered if that disaggregation is important or not or is it really just the focus on disaggregation by location?” FASB member Christine Botosan asked. “And then Ron you did say something about whether state and country – which one’s more important? that was a question in my mind.”

“I think we had a general feedback that maybe state is less important,” Graziano said.

“For example, there’s more impact, analysis around companies moving profits around the different countries to minimize tax as opposed to states,” he said. “And maybe if they do move to a different state, it’s kind of a one time thing and now you know they’re in that particular state and it’s all contained so you don’t have to really track it as much or break it down.”

Asked by FASB member Susan Cosper if the board required disclosure of past taxes paid by jurisdiction whether the panel discussed if there is “some kind of a cut off or coverage that members discussed that we should aspire to,” Graziano said no. “Just materiality in the accounting sense,” he said.

As environmental, social, and governance (ESG) considerations become more important materiality might not matter as much, Kevyn Dillow, vice president, senior accounting analyst at Moody’s Investors Service, added.

“Because we want to understand tax payments and the significant jurisdictions that they’re in,” she said. “And if there’s tax avoidance in those countries I think we’d want to understand that.”

May 24, 2022 - Small Public Companies Signal to FASB: Fix Accounting Rules for Research and Development Costs The FASB’s efforts to tackle intangibles could Summer 2022 | The Cooperative Accountant

ACCTFAX open up a huge can of worms if done too broadly, and therefore the board should steer its efforts toward areas that lack consistency, board advisers said.

Currently, there is a lack of consistency in reporting costs for internally generated intangibles, including research and development (R&D), which are required to be expensed, while the same assets, if acquired, have to be capitalized.

Investors find that odd, according to Small Business Advisory Committee (SBAC) discussions on May 12, 2022.

“R&D is where we see a large disparity, especially for life science companies and others [whereby] that is what they do,” Dominick Kerr, partner, Global Accounting Standards & Professional Practice at Connor Group, said. “It always is a bit odd if we see you’ve grown that yourself it’s expensed as incurred but if you buy that from somebody else who’s grown it themselves, now you have an asset on the books,” he said. “And that is a challenge from a comparability standpoint.”

Companies with significant R&D programs in place generally do offer disclosures in a line item “but it doesn’t always actually capture the value which I think is really important,” Kerr said. Once beyond the research phase following a capitalization model makes sense, he said.

“We see this a lot and it’s always a challenge when you have two entities that could be similar in what they are doing - one purchases that R&D asset if you would and one develops internally - those financials look completely different,” Kerr added. “Easier to just expense as incurred but I don’t know that that produces the best economic answer.”

Discussions by the SBAC, a panel that advises the board on small public company matters, surround the FASB’s research on whether to add a project to its technical agenda on disclosure and accounting for intangibles.

Intangibles “can open Pandora’s box in my mind because there’s a lot of intangibles 20

that go beyond” in-process research and development (IPR&D), Ryan Siurek, chief accounting officer, at Biodesix, Inc., said.

The FASB should therefore narrow its efforts “just to make improvements from a GAAP perspective in areas that we know there is inconsistency,” he said.

Current R&D Rules Current guidance for intangible assets, including R&D, span several areas of GAAP, a FASB staff member explained to the panel.

Initial accounting guidance, including R&D, depend on whether they are internally generated or acquired.

Under Topic 730, Research and Development, R&D costs are required to be expensed as incurred. An entity is required to disclose the total amount of R&D expense in each period for which an income statement is presented. The guidance for internally generated intangibles specifies that the cost of internally developing, maintaining, or restoring intangibles that are not specifically identifiable, have indeterminate lives, or are inherent in continuing business and related to an entity as a whole are an expense when incurred.

Other than that guidance, GAAP does not have over-arching recognition and measurement guidance for internally generated intangibles, staff said. Instead GAAP has different guidance for some internally generated intangible assets, including software, website development costs, cable television, broadcast, and others.

In contrast, intangible assets acquired either individually or with a group of assets are required to be capitalized and initially measured at their cost to the acquiring entity.

For a group of assets, entities are required to allocate the cost of the individual assets acquired based on their relative fair values.

Further, intangible assets acquired in a business combination are required to be capitalized and initially measured at their value at the acquisition date.

Summer 2022 | The Cooperative Accountant

ACCTFAX Project on Software Development Costs?

So far the board - at a prior meeting signaled it might add a narrow project on accounting for software development costs only, separate from the broader intangibles topic and R&D matters. No formal votes however have yet been made. (See Rules to Update Outdated Accounting Guidance on Software Costs Will be Developed, FASB Signals in the April 14, 2022, edition of Accounting & Compliance Alert.)

Currently, there are two different models in GAAP for software costs which have largely remained unchanged since they were developed in the 1980s and 1990s.

SBAC members said there is a disparity in current accounting guidance for development costs of internal and external use software.

Members suggested that development costs for software that is revenue generating, including hosted software arrangements, should follow one model, while development costs for software developed strictly for internal use should follow a separate model.

The increased use of agile methodologies for software development introduces challenges under the current accounting models, some on the SBAC also said.

May 23, 2022 - AICPA Auditing Standards Board Votes to Issue Final Quality Management Standards The AICPA’s Auditing Standards Board (ASB) voted to issue final quality management standards during a meeting on May 11-12, 2022.

The standards “introduce a risk-based approach to a firm’s system of quality management, formerly referred to as quality control, that allows firms to tailor their approach to quality management based on the nature and circumstances of their firm,” according to Ahava Goldman, associate director for audit and attest standards with the Association of International Certified Professional Accountants.

The final standards are: 21

• Statement on Quality Management Standards (SQMS) No. 1, A Firm’s System of Quality Control (SQMS No. 1) • SQMS No. 2, Engagement Quality Reviews; and • Statement on Auditing Standards (SAS) No. 146, Quality Management for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards.

SQMS No.1 supersedes Statement on Quality Control Standards (SQCS) No. 8, A Firm’s System of Quality Control (QC section 10) , and SAS No.146 supersedes SAS No. 122, Statements on Auditing Standards: Clarification and Recodification, as amended, AU-C Section 220, Quality Control for an Engagement Conducted in Accordance With Generally Accepted Auditing Standards (AUC section 220), according to an executive summary that was prepared before the ASB meeting.

This follows a proposal the board issued in February 2021.

ASB writes standards for audits of private companies.

The QM standards, according to the summary, are intended to: • Increase firm leadership responsibilities and accountability, and improve firm governance • Introduce a risk-based approach focused on achieving quality objectives • Address technology, networks, and the use of external service providers • Increase focus on the continual flow of information and appropriate communication internally and externally • Promote proactive monitoring of quality management systems and timely and effective remediation of deficiencies • Clarify and strengthen requirements for a more robust engagement quality review • Enhance the engagement partner’s responsibility for audit engagement leadership and audit quality Audit firms must comply with SQMS No. 1 Summer 2022 | The Cooperative Accountant

ACCTFAX flagged, for example, is in advertising expense by companies who spend a lot of money on online or for TV ads, according to the discussions. Investors want most public companies to detail how much they have to pay for the ads and do so consistently.

“If you just look at the top 100 purchasers of online or TV ad time, and then look to see which of them actually disclose advertising expense, it’s something less than 20 percent,” Ryan LaFond, partner and deputy chief investment officer at Algert Global, said.

May 19, 2022 - No Way Around Costs for “Almost all the firms that spend the most Companies on Project to Detail Statement money buying ad time disclose no advertising Expenses, FASB Signals expense,” he said. “I’m still frustrated The investment community’s push for more with this as we talk about a principle [and detailed expense information in the income so forth], is the fact that there’s such a statement will come at a cost to companies, large gap that I think just providing some and there is no way around it, a recent FASB additional prescriptive information at least advisory discussion signaled. for the investment community, we would be “Each of our board members recognizes extremely happy and I can’t believe that it’s disclosing further disaggregated information that costly to do.” has a cost associated with it—it does,” FASB Preparers on the SBAC said they are Chair Richard Jones told the Small Business Advisory Committee (SBAC) on May 12, 2022. not adverse to providing “decision-useful” information to investors but want the FASB to “Just like every other standard we issue, draw the line on certain kinds of information. we recognize that and therefore making “There are a number of elements of cost sure that we can talk about that benefit that we have in our income statements that to investors in allocating capital is very would not be challenging to disclose,” Ryan important. But it’s not lost on us, there is a Siurek, chief accounting officer at Biodesix, cost to it - there’s no way around it,” he said.

Inc., said. “But we’re not going to disclose “I doubt what we come out with will just be them if they’re going to be a competitive there for every company, that’s something disadvantage relative to others that we do we’re going into with our eyes wide open.” business with. So I think that comes down His remarks were in relation to discussions to a fundamental issue,” he said. “For me, with the SBAC about the board’s project on when I’m working at disclosures that we think disaggregation of expenses in the income are relevant to provide investors, I’m bench statement, a topic investment groups have marking what I do in my 10-Q against other asked the board to prioritize. The SBAC is a people in my sector, no matter what industry panel that advises the board on small public I’m in, to make sure I’m providing a consistent company matters. level of information.”

SBAC members offered a glimpse at the The discussions come as the board has tough line the board has to walk: provide been seeking input on its efforts to improve investors with the level of granularity and the usefulness of business entities’ income consistency they want without asking companies to disclose information that could statements through the disaggregation of place them at a competitive disadvantage, or a. Selling, general, and administrative (SG&A) expenses, that would be too costly to comply with.

A big area of disclosure deficiency analysts b. Cost of services and other cost of revenues,

by December 15, 2025.

SQMS No. 2 will be effective for audits or reviews of financial statements for periods beginning on or after December 15, 2025, and for other engagements in the firm’s accounting and auditing practice beginning on or after December 15, 2025.

SAS No. 146 will be effective for engagements conducted in GAAS for periods beginning on or after December 15, 2025.

22

Summer 2022 | The Cooperative Accountant

ACCTFAX and c. Cost of tangible goods sold.

In preliminary discussions, some FASB members said they are interested in pursuing a principle that would disaggregate categories that respond differently to changes in economic conditions or that would leverage aspects of the disaggregation principle in Topic 606, Revenue from Contracts with Customers. The board also discussed quantitative thresholds or “backstops,” and discussed how those alternatives might be affected by issues such as inventoriable costs (which results in significant challenges to disaggregate costs after they have been capitalized into inventory).

May 13, 2022 - FASB Mulling Whether to Require Disclosure of Taxes Paid by Top Jurisdictions The FASB on May 11, 2022, said it would research whether to require companies to disclose the top jurisdictions in which they pay the most income taxes.

The board will also research improvements to the tax rate reconciliation table, a tool that can help with the understanding of future cash flows when there are changes in tax laws, according to the discussions.

No rulemaking decisions were made.

Staff will research two alternatives: disclosure of income taxes paid to states and countries, such as top 5, top 10, or any other number, on the basis of the amount of income taxes it paid to each jurisdiction during a reporting period; disclosure of the amount of income taxes paid for each of the jurisdictions identified on the basis of a quantitative threshold.

“I think [a jurisdictional approach] is really the only viable alternative,” FASB member Marsha Hunt said. “That’s the auditable way to go,” she said. “An entity is actually transferring cash somewhere. So you know who you paid, you know how much you paid.”

23

Especially important are disclosures for taxes paid in foreign countries as there is less transparency, some board members said.

“To me this is a really important issue,” FASB member Gary Buesser said. “If you look at it by jurisdiction, U.S. federal clearly is important; the states one line item for me is fine, [but] it’s really the foreign jurisdictions that are important here,” he said.

Under current U.S. GAAP, income taxes paid is provided as an aggregated number that is compiled under the current disclosure requirements of Topic 230, Statement of Cash Flows. Financial statement users have asked the board to require information of cash taxes paid at a more granular level such as by jurisdiction or geographic segment or by types of taxes paid such as the base erosion and anti-abuse tax (BEAT) or the global intangible low-taxed income (GILTI), a staff member explained to the board.

Furthermore, users suggested disaggregating income taxes paid between current and prior tax seasons.

“The test on whether we’re making progress is whether the disclosure that we’re going to create is going to allow them to assess risk and opportunities from changes in foreign tax policy in particular and state policy secondarily,” FASB member Fred Cannon said.

The early-staged discussions are in relation to a revised project to provide targeted improvements to disclosures under Topic 740, Income Taxes.

The board also discussed potential approaches that would improve the rate reconciliation table, another area users flagged as needing more detailed and consistent information especially related to the foreign tax rate differential.

Board members favored an approach that would establish a quantitative threshold with any reconciling item greater than that threshold needing to be separately disclosed in the rate reconciliation. The threshold would be aligned with existing SEC guidance.

Summer 2022 | The Cooperative Accountant

ACCTFAX Standardizing the rate reconciliation information would drive consistency in financial reporting and help with comparisons of companies that may have different operational structures but are in the same industry, board members said.

Under current GAAP, public companies are required to disclose a rate reconciliation from the statutory rate tax to the effective tax, whereas private companies are only required to disclose the nature of significant reconciliation items.

Additionally, all companies are required to disclose the nature and effect of any other significant matters affecting comparability of information for all periods presented if it is not disclosed elsewhere.

Furthermore, SEC guidance requires disaggregation of reconciling items based on five percent of the amount computed by multiplying pre-tax income by the applicable statute or income tax rate.

May 12, 2022 - Accounting Rules Will be Developed for Crypto Assets, FASB Says The FASB on May 11, 2022, unanimously voted to add a project to its technical agenda to develop recognition, measurement, presentation, and disclosure guidance for cyptocurrencies, a subset of digital assets.

The topic has become sufficiently prevalent to warrant accounting rules that reflect the underlying economics of those types of assets, the board said.

“The prevalence of the issue is broad throughout the economy – not necessarily public companies – but I think given its breadth in the economy I think it’s important to address,” FASB member Fred Cannon said.

“We have to recognize this is a very rapidly evolving asset class - it’s going through quite wild gyrations,” said Cannon, one of two analysts on the board. “And it feels like, and again this is just my view, we’re either at the end of the beginning of adoption of a new technology, or the beginning of the end of some speculative excess, not sure, maybe 24

both of those or maybe neither but we have to recognize that this is rapidly evolving and we want to allow for some adaptability of accounting standards to that evolution.”

The decision is contrary to the board’s overseas counterpart, the IASB’s view that a comprehensive project for its IFRS standards “would be complex and maybe premature, given [that] such crypto-assets and liabilities are part of a new and rapidly evolving ecosystem,” and as well differs from the FASB’s vote two years ago – same things considered.

Different this time, however, is the SEC’s push and Staff Accounting Bulletin (SAB) No. 121, issued late March on accounting for obligations to safeguard crypto assets held for platform users. Recently, SEC Acting Chief Accountant Paul Munter pressed the board to prioritize the topic, stressing his office has been pulling in a high volume of consultations in the area, many of which are complex.

In adding the project, FASB members acknowledged that scoping the topic is going to be challenging, including weighing the application of ASC 820, Fair Value Measurement, in light of the volatility of the crypto marketplace. Specifically, in November 2021, crypto reached a market cap of $3 trillion dollars but dropped by one trillion to $2 trillion by March this year.

“I recognize that with highly volatile assets fair value is a very unforgiving model – it is,” FASB Chair Richard Jones said. “That being said I think that transparency is also very important to people so they can make their own decisions, and so I would be very interested as we pursue this in seeing how we can provide that transparency in the accounting, which I think is very important here, not just in the disclosure,” he said.

Board Tackling a New Agenda The topic is being discussed at a time when the board is developing its five-year technical agenda, which generally is set based on three factors: whether there is an identifiable and sufficiently pervasive need to improve U.S. Summer 2022 | The Cooperative Accountant

ACCTFAX GAAP; whether there are technically feasible solutions and the perceived benefit to those solutions are likely to justify the expected cost of change; and whether the issue has an identifiable scope.

Interestingly, U.S. GAAP already have the rules in place for digital assets, according to the discussions.

“I think GAAP does have guidance on accounting for nearly any asset you can think of,” FASB Vice Chair James Kroeker observed. “If an asset is a security we have guidance, if an asset is an intangible we have guidance, if an asset is inventory we have guidance. I would say GAAP does have accounting guidance for digital assets,” he said.

The AICPA’s nonauthoritative paper on the topic “simply pointed people to the authoritative points in GAAP that tell you the accounting for different types of assets including digital assets that are securities and digital assets that are intangibles,” Kroeker said. “And so all the discussion about GAAP not having guidance I think is really a short cut for a request for an exception to GAAP that allows a certain category of items that don’t meet the definition of a security and are not tangible – so certain intangible assets to be accounted for at fair value – and I think for very good reasons we’re getting that request,” he said.

There was a hint that not all are in agreement that the topic is prevalent in the accounting world, though all on the board agreed to the project.

Specifically, board member Gary Buesser, also an analyst, pointed out that the disclosure aspect of rules on digital assets would be the most important for investors over recognition and measurement rules “if and when digital assets become a pervasive issue on companies’ balance sheet.”

“But I don’t think we’re there, a few companies yes, most companies no,” he said.

Commodities Won’t be Included In a related discussion, the board also voted 25

against including accounting for commodities at this point in time under the project, believing it would complicate and slowdown the efforts on digital assets.

Jones, however, under his purview as chair kept the project on the board’s research agenda but on pause until the work on digital assets is concluded.

“I think commodities are kind of the neglected stepchild in the accounting here.

We see this issue, I think there was originally a model that might be a pre-1960 accounting standard that recognized that there were certain unique commodities that maybe a fair value or net realizable value treatment made sense,” said Jones. “I think there’s probably been some tortured application of the broker dealer guide to get things at fair value today versus just dealing with it from an accounting perspective,” he said. But “putting it in this project would be complicated and it would slow the project, which is something that I don’t want to do.”

May 10, 2022 - Proposed FASB Accounting Rules to Revise Segment Reporting Coming in Third Quarter The FASB plans to issue a proposal during this year’s third quarter on revisions to segment reporting, “an area of great importance to investors,” chair Richard Jones told an industry conference.

Segment reporting provides details about revenue generating business units within a public company.

The project “is aimed at improving the segment disclosures to provide users with more detailed information about a public company’s reportable segments,” Jones said on May 4, 2022, at the 20th Annual Baruch College Financial Reporting Conference.

Five years ago the board added a project to its technical agenda in response to feedback to its 2016 Invitation-toComment that it should improve the segment aggregation criteria and disclosure requirements under Topic 280, Segment Reporting.

Summer 2022 | The Cooperative Accountant

ACCTFAX Conference moderator Norman Strauss, EY’s executive professor-in-residence, observed that segment reporting was introduced about 40 years ago under superseded FASB Statement (SFAS) No. 14, Financial Reporting for Segments of a Business Enterprise, but is now back on the board’s agenda as is goodwill accounting.

“Is that just the way it has to be that these projects don’t seem to quite ever get done?” he asked.

“I would say it’s probably when you look at financial reporting it’s an evolution, it’s incremental improvement over time,” Jones responded. “There is a saying ‘there’s not a lot of new accounting issues, it’s just different ways of looking at the issues, and different ways of communicating that story to investors.’”

The FASB’s forthcoming proposal is being drawn with an overarching principle that a company should disclose significant expense categories and amounts that are both: regularly provided to the chief operating decision maker (CODM), and included in each reported measure of segment profit or loss.

“What we’re looking at right now is actually something that is providing more affirmation about the expenses in those segment disclosures, it’s not throwing out the entire model by any means, it’s simply making incremental improvements,” Jones said.

The topic is being addressed at a time when the appetite for financial reporting information and the ability to process it has increased, he added.

“When you look at the largest of the Fortune 500 companies back in 1980 versus today, it’s seven times greater in revenues, and very often you say ‘is there additional information about that income statement that could be provided to investors to help them better understand those ever growing companies?’” said Jones. “So yes, maybe there’s not a lot new, but there may be new ways of looking at it and technology and the evolution of all of our stakeholders may 26

enable different information to be presented to investors to make those decisions.”

Under FAS 14 “in order to do segment reporting you had to decide who the principle decision-maker was to follow on what to disclose,” Strauss observed.

“In my case the chief operating decision maker is clearly my wife - [for] other people sometimes it was the CEO, it might have been the comp and so on,” he joked - a subtle observation that making the determination might not be that clear cut for some entities.

May 5, 2022 - FASB Open to Hearing of Reporting Issues on Accounting for Inflation, Chair Says Details investors may want to know about in a higher inflation environment would likely be covered in management’s discussion and analysis (MD&A) disclosures or by the FASB’s current efforts to require more detailed income statement information, FASB Chair Richard Jones said.

“That being said we’re certainly interested if people have ideas of things we should be doing in this area,” Jones said on May 4, 2022, at the 20th Annual Baruch College Financial Reporting Conference, which was held virtually.

“When I think about inflation today and recognizing our financials are designed to work with what comes out of the SEC, and I look at the MD&A disclosures, and I look at changes in revenue and cost based on volume and pricing that’s often in MD&A disclosures coupled with the detail that’s provided on expenses, and some of that detail we’re contemplating providing via the disaggregation of the income statement project, it appears that that may provide that detailed information that people could be looking for in a higher inflation environment,” he said.

MD&A is the narrative section of company’s annual reports or SEC 10-K filings, an SEC requirement.

Summer 2022 | The Cooperative Accountant

ACCTFAX His remarks were in response to a question posed by conference moderator Norman Strauss, EY Executive Professor-in-Residence, about whether the FASB is thinking about revising old inflation accounting rules from the 1980s, or “is it really too early?”

The theory of the ‘80s guidance was that if inflation continues at some point, financial statements become less and less useful, Strauss said.

“Adding apples and oranges - and when you add 2020 dollars to 2022 dollars, the difference is confusing and not really addable,” he said. “In those days it was really a big deal, companies had to disclose among other things - something called the purchasing power gain - the example of that was if you had $100,000 mortgage and you have 10 percent inflation you could pay it back with cheaper dollars and therefore you had a purchasing power gain of $10,000 that year that could be reported on a pro forma type income statement.”

As a joke, Strauss said “I made a mistake of explaining that to my wife about the purchasing power gain [and] the next day she went out and spent it,” — a subtle illustration of current spending trends.

Accounting for inflation has become a top reporting issue because prices are increasing as fast as during the 1980s when FASB Statement (SFAS) No. 33, Financial Reporting and Changing Prices, the rules Strauss was talking about, were in place. SFAS No. 33 was codified in ASC 255, Changing Prices.

Jones noted inflation is at the top of every business news article, causing him to dust off a paper from the Accounting Historian’s Notebook, called The Evolution of Inflation Accounting in the U.S., which showed the journey that different standard-setters took on the topic.

He observed that the disclosures on changing prices that were required decades ago were “strongly encouraged versus required,” which appears “at least for the last several years to be code for ‘people don’t do it.’”

27

“But it is there,” Jones added.

In the late ‘80s, the FASB decided to move from “required” to “voluntary” for the disclosures because their valuation at the time was it was not really being effectively used. “I don’t know how many would say that we should just make that required disclosure on changing prices but we’re certainly paying attention to it,” said Jones.

The topic comes up at a time when the FASB is gearing up to establish its new fiveyear technical agenda for 2022 to 2026.

Topics are typically brought to the board’s attention if there is pervasive diversity in practice among companies, or because of a lack of accounting rules in U.S. GAAP. Agenda decisions are decided by the full FASB board at a public meeting. Research agendas however are set by the chair.

April 21, 2022 - FASB Drops Project to Reorganize Consolidation Accounting Rules The FASB on April 20, 2022, unanimously voted to drop a project to reorganize consolidation accounting rules, agreeing the effort would not produce the simplification companies wanted.

Reorganizing and then trying to simplify terminology of Topic 810, Consolidation, in targeted areas would cause accountants to incur large one-time cost, especially those that have significant documentation related to past consolidation assessments, according to the discussions. Also, practitioners would need to revise extensive published interpretive guidance as a result of the reorganization.

“I don’t think that reorganizing it and changing some words will really accomplish what is the real issue here which I think is ‘do we have the right consolidation model?’”

FASB Chair Richard Jones said.

Jones added a project to the board’s research agenda, part of his purview as chair, for staff to study whether it is feasible to develop a single consolidation model to replace the separate variable interest entity (VIE) and voting interest entity (VOE) models Summer 2022 | The Cooperative Accountant

ACCTFAX that have to be followed.

“Consolidations is probably one of the most important decisions you make in accounting, and if you don’t think so just pick up any Fortune 500 company and delete half the numbers because the reason the numbers are in that financial statement is because the business was made to consolidate entities,” he said.

The consolidation project was added to the FASB’s agenda in 2016 after accountants said the GAAP codification was tough to navigate and explain in that area. In September 2017, the board issued Proposed Accounting Standards Update (ASU) No. 2017-280, Consolidation (Topic 812): Reorganization, to suggest revisions to certain VIE terminology. The proposal was “met with resistance from consolidation specialists who raised concerns that changes to those terms could inadvertently affect how they are interpreted,” according to a staff analysis.

“This really to me is a weak spot for us organizationally, particularly when you look at smaller public companies and private company constituents,” FASB Vice Chair James Kroeker said. “What we do hear is that the language is so impenetrable to somebody who is not a national office expert, doesn’t spend significant amounts of time - probably not even using the [codification] but using the books that have been put together by the largest firms,” he said. “Oftentimes the answer is ‘you can’t really use the cod you’ve got to go to somebody else’s publication.’ I’d love to see if there is a way to come up with a single model that uses terminology that accountants are probably more familiar with.”

The decisions come as the board has been working toward establishing its fiveyear technical agenda from 2022 to 2026. As part of the process, older projects are being weighed to determine whether they should be kept or removed from the agenda to make room for more pressing accounting topics.

The consolidation project was also included in Invitation-to-Comment (ITC) No. 2021-004, Agenda Consultation, to obtain 28

feedback about its direction.

In general, FASB staff said the consolidation guidance would remain conceptually and terminologically complex even if it were reorganized, “therefore we expect that many entities would continue to rely on interpretive guidance rather than refer to the codification directly.”

Moreover, “similar statements were reiterated in the comment letters to the 2021 agenda consultation” and therefore the staff questioned “whether the long-term cost savings would exceed the one-time cost incurred by preparers and practitioners that need to revise existing documentation and published guides.”

April 14, 2022 - Investor Disinterest Push FASB to Drop Project on Distinguishing Liabilities from Equity The FASB on April 13, 2022, voted 5 to 2 to drop the second phase of its project to simplify rules for distinguishing liabilities from equity, after finding no viable solution and hearing that investors do not view it as a priority issue.

Rules for distinguishing liabilities from equity were flagged last year as a troublesome area for companies that use special purpose acquisition company (SPAC) vehicles to go public—cited as the cause of frequent misstatements due to accounting for warrants.

The board’s project aimed to improve and align the two existing indexation models used to evaluate financial instruments with characteristics of equity in Topic 480, Distinguishing Liabilities from Equity, and Subtopic 815-40, Derivatives and Hedging— Contracts in Entity’s Own Equity.

Ultimately there was no clear cut path on the issue, according to the discussions.

“This is a very complex area of accounting but the complexity isn’t for complexity sake alone, the complexity is because these instruments are very complex and in my view if we change the rules the instruments will change and continue to be incredibly Summer 2022 | The Cooperative Accountant

ACCTFAX complex,” FASB member Fred Cannon said.

“And I think the staff did a very good job going down a number of paths, and showing it does not appear there’s a viable path that we can reach consensus on - so I don’t view this as an achievable project even after these many decades,” he said. “I don’t see this as a priority for users, I see it as a priority for some folks who want to reduce the complexities, but I haven’t heard it’s a priority for users.”

A staff analysis of the project and responses to Invitation to Comment (ITC) No. 2021-004, Agenda Consultation, showed that views were mixed and conflicted, the discussions indicated. The ITC, which included an analysis of the project and four potential paths forward, was issued last year to solicit public comment about the board’s five year technical agenda from 2022 to 2026.

Other topics such as disaggregation of income statement items were cited by investors as being more pressing, board member said.

“Is the guidance complex for companies and other firms?—yes, these are complex transactions, complex instruments and we are not going to come up with accounting standards that will automatically reduce complexity, FASB member Gary Buesser said.

“If I was asking an investor ‘is this project on the list of the top 10 most important projects we should work on based on the agenda consultation?’ the answer is unequivocally no,” he said. “I just don’t understand why we’d want to put our valuable staff resources into a project that’s 30 years ongoing, we’ve reduced the path five to four, so maybe in five or 10 years we’re down to three paths – this is not a good use of our staff’s time.”

FASB member and academic Christine Botosan held similar views as Buesser and Cannon, the two analyst voices on the board.

Two Dissented; Two Conflicted FASB Vice Chair James Kroeker and board member Susan Cosper, the two dissents, argued that progress could be made to further simplify the rules, though tough to 29

do, as there are viable solutions that could be pursued.

“I think we’ve heard that the larger companies and the larger firms can handle this guidance that we have today that’s very complicated, I think once you get below that it’s a big question mark and I don’t think that we have good data on whether or if they’re applying it consistently and that concerns me a great deal,” said Cosper. “So I think this has been particularly vexing to those.”

FASB Chair Richard Jones and board member Marsha Hunt, who ultimately voted to drop the project, were very conflicted in doing so.

“While there are possible paths that we could continue to explore, it’s not clear to me that any of those paths would be received well by all of our stakeholder groups,” said Hunt. “ The other troubling point is – it’s our job to deal with things that are hard to do...but I do agree that at this time, with the feedback that we’ve received about other areas of prioritization, I’m comfortable supporting the staff recommendation that at this time [to] redirect the resources to other projects,” she said.

Similarly, Jones said the ITC responses swayed his view, because though all agreed the model was complex, there was a lack of consensus on how to fix it. “I think this is something we have to deal with at some point in time,” he said. “I’m not sure now is the time.”

March 3, 2022 - Chalk Up All Inseparable Customer Relationships as Goodwill, FASB Says The FASB on March 2, 2022, tentatively voted by 5 to 2 to require public companies to subsume all customer relationships that cannot be separated into goodwill – a change that inches toward what private companies can do now.

The rule would apply to both contractual and noncontractual customer relationships that are inseparable, a change from current rules. Today, contractual customer Summer 2022 | The Cooperative Accountant

ACCTFAX relationships are separated under GAAP. Views on the topic differ, but research found that generally investors do not distinguish between goodwill and intangible assets, according to the discussions. “I don’t want to combine assets with goodwill but what I would like to do is stop reporting separately from goodwill items that are in fact goodwill,” FASB Vice Chair James Kroeker said. “I don’t believe that noncontractual hoped-for future sales meets the definition of an asset,” he said. “And I think today it actually gets combined with - in many cases - both the contractual piece, the in-place contracts, and the hoped for future sales and I think it’s misleading to investors - they don’t understand what the item represents.”

Overall, the decision could mean that the initial goodwill balance would be larger.

Doesn’t Sufficiently Differ The discussions are part of the board’s ongoing efforts to revise the subsequent accounting for goodwill. Goodwill is the residual figure that is recorded on the balance sheet after subtracting the book value of a business from the higher price that was paid for it.

The board deliberated on whether an intangible asset acquired in a business combination is sufficiently different from goodwill to warrant a separate accounting.

At the crux of the matter is whether the intangible asset is identifiable, which means whether it is of a contractual legal nature or is able to be separated from the entity.

Customer relationships are deemed to be very similar to goodwill, and some financial statement users do not distinguish those assets in their analysis, according to the discussions. If customer relationships and goodwill are amortized and displayed together, it would be easier for users to include or exclude the amortization as needed.

“On the scale of 1 to 100, this would be 30

probably 1 in terms of info I need,” board member and analyst Gary Buesser said. “Let’s work on information disclosures that would be useful to users and this is a sideshow.”

Two Dissent FASB Chair Richard Jones and board member Fred Cannon voted in agreement with staff against changing current rules.

“Stepping back, investors are looking for more information about intangibles and so it’s very difficult for me to support something where we’re taking away information albeit dubious information about intangibles without a broader look at intangibles, disclosures overall,” Cannon, an analyst, said.

“So if we get to the point where we have what I would consider a strong disclosure package - would I object to this potentially being subsumed in goodwill?—probably not,” he said. “I think there are some people who find utility from it and so therefore I don’t want to give up on this until we get a fuller package.”

Other Issues Kept in Scope The FASB also tentatively voted to keep the following types of goodwill within the scope of the subsequent accounting guidance in Subtopic 350-20, Intangibles— Goodwill and Other— Goodwill: goodwill from a reorganization such as a bankruptcy; subsidiary goodwill, including “pushdown” accounting; and goodwill arising from application of the equity method of accounting.

Next Steps Deliberations are still early-staged and board decisions are tentative leanings and therefore can change at a later date, according to the discussions. At a future meeting, the board will give leanings on presentation on the financial statement, consequential disclosures, transition matters, and miscellaneous issues.

Summer 2022 | The Cooperative Accountant

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

Potential Federal Tax Legislation in 2022

By Marlis Carson While it is extremely unlikely that there will be a major tax bill in 2022, a few provisions could be enacted by year-end.

Legislative opportunities include the FY 2023 appropriations bill and the post-election lame duck session in which unresolved issues are addressed. Following are several tax provisions that may be of interest to cooperatives.

Tax Extenders. Forty-one so-called “tax extenders” expired at the end of 2021; if the past is prologue, these and other expiring provisions will be renewed retroactively at the end of 2022.

Farmer cooperatives may benefit from several energy tax incentives, including: • The second-generation biofuel producer credit (Section 40(b)(6)(J)); • Excise tax credits and outlay payments for alternative fuel (Sections 6426(d)(5) and 6427(e)(6)(C)); and • Excise tax credits for alternative fuel mixtures (Section 6426(e)(3)).

Research and Development “Fix.” Under a change made by The Tax Cuts and Jobs Act of 2017, taxpayers must capitalize and amortize R&D expenditures for tax years starting after December 31, 2021. There is bipartisan and bicameral support to reinstate the Section 174 deduction for R&D; that change could be enacted by year’s end.

Retirement Tax Credit. The Retirement Tax Credit Parity for Cooperatives and Charities Act, H.R. 6738, would provide 31

GUEST WRITERS Marlis Carson General Counsel Vice President – Legal, Tax and Accounting National Council of Farmer Cooperatives 50 F Street, N.W. – Suite 900 Washington, D.C. 20001 tel: (202) 879-0825 fax: (202) 626-8722 e-mail: mcarson@ncfc.org Rebecca L. Thoune (Smith), CPA, Signing Director, Cooperatives CliftonLarsonAllen LLP 10401 West Innovation Drive, Suite 300 Wauwatosa, WI 53226 tel: (414) 721-7513 fax: (414) 476-7286 e-mail: rebecca.thoune@claconnect. com

Summer 2022 | The Cooperative Accountant

TAXFAX participants in Cooperative and Small Employer Charity (CSEC) defined contribution pension plans a new tax credit. The credit is ten percent of employer retirement savings contributions, up to a cap credit of $100 per employee. A CSEC Plan is defined as a closed group of existing plans generally maintained by more than one employer.

The plans are sponsored by charities or rural cooperatives.

SECURE Act 2.0. In March of 2022 the House approved the Securing a Strong Retirement Act (H.R. 2954), or SECURE 2.0, by a vote of 414 to 5. The legislation is an updated version of a bill approved by the Ways and Means Committee in May of 2021.

The bill would expand automatic enrollment in 401(k) plans by requiring 401(k), 403(b) and SIMPLE plans to automatically enroll participants in the plans upon becoming eligible, with the ability for employees to opt out of coverage. The legislation also would clarify and simplify a number of plan rules.

If approved by the Senate, the bill could be addressed in the lame duck session. A Ways and Means Democratic staff sectionby-section summary of the bill is available. A one-page summary is also available.

Tax Proposals in President Biden’s Budget Proposal. While the President’s budget is merely a request to Congress, it does reflect the administration’s priorities.

The administration released the President’s budget in late March; it includes the following tax proposals: • Raise the corporate income tax rate from 21 percent to 28 percent.

• Increase the top marginal income tax rate for high earners from 37 percent to 39.6 percent.

• Require households worth more than $100 million pay tax at a rate of at least 20 percent of their income, defined to include both standard taxable income and unrealized income, over a period of years.

• Tax long-term capital gains and qualified dividends of taxpayers with taxable income of more than $1 million at ordinary rates.

32

• Repeal deferral of gain from like-kind exchanges.

• Make the New Markets Tax Credit permanent.

A general explanation of the tax provisions is available. A White House fact sheet provides an overview of the budget.

Transformation of Partnership Reporting

By Rebecca Thoune Partnerships and Limited Liability Companies taxed as partnerships may be relatively easy to establish as a business structure, but the ongoing reporting has transformed significantly over the last ten years. There are three significant items, which are discussed below, in the last five years that has increased the amount of reporting as a result of a desire for transparency and simplification. In my 22 year career I can easily say that the attempt to simplify and provide transparency always has come with additional reporting and compliance, so simplification clearly has not been met. The jury is still out if these changes have created transparency.

Centralized Partnership Audit Regime (CPAR) The Bipartisan Budget Act of 2015 (Public Law No. 114-74) was signed into law on November 2, 2015. In part, the law replaced the auditing and tax collection procedures for partnerships under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and the electing large partnership rules with the centralized partnership audit regime.

Effective for 2018 and beyond, the IRS has adopted this new rule governing partnership income tax audits. The new rules represent a significant departure from the prior partnership audit rules. The new rules are effective for all partnerships, including limited liability companies (LLCs) taxed as partnerships, with tax years beginning on or after January 1, 2018. Among other things, the new rules: Summer 2022 | The Cooperative Accountant

TAXFAX • Allow the IRS to assess and collect tax on understatements of income at the partnership level; • Compute tax deficiencies based on the highest applicable federal income tax rates;

• A foreign entity that would not be treated as a C corporation if it were domestic • Any person that holds an interest in the partnership on behalf of another person.

If an S corporation is a partner, the partnership does not need to consider • Grant a partnership representative whether the shareholders would be sole authority to act on behalf of the considered eligible partners if they owned an partnership in audit proceedings; and interest in the partnership directly; however, the S corporation and each of its shareholders • Simplify the administrative burden placed on the IRS in connection with a partnership count as partners for purposes of the 100 partner test. audit.

Many eligible partnerships will elect out of You will need to (i) decide whether to the new audit rules in order to make historic opt out of the new rules (if you are eligible partners pay tax at their actual tax rates and to do so), (ii) designate a partnership to allow each partner to decide whether representative, and (iii) consider whether your to settle or appeal the results of an audit. partnership agreement needs to be updated However, there are reasons a partnership to reflect the new rules. may not want to opt out, including that there may be additional administrative burdens Opt out election associated with electing out (e.g., election Eligible partnerships will not be subject to the has to be made annually and notice of the election must be provided to each partner). In CPAR for any year in which it files an election with the tax return to opt out of the rules. This some cases, the benefits of electing out may not justify the cost, especially if the potential is a yearly election not a one-time election.

An eligible partnership is any partnership with tax exposure is low or the partners intend to adopt the same strategy in the audit.

100 or fewer eligible partners.

Eligible partners are: Role of the partnership representative • Individuals • C corporations A partnership that does not opt out must • S corporations designate a person or entity to serve as the • Foreign entities that would be treated as a partnership representative. The IRS requires C Corporation if it were domestic that the partnership representative have • Estates of deceased partners substantial presence in the United States. If Any partnership that contains any of the the partnership representative is an entity, the following types of partners are not eligible to partnership representative must appoint an elect out of the CPAR: individual to act on its behalf. With respect to IRS audits, the partnership representative • A trust (including a revocable living trust has the sole authority to act on behalf of and or any other trust that is ignored for tax legally bind the partnership (but may appoint purposes) a power of attorney to act on its behalf).

• A disregarded entity (including a single Other than the partnership representative, member LLC that is ignored for tax no partner may participate in any audit or purposes) any other proceeding with the IRS. The • A partnership partnership representative indicated on the return applies for that specific tax period, • An estate of an individual other than a therefore you will have to designate who the deceased partner 33

Summer 2022 | The Cooperative Accountant

TAXFAX partnership representative is for each tax year.

There is no requirement that the partnership representative be the same for any given tax year however many taxpayers try to keep the partnership representative consistent from year to year. Since the partnership representative has the sole authority to act on behalf of the partnership and binds the partnership and the partners by their actions this decision should not be taken lightly, and careful consideration should be given to who the partnership representative is for any given tax year.

The actions of the partnership representative on behalf of the partnership and the partners include but are not limited to: • Entering into a settlement agreement • Agreeing to a notice of final partnership adjustment (FPA) • Requesting modification of an imputed underpayment • Extending the modification period by agreement • Waiving the modification period • Agreeing to adjustments and waiving the FPA • Extending the statutory periods for making adjustments by agreement • Making a push out election If a partnership is not eligible to elect out of the new rules or chooses not to elect out, there are options available to the partnership representative to cause the historic partners to pay tax rather than having the partnership pay the tax.

Effect on partnership agreements Partnership agreements may need to be modified to reflect the CAPR. For example, it may be appropriate for the partnership agreement to: • Designate the partnership representative; • Specify if the partnership should make the 34

opt out election, if available; • Restrict transfers of partnership ownership to ineligible partners; • Require the partnership representative to notify partners of developments in an audit; • Obligate partners to cooperate with the partnership representative in handling a tax audit (e.g., providing requested information, amending prior returns, etc.); • Restrict the partnership representative’s authority as appropriate (e.g., obtain approval from the partners before settling a tax dispute); or • Specify how any income tax paid by the partnership will be allocated among current and former partners, among other things.

Current State of IRS Examinations Within the last couple months, the IRS has indicated it is ramping up audits of partnerships and pass-through entities with a plan to significantly increase its staff. The IRS focus on partnership compliance is a direct result of the increase in the number of partnership filings, while there is a decrease in staff overseeing partnerships.

Exam activity under the CPAR has been somewhat limited. A couple reasons for this is the IRS generally has been examining taxpayers that early adopted and audits under the CPAR generally take longer than conventional exams do.

In March of 2022 it was published in a report from the Treasury Inspector General for Tax Administration that a high rate of partnership returns reviewed by the IRS under CPAR are going unchallenged. The report indicated that through fiscal 2021, 78% of the IRS’s 480 completed exams resulted in no change. This is much higher than the 50% average no-change rate for all partnership returns during the same period between tax years 2016 and 2018.

While it is expected to see an increase in Summer 2022 | The Cooperative Accountant

TAXFAX exam activity maybe it won’t be much of a concern if no change rates remain high.

Reporting of Partner Capital Accounts On February 21, 2021, the Internal Revenue Service (IRS) released the instructions to the 2020 Form 1065, U.S. Return of Partnership Income, indicating partnerships are required to report partner capital accounts on Item L of Schedule K-1 using tax basis as determined using the transactional approach (the Tax Basis Method). The purpose for this change, as stated by the IRS, is “part of a larger effort by the agency to improve the quality of information reported by partnerships and furnished to partners to facilitate increased compliance”. This change may also enhance the IRS’s ability to assess compliance risk and identify potential noncompliance when auditing partnerships under the regime discussed above. In prior years, taxpayers were permitted to use a number of methods to report partner’s capital including tax basis, GAAP, Section 704(b) or other.

The Instructions provide guidance on how to compute each partner’s capital account using the Tax Basis Method. While the Instructions do not provide specific guidance for every situation, they do provide helpful instruction as to how a partnership should report events or transactions where uncertainty lies. Specifically, the Instructions state that “the partnership should account for the event or transaction in a manner that is generally consistent with figuring the partner’s adjusted tax basis in its partnership interest (without regard to liabilities), taking into account the rules and principles of sections 705, 722, 733, and 742.”

Tax Basis Method (TBM) is a transactional approach, applying partnership tax accounting principles. The TBM increases a partner’s capital by: • Money contributed • The tax adjusted basis of property contributed • Partnership liabilities assumed by the partner 35

• The distributive share of income, gain, and tax-exempt income • The partner’s share Section 734 adjustments The TBM decreases a partner’s capital by: • Distributions of money • The adjusted tax basis of property distributed • Partner liabilities assumed by the partnership • The distributive share of losses and deductions, depletion items (up to the property basis) • The distributive share of the adjusted tax basis of charitable property contributions • The partner’s share Section 734 adjustments The instructions do make it clear that despite the reporting done by the partnership, it is the partner that is responsible for maintaining its adjusted tax basis in its partnership interest and that the amount reported by the partnership on Item L may be different from the partner’s tax basis in the partnership.

Determining the beginning capital account balance for the 2020 tax year The Instructions include specific guidance to transition capital account reporting to the Tax Basis Method for the 2020 tax year. As described below, a partnership’s approach to determine each partner’s beginning capital account amounts will be dependent, in part, on the method reported in the prior years and in part on what records the partnership has kept.

If a partnership reported capital accounts on other than a tax basis (i.e., generally accepted accounting principles (GAAP), section 704(b), or other basis) in the prior tax year, but maintained capital accounts in the books and records of the partnership under the TBM (e.g., to report a partner’s negative tax basis capital account in the prior year), then the partnership must report each partner’s beginning capital account using the Summer 2022 | The Cooperative Accountant

TAXFAX TBM. Where the partnership did not either report or maintain capital accounts using the TBM in the prior year, the partnership may redetermine the partners’ beginning capital account under one of the following four methods: • • • •

Tax Basis Method, as discussed above Modified outside basis method Modified previously taxed capital method Section 704(b) method

The best method to use for any given partnership will be based on the facts and circumstances of that particular partnership.

When choosing a method, it’s important to consider the availability of data required for each method, time constraints, and cost.

Schedule K-2 and K-3 Beginning with tax year 2021, partnerships, S corporations, and filers of Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships (for U.S. persons who are partners in foreign partnerships, or entities electing to be taxed as partnerships), will be required to include the new Schedules K-2, Partners’ Distributive Share Items — International, and K-3, Partner’s Share of Income, Deductions, Credits, etc. — International, with their returns if they have items of “international tax relevance” as described in the instructions and the updates posted on January 18, 2022.

While there is no concise definition of what “an item of international tax relevance” is, there is a reference to “the international tax provisions of the Internal Revenue Code” in the form instructions. Examples of items of international relevance that must now be reported on Schedules K-2 and K-3 (as opposed to on Schedules K and K-1) include: • Foreign tax credit–related information including the sourcing and basketing of income and deductions, including information related to items such as R&E expenses and interest expense.

• Interests in foreign entities or distributions from foreign corporations.

36

• Foreign partner’s U.S.-source income and/ or U.S. effectively connected income, including the distributive share of deemed sale items on the transfer of a partnership interest.

• Information related to: v Investments in foreign entities, e.g., passive foreign investment companies. v Interests in controlled foreign corporations, global intangible lowtaxed income (GILTI), and Subpart F income inclusions. v Foreign-derived intangible income.

Per the IRS, the new schedules K-2 and K-3 were created to provide consistency in the reporting to partners and shareholders. Prior versions of schedules K and K-1 did not require any specific format to provide international information, resulting in what could be a confusing array of statements attached to the schedules K and K-1. The new schedules K-2 and K-3 provide greater certainty and consistency, helping partners and shareholders to voluntarily comply with their filing and reporting obligations. The greater certainty also enables the IRS to verify that partnership and S corporation items are properly reported on partners’ and shareholders’ returns. This should reduce the burden on both taxpayers and the IRS by reducing unnecessary inquiries and examinations that may arise due to inconsistent reporting of partnership and S corporation items.

Partnerships and S corporations may not have previously reported information in as much detail and for every fact pattern where reporting is required. The new schedules require more detailed and more complete reporting than partnerships and S corporations may have been providing previously to partners and shareholders.

Exceptions to Filing The instructions and the January 18, 2022 updates provide certain exceptions to Summer 2022 | The Cooperative Accountant

TAXFAX completing Schedules K-2 and K-3. As stated • In tax year 2021, the direct partners in

By Barbara A.the Wech in the instructions, the partnership need not domestic partnership are not foreign complete Schedules K-2 and K-3, Parts II and partnerships, foreign corporations, foreign III if it knows that it has no direct or indirect individuals, foreign estates, or foreign partners eligible to claim a foreign tax credit. trusts.

A similar exception applies with respect to S • In tax year 2021, the domestic partnership corporations. or S corporation has no foreign activity, Additionally, the instructions provide that, including foreign taxes paid or accrued or if a direct or indirect partner is eligible to ownership of assets that generate, have claim a foreign tax credit, the partnership generated, or may reasonably expected does not need to complete the Schedules to generate foreign source income (see K-2 and K-3, Parts II and III, if the partnership section 1.861-9(g)(3)). knows that the direct and indirect partners • In tax year 2020, the domestic partnership are not completing Form 1116 or 1118. This or S corporation did not provide to its could be the case, for example, when the partners or shareholders nor did the partnership knows that the direct and indirect partners or shareholders request the partners do not claim a foreign tax credit or information regarding (on the form or when the partnership knows that the direct attachments thereto): and indirect partners qualify for an exception to filing the Form 1116 or Form 1118. A v Line 16, Form 1065, Schedules K and similar exception applies with respect to S K-1 (line 14 for Form 1120-S), and corporations. v Line 20c, Form 1065, Schedules K and If the partnership has only U.S. source K-1 (Controlled Foreign Corporations, income and none of the partnership’s income Passive Foreign Investment Companies, or deductions must be sourced or allocated 1120-F, section 250, section 864(c)(8), and apportioned by the partner, and all section 721(c) partnerships, and section partners are less-than-10% limited partners, 7874) (line 17d for Form 1120-S). the partnership need not complete Schedule • The domestic partnership or S corporation K-2, Part II. Further, if the partnership has has no knowledge that the partners only U.S. source income and none of the or shareholders are requesting such partnership’s income or deductions must be information for tax year 2021. sourced or allocated and apportioned by the partner, Schedule K-3, Part II is not completed If a partnership or S corporation qualifies for its partners that are less-than-10% limited for this exception, the domestic partnership partners. or S corporation does not need to file If the partnership knows that all its Schedules K-2 and K-3 with the IRS or with partners are less-than-10% limited partners, its partners or shareholders. However, if the the partnership does not need to complete partnership or S corporation is subsequently Schedules K-2 or K-3, Part III, Section 2. notified by a partner or shareholder that Further, the partnership must only complete all or part of the information contained on Schedule K-3, Part III, Section 2 with respect Schedule K-3 is needed to complete their tax to its partners that are not less-than-10% return, then the partnership or S corporation limited partners. must provide the information to the partner The IRS is providing an additional or shareholder. If a partner or shareholder exception for tax year 2021 to filing the notifies the partnership or S corporation Schedules K-2 and K-3 for certain domestic before the partnership or S corporation files partnerships and S corporations. To qualify for its return, the conditions for the exception are this exception, the following must be met: not met and the partnership or S corporation 37

Summer 2022 | The Cooperative Accountant

TAXFAX must provide the Schedule K-3 to the partner or shareholder and file the Schedules K-2 and K-3 with the IRS.

Section 4661(b). The listed chemicals are the building blocks of many chemical products.

The tax is generally figured at a specified perton rate. The specified rate of the reinstated Penalty Relief tax is twice the rate that was in effect when Taxpayers who make a good faith effort the tax lapsed in 1995. to comply with the new schedules for tax There are a variety of exceptions to the year 2021 will not be assessed a penalty, as Section 4661 tax specified in Section 4662. described in IRS Notice 2021-39. According For farmer cooperatives (and their farmer to the Notice, a filer will not be subject to members), two are particularly important – penalties if it made a good faith effort to one for certain taxable chemicals used in the determine whether it must file a part and how production of fertilizer (Section 4662(b)(2)) to complete a part if it determines it must file. and a second for certain taxable chemicals The notice outlines some factors the IRS will used in the production of animal feed consider in determining if a partnership or S (Section 4662(b)(9)). Another important corporation made a good faith effort. exception is contained in Section 4662(e), which exempts chemicals produced for export by domestic manufacturers. This The superfund excise tax on taxable exception helps level the playing field for chemicals and chemical substances is back domestic producers exporting taxable

By George W. Benson chemicals who must compete in international markets with foreign producers not subject to The Infrastructure Investment and Jobs a similar tax.

Act, P.L. 117-58 (the “Infrastructure Act”), The second component, contained in which President Biden signed into law on Sections 4671 and 4672, imposes a tax on November 15, 2021, reinstated one of the importers of “chemical substances” that are taxes, an excise tax on certain chemical manufactured outside of the United States. substances, historically used to fund the Chemical substances are, in general, products Hazardous Substance Response Trust Fund produced using significant amounts of (the “Superfund”). chemicals identified as “taxable chemicals.”

The excise tax on chemical substances The Section 4671 tax is intended to protect was originally enacted in 1980 as part of the domestic producers of chemical substances Comprehensive Environmental Response, from the advantage importers of chemical Compensation and Liability Act of 1980, P.L. 96-510 (“CERCLA”). CERCLA was enacted, in substances (produced overseas with “taxable part, to create a hazardous substance cleanup chemicals” not subject to the Section 4661 tax) would otherwise enjoy. program, and the Superfund has been used Section 4662(e) also provides exporters to help finance cleanup. The tax was allowed of chemical substances produced in the to expire on December 31, 1995. The United States with a means to claim a tax Infrastructure Act reinstates the tax effective refund, thus allowing them to compete in July 1, 2022. It is scheduled to sunset again international markets.

December 31, 2031.

Section 4672(a)(3) lists 50 “chemical The reinstated tax has two components. substances” subject to the tax. The IRS is The first component, contained in Sections authorized to add products to the list upon 4661 and 4662, imposes a tax on domestic a determination that “taxable chemicals manufacturers and importers of 42 “taxable constitute more than 20 percent of the weight chemicals” that are used as feedstocks in (or more than 20 percent of the value) of the the production of a wide range of chemical products. The taxable chemicals are listed in materials used to produce such substance 38

Summer 2022 | The Cooperative Accountant

TAXFAX (determined on the basis of the predominant method of production).” These percentages are reduced from 50 percent under prior law and so it is anticipated that a large number of products will eventually end up classified as chemical substance. In Notice 202166, 2021-52 IRB 901, the IRS has already identified another 101 “chemical substances” (based upon its determinations under the old law).

Under the old law, Notice 89-61, 1989-1 C.B. 717, as modified by Notice 95-39, 19951 C.B. 312, provided guidance as to how exporters and importers could request that certain substances be added to or removed from the list of chemical substances. The IRS received a number of such requests often from domestic companies seeking protection from foreign competition. Notice 202166 announced that notice is “suspended pending the issuance of additional guidance.”

Notice 2021-66 solicited comments “on whether any issues related to the reinstated Superfund chemical taxes require clarification or additional guidance.” A handful of comments have been received. One area of particular concern is determining the rate of tax on imported products. One of the commenters has requested the IRS to published standardized rates for each taxable substance.

Companies affected by the tax have been scrambling to put systems in place prior to the July 1 effective date. Some companies are required to obtain G Registrations to benefit from several exemptions available under the reimposed tax. The IRS released internal guidance (“Interim Guidance on Registration Tests for Form 637 Registrations Other than Under IRC 4101, including new G Registrations” (March 1, 2022)) providing guidance to its staff processing requests for G Registrations. All companies subject to the reimposed taxes will be required to report liability for tax on quarterly Form 720s (and to begin making semi-monthly tax deposits starting in July). Some taxpayers and trade 39

associations complained about the shortness of time to prepare for reporting and making deposits. In response to their comments and some Congressional prodding, in mid-April the IRS announced temporary relief from certain penalties related to failure to deposit amounts required by the new tax. See, Notice 2022-15 Most farmer cooperatives, except a few of the large ones, likely will not be subject to either the tax on taxable chemicals or the tax on chemical substances unless they are producers or importers of those items.

However, while not directly liable for the tax, some cooperatives likely will find that the price of some of the chemical substances they buy for resale to their members will be affected as producers and importers attempt to pass the taxes on to their customers. This new tax may add to the inflationary pressure already present. As noted above, the good news is that taxable chemicals used in the production of fertilizer and animal feed have been exempted from the tax (and, as noted below, the excise tax on crude oil and imported petroleum products has not, at least for now, been reinstated).

The old superfund taxes also included an excise tax on crude oil and imported petroleum products and a special environmental tax on corporate income. So far, these other superfund taxes have not been reinstated, but there are proposals to do so.

• Reinstatement of the superfund excise tax on crude oil and imported petroleum products was being used as one of the “pay-fors” in the Build Back Better Act, H.R. 5376, which passed the House last year but then stalled in the Senate.

It remains to be seen whether some slimmed-down version of the Build Back Better Act will emerge this year. If it does, it is felt likely to include a reinstated excise tax on crude oil and imported petroleum products.

Summer 2022 | The Cooperative Accountant

TAXFAX • A bill introduced in the House, H.R. 2703, would reinstate the special environmental tax on corporate income. This bill has not yet been acted on, and its fate is uncertain Special rules can extend the statute of limitations for taxpayers with foreign activities

By George W. Benson Determining with certainty when the Government is barred from assessing a deficiency with respect to a year by the statute of limitations is often not so easy for U.S. corporations with foreign activities.

The basic rule is that the Government cannot assess a deficiency with respect to a year more than three years after the return for that year is filed. Section 6501(a). If a return is filed early, the three-year period runs from the due date of the return. Section 6501(b) (1).

There are many exceptions to this rule. For instance, if no return is filed, the statute never runs. Sections 6501(c)(3). The same is true in the case of a false or fraudulent return or in the event there is a willful attempt to defeat or evade tax. Sections 6501(c)1) and (2). If a return omits a substantial amount of gross income (more than 25%), there is a six-year statute of limitations. Section 6501(e)(1)(A) (i). In the case of net operating or net capital loss carryback, the Government can assess deficiencies with respect to the carryback year even if that year is otherwise closed so long as the statute remains open on the loss year. Section 6501(h).

There are two special rules applicable to corporations with foreign activities that can unexpectedly extend the statute that have taken on increased significance in recent years as tax reporting for foreign activities has gotten ever more complicated.

Section 6501(c)(8) applies to corporations who do not provide the IRS with all information required by the following sections of the Code: 40

• Sections 1295(b) and 1295(f) – reporting related to passive foreign investment companies.

• Section 6038 – information reporting with respect to certain foreign corporations and partnerships.

• Section 6038A – information with respect to certain foreign-owned corporations.

• Section 6038B – notice of certain transfers to foreign persons.

• Section 6038D – information with respect to foreign financial assets.

• Section 6046 – returns as to the organization or reorganization of foreign corporations and as to acquisitions of their stock.

• Section 6046A – returns as to interests in foreign partnerships.

• Section 6048 – information with respect to certain foreign trusts.

Where required reporting is not made, this section provides that the statute of limitations “shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under the section.” Generally, the entire return remains open, but, if the failure is “due to reasonable cause and not willful neglect,” the statute remains open “only to the item or items related to such failure.”

Note that this extended statute may be triggered not just by failure to file a required form, but also by failure to report all required information on a required form, at least where the omission is significant. See, by analogy, CCA 200429007 (May 28, 2004), analyzing what kinds of failures to include information on a Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) would result in a “substantially incomplete” form and trigger a penalty under Section 6038A(d).

Section 6501(e)(1)(C) provides for a special six-year statute when a taxpayer “omits from gross income an amount properly included therein under section 951(a).” Section 951(a) requires inclusion of a taxpayer’s share of Summer 2022 | The Cooperative Accountant

TAXFAX Subpart F income as well as income with respect to controlled foreign corporations required by reason of Section 956 (investment of earnings in United States property). Also covered are required inclusions of global intangible low-tax income (“GILTI”). See, Section 951A(f)(1)(A).

It is the IRS’ position that Section 6501(e)(1) (C) leaves the entire return open, not just the portion of the return related to the omission.

See, CCA 202142009 (July 26, 2021), which provides: “Therefore, like section 6501(e)(1)(A), the phrase ‘the tax may be assessed … at any time within 6 years after the return was filed’ refers to all income taxes reflected on a return. Thus, the six-year limitations period under section 6501(e)(1)(C) applies to the entire tax liability for a particular tax year and is not limited to the specific subpart F items constituting the omission from gross income.” (emphasis added).

This seems like an extreme result. That is particularly the case since there is no dollar or percentage “de minimis” exception to application of this section. Reading the statute literally, the omission of $1 dollar of Subpart F or GILTI income could result in the statute of limitations on assessments of deficiencies related to the entire return remaining open for six years.

Wisconsin Tax Appeals Commission Decision Examines the Extent to Which Cheese Plant Equipment is Subject to the Personal Property Tax

By George W. Benson For state and local property tax purposes, classification is important. Sometimes the governing statutes draw lines that do not seem to make sense, which can make it difficult to classify particular assets. A recent Wisconsin Tax Appeals Commission decision illustrates this.

Wisconsin has for many years imposed a personal property tax. Recently, there was 41

an effort to repeal that tax, but that effort was stymied by partisan politics. For now, at least, the tax is still present. See, “Democrats & Republicans both want Wisconsin’s personal property tax gone. They don’t agree on how to do it.” by Adam Rogan, The Journal Times (December 20, 2021) (“The personal property tax has been around for more than 170 years. … Neither Republicans nor Democrats are fans of the personal property tax, but they disagree about how to get rid of it. So despite bipartisan distaste, the person property tax is remaining indefinitely.”)

For purposes of that tax, personal property is presumed taxable, but the tax is riddled with exemptions. Manufacturing machinery and specific processing equipment is exempt under one section if “used exclusively and directly in the production process.”

Wisconsin Statutes § 70.11(27). In addition, since January 1, 2018, machinery, tools, and patterns are generally exempt under another section unless “used in manufacturing.”

Wisconsin Statutes § 70.111(27)(b).

Masters Gallery is a company specializing in the procurement, aging and distribution of cheese to grocery chains, wholesalers, restaurants, and distributors. It is regarded as a manufacturer of cheese.

Masters Gallery and the Wisconsin Department of Revenue disagreed as to whether the personal property tax applied to machinery not used “exclusively and directly” in the manufacturing process, but rather used indirectly, nonexclusively, and occasionally in that process. The Wisconsin Tax Appeals Commission concluded that such property did not qualify for either exemption and thus was subject to the personal property tax. See, Masters Gallery Foods, Inc. v.

Wisconsin Department of Revenue, Docket No.19-M-067 (September 8, 2020).

While it might seem odd that machinery not used in the manufacturing process at all and machinery used exclusively and directly in the production process should be exempt from personal property tax, but machinery Summer 2022 | The Cooperative Accountant

TAXFAX sometimes used in the manufacturing process should not, this did not appear to trouble the Wisconsin Tax Appeals Commission.

After that decision, Masters Gallery and the State of Wisconsin disagreed as to the classification of a number of items of personal property used at one of its locations. The Commission recently released a second decision focusing on how the items in dispute should be classified. See, Masters Gallery Foods, Inc. v. Wisconsin Department of Revenue, Docket No. 19-M-067 (January 28, 2022).

The Commission concluded that some items in dispute had nothing to do with manufacturing (e.g., equipment in the plant office such as a shredder, washer, copier and refrigerator, and equipment such as a snow blower and lawn tractor). This equipment was exempt under Wisconsin Statutes § 70.111(27)(b). Other items in dispute were used directly and exclusively in manufacturing (four machines related to pallet-wrapping).

The Commission defined when manufacturing was deemed to begin and end. Its definition excluded activities related to receiving and warehousing raw materials and storing and shipping finished products.

It then concluded that certain items of machinery were used only in pre- and postmanufacturing processes and therefore not in manufacturing. This equipment was held to be exempt under Wisconsin Statutes § 70.111(27)(b).

Finally, the Commission identified items of property that were not used directly or exclusively in cheese manufacturing but were nevertheless occasionally or indirectly used in manufacturing. It concluded that this equipment was taxable since it qualified for neither exemption.

Here the lines were not as clear.

Certain equipment used in both preand post-manufacturing processes and in manufacturing processes fell within this category. For instance, equipment related 42

to general cleaning and maintenance of the plant was held to be exempt. But the Commission distinguished such equipment from specialized clean-in-place machinery used to clean equipment used in the production process between batches. The Commission discussed a recent decision concluding that such equipment was not used “directly” in manufacturing and thus was not exempt under Wisconsin Statutes § 70.11(27).

See, Saputo Cheese USA, Inc. v. Wisconsin Department of Revenue, Docket No. 15M-148 (August 4, 2020). However, the Commission concluded that such equipment not to be exempt under Wisconsin Statutes § 70.111(27)(b) because it was still used in manufacturing, albeit indirectly.

Bulk storage propane tanks held not subject to Iowa real property tax

By George W. Benson An Iowa court recently provided another illustration of the importance of property classification for State and local tax purposes.

McDermott Propane, LLC vs. Board of Review, No. 20-1619 (Court of Appeals of Iowa, 2022), reversing a decision of the Iowa District Court for Dubuque County.

This case focused on whether three 30,000-gallon above-ground propane storage tanks at McDermott’s bulk plant were subject to the tax as real property. The Court of Appeals concluded that they were not since they were “equipment,” not “improvements” to McDermott’s real property, and were not “attached” to McDermott’s real property. It is important to note that the decision did not extend to the foundational concrete piers and saddles on which the tanks rested. The piers and saddles were conceded by McDermott to be improvements.

This case rests upon its peculiar facts and the Court of Appeals’ parsing of the language of the Iowa statute. The Court of Appeals concluded that the tanks were equipment, Summer 2022 | The Cooperative Accountant

TAXFAX not improvements, because they could “be taken apart and separated from the rest of the operation.” “… the tanks are positioned on top of a concrete foundation, where they are ‘held in place by gravity’ and nothing more. They are connected to two pipes that can be disassembled within a ‘couple hours’ without leaving any damage to the property around it. Once the tanks are removed, they can be transported from one location to another and be reconnected to new pipes in short order. Moreover, … the undisputed evidence shows the tanks are freely bought and sold within the fuel industry nationwide.”

Equipment “attached” to real property is subject to tax in Iowa as real property, but similar factors led the Court of Appeals to conclude that the tanks are not “attached” and that they “are the kind of equipment ordinarily removed when the owner moves to another location.” “… McDermott offered ample evidence

that tanks of this kind are ordinarily removed when the owner moves to another location based on the relevant factors.

McDermott’s president testified the tanks could be easily removed by reversing the process of connecting them to the pipes.

He also testified there was ‘a whole industry built around’ buying and selling used tanks, suggesting the tanks are not often abandoned or thrown away by the owner.

Plus, McDermott showed there was no harm or injury to the property when the tanks were moved because they were simply lifted from their place with a crane after the pipes were disconnected. And given the longevity of the tanks, it was economically feasible for McDermott to reuse the existing tanks rather than purchase new ones for the new location.”

McDermott’s case was particularly strong because it had, in fact, moved two of the tanks in question when it had relocated its bulk plant to a new site. Thus, its arguments with respect to movability were not just theoretical.

https://nsacoop.org/events/2022-tax-finance-accounting-conference-cooperatives 43

Summer 2022 | The Cooperative Accountant

TAXFAX TAXFAX

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

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 Workforce of the future - Internal controls in remote work environments With the onset of COVID-19 in the United States in early 2020 and numerous states enacting stay-at-home orders, employers sent their non-essential workers home and were forced to immediately implement remote work practices. The sudden and swift shift of millions of workers from on-site to remote work environments challenged organizations as never before. A couple of the more pressing areas that CFOs and management executive teams needed to immediately address were remote connectivity and maintaining strong internal controls in a remote work environment.

Technology and security considerations in a remote work environment: During the early weeks of the crisis, organizations were mostly focused on remote connectivity and ensuring that 44

they had the capacity to meet the needs of their customers and employees for virtual meetings, live streaming, online education, customer assistance and more.

For organizations that had a large-capacity virtual private network (VPN) and laptops for all its employees, the transition was more seamless. However, for organizations that had a limited bandwidth VPN and where employees worked on desktop machines, the transition was much more challenging. Many organizations had to expand remote connectivity and some may have taken short-cuts to get there.

For those organizations, it may make sense to conduct an assessment that reviews access, the current controls in place and the threats remote workers may inadvertently be creating. In a recent PwC CFO Pulse Survey, more than twothirds of the organizations responding to the survey are investing in cybersecurity tools and training. This includes updating algorithms and analytics solutions to help detect anomalous behavior and taking a holistic approach to identity management.

They are also considering robust risk Summer 2022 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM

analysis and scenario planning to account for possible disruptions. Even with these investments being made, cybersecurity remains a top concern, and more than onethird of CFOs in that survey say not having effective cybersecurity measures in place is a challenge to a successful hybrid work model. Below are some comment best practices related to IT security in a remote work environment: • Whenever possible use a companyowned computer, NOT your personal computer, to work from home. The company computer should have the necessary anti-virus and encryption software to ensure the data is protected.

Also, company I.T. staff will be familiar with company devices and therefore be better able to help answer questions and resolve issues.

• If you have WiFi in your home, make sure that you have encryption turned ON (this will require you to enter a password before you connect) and that the password is long (24 characters) and not easy to guess. This will help prevent neighbors or others accessing your network and intercepting work-related information.

• DO NOT let your children or other family members play with or use your company computer for any reason.

Restrict YOUR use of the computer to business purposes only. This will reduce the possibility of downloading something malicious onto the computer.

• If you have limited Internet bandwidth in your home, you may experience slow computer response, or some functions may not work correctly. Limit the bandwidth used by other devices during working hours (TV, audio steaming, etc.) and if you are meeting with others via Skype, Zoom, GoToMeeting, etc. limit the meeting to AUDIO only, as video 45

webcams use more bandwidth.

• Use a Virtual Private Network (VPN) to connect to the office. A VPN connection allows someone outside the company’s network to connect to it and access resources. Enabling Multi-Factor Authentication (MFA) will require employees to enter another randomly generated code that is sent by text message or is available on an authenticator app, which only the employee has access to.

• DO NOT save files or documents on your local computer, put them where they belong on the home network (Shared disk, etc.) Otherwise, working remotely could end up meaning files are scattered and inaccessible to others. If users do not have a way to connect back to the company network, or independently determine it is too difficult, they may look to a file sharing program available online to help them store and transfer files.

Programs like Google Drive, Dropbox, etc. could be used. The problem is that this allows company documents and information to be stored outside of the company network. Once documents are stored in these locations they are no longer under the control of the company, possibly without the knowledge of IT or leadership within the company. Company data can easily be breached without the knowledge of the company. Use of these applications should be limited by both policy and technology constraints to help ensure data is not compromised.

• Remote employees’ computers will not be protected by the company’s firewall. This is true regardless of what computer is being used. Hopefully they have an adequate endpoint protection (that includes more features than just anti-virus), but that does not replace the protection of a hardware Summer 2022 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM

firewall. Firewalls have features like content filtering, geo-filtering, Intrusion Protection System (IPS), etc. Employees will have to be extra cautious when browsing the web and when reviewing emails. A simple mis-click can lead them to a site that would have otherwise been blocked inside the protection of the company network.

• It is important to continually train employees due to this change.

Employees who sit through a onetime training may not effectively learn everything; it is a lot to take in all at once. Then, what they did learn may not be relevant after a couple years, or even months. A recurring training and testing program will allow employees to learn pieces at a time, reinforce what they learned at a later date, and then be updated on new technology, terms, and recommendations. How many employees in your organization would be able to recognize an email that is a phishing attempt, trying to get them to click a link that would compromise your entire system? Some other examples are password best practices, working from home, public Wi-Fi security, etc.

There is an ever growing and changing list of what employees need to be knowledgeable about in the IT and cybersecurity world.

As a reminder, there are some best-inclass industry resources that can be utilized in a cost-efficient manner to help protect your business. For example, COSO has published a Fraud Risk Management Guide to assist businesses in managing fraud risks, including those fraud risks prevalent in a remote working environment. The guide includes best-practices on the following topics: 1) Establishing fraud risk governance policies; 2) Performing a fraud risk assessment; 3) Designing and deploying 46

fraud preventative and detective control activities; 4) Conducting investigations; and 5) Monitoring and evaluating the total fraud risk management program.

Not only is technology a key component to a successful hybrid work model and maintaining a strong internal control environment, but people collaborating and working together are integral to strong internal controls as well. A big concern around making a hybrid work model successful centers on what gets lost when people aren’t physically working together. Coordination among teams is a key for success to avoid dropped handoffs between functions. Another key to success is maintaining the corporate culture of a disciplined internal control framework, which can be challenging in a remote work environment. Organizations’ control environments likely changed over the course of the pandemic given the move to remote work and changes in business conditions and work volume.

So it’s important to revisit and evaluate internal controls and processes in an environment that combines both remote and on-site work. It’s also a good time to leverage technology in the move toward virtual processes and to use digital tools to automate manual processes where possible.

Actions taken and planned to be taken at CoBank: At CoBank we were fortunate that at the onset of the pandemic all employees had laptop computers and access to a largecapacity VPN, which facilitated a relatively smooth transition to remote work. We evaluated our internal controls in a remote work environment and considered changes that would be needed to maintain a clean integrated audit opinion and Service Organization Control 1 (SOC1) report. We make an assertion as to the effectiveness of Summer 2022 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM

our internal controls over financial reporting (ICFR) and receive an audit opinion on such. We also issue a SOC1 report to offer assurance on certain of our service controls.

We determined that only minor changes in controls were necessary as a result of most employees working from home. However, we are now being responsive to the longerterm and evolving risks presented with a remote work environment, including cyber considerations, electronic workflow and communications, human capital, etc.

The following are some of the actions we took to ensure strong internal controls in a remote work environment.

• Replaced manual, wet signatures with electronic signatures via PDF or scanned copies to evidence many review and approval controls.

• Adjusted our quarterly management certifications of internal controls supporting ICFR to include COVID19 considerations (changes in internal controls, evidence of effectiveness, etc.).

• Collaborated closely with areas across the bank to understand any issues and changes in internal controls and processes.

• Established ongoing and regular communication with Internal Audit to gain alignment on any control changes required.

• Engaged in frequent communication with our independent auditors to understand their remote work arrangements and to effectively execute interim and year-end procedures for financial reports, ICFR reviews and testing.

• Revisited our hiring and onboarding process to ensure the approach is welldesigned to support new employees successfully joining the bank while working remotely.

• Provided a stipend to all employees early 47

in the pandemic to ensure they had the right equipment and office set-up to work effectively from home.

• Balanced out the workload to avoid overloading some employees with tasks while others have time to take on more.

• Maintained a detailed closing and financial reporting checklist with clear owners and dates.

• Stayed in touch with our employees through virtual meetings ranging from small group social events to “skip-level” manager meetings to Finance division meetings to all-employee meetings hosted by our CEO. The following are actions CoBank is planning to take in the future: I Identify and document significant manual processes and controls in Finance, as well as individuals involved. Evaluate readily available digital tools to help automate manual processes.

II Upskill Finance resources with knowledge of essential tools, digital acumen and new ways of working. Have employees use their new skills to develop tools and bots to automate manual processes and make it easier to do work virtually.

III Continue to focus on frequently touching base with employees and personalizing messages for them as well as meeting people’s individual needs. Open and frequent communication from leaders makes employees feel more engaged and confident in their ability to do their jobs, which further strengthens the internal control environment.

IV Adopt flexible, hybrid job classifications allowing employees to take care of themselves and their families while maintaining a strong commitment to meet their working requirements.

For remote work environments, organizations must ensure that they have Summer 2022 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM

the right policies, procedures and controls in place for safe, healthy and productive employees and for a strong internal control environment that customers, employees and business partners can trust.

Automation in the Accounting Function The COVID-19 pandemic has accelerated the pace in which cooperatives need to re-imagine their accounting departments.

As it becomes increasingly more difficult for all organizations to attract and retain accounting and finance talent, automation of certain elements within the accounting function may allow organizations to leverage transactional tasks, allowing its accounting and finance team to focus on performing high-value, high-impact tasks.

There are several different technologies that enable cooperatives to automate accounting functions. Robotic Process Automation (RPA) is a software solution that works like a virtual employee. RPA performs repetitive tasks which emulate human execution, often within the existing IT landscape. Many organizations experience reduction in data entry costs (by up to 70%) and reduction of error rates. Moving further down the automation journey, some organizations have added Artificial Intelligence (AI) technology. AI mimics human judgment and behavior to solve certain problems. Such activities could include reconciling accounts, inputting and matching data from scanned documents, comparing employee expense reports against company policies, or tracking vendor price changes. Further down the AI maturity model is Machine Learning (ML), which allows the machine to learn from its experience to more accurately handle automated activities.

The journey to automate accounting processes can be daunting. However, taking the time to conduct an objective assessment of the current accounting and 48

finance infrastructure is the first step in the journey. Questions to consider: • What are the roles and responsibilities of the individuals on the team?

• How much time are they spending entering data or operating in excel data files?

• Which processes would be nice to automate and which are critical to automate?

• Which systems utilized by the organization do not integrate, and how much “dual entry” is occurring between systems?

Cloud Computing Cooperatives have been hearing about the trend towards more technology and automation for years. The abrupt need to shift to a remote working environment escalated during the COVID-19 pandemic.

Cooperatives that were slow to adapt to cloud technologies suffered a decline in back-office efficiency, timeliness of reporting and ultimately negative impacts to the cooperative’s bottom line.

Cloud computing can be key as cooperatives evaluate their digital transformation plans. Cooperatives that operate in a cloud computing environment often see benefits, such as managing costs associated with an inhouse IT infrastructure.

Also, many see the benefit of increased speed and processing time, while scaling storage capacity.

There are many misconceptions about modern cloud technology, specifically surrounding difficulty in implementing and security compared to on premise systems. While implementing any system can be overwhelming, there continues to be a surge in cloud technologies that allow organizations, from small to middle market to large, to choose systems that work for them. The word “implementation” Summer 2022 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM

no longer necessarily means a robust team working on the project for 12 to 24 months. Regarding security, on premise systems can be secure if you have the right controls in place and have a strong internal IT team. However, sharing data security responsibilities with one of the reputable cloud technology providers is often just as effective from a risk management standpoint. Many of these providers have robust security controls and go through extensive third party IT audits.

Cooperatives that are considering moving systems to the cloud should evaluate the impact on their internal control environment, including their Enterprise Risk Management (ERM) strategy. This includes having an understanding of cybersecurity, who is accessing company data and why, and what the cooperative’s enterprisewide cloud activities consist of.

Treasury Management Banks have provided traditional treasury management services to their cooperative clients for years. Just as cooperatives and other businesses are using technology and increased automation to achieve efficiencies, many banks have upgraded their treasury management services to include advanced technology tools that cooperative finance teams may use right at their desk. Just one example of these tools is integrated payables.

First, what are integrated payables? It is a service whereby numerous vendor payments are consolidated into a single file and transmitted to the cooperative’s bank (that provides such service) for processing. The bank then processes the payments pursuant to the cooperative’s instructions. Depending on the preference of the cooperative, vendor and the bank’s capabilities, payments may be sent via mail, electronically, by virtual card, ACH or wire. The benefits of integrated payables 49

are many. The cooperative consolidates its payment processing function into a single step, rather than entering each vendor transaction separately. Using integrated payables improves efficiencies by reducing the cooperative’s costs in processing each payment and allowing the cooperative’s bank to absorb such costs.

Many banks that provide this service will also survey the cooperative’s vendors, analyze the vendors’ preferred methods of payment and incorporate those payment methods in their process. Additionally, by scheduling payments on their due date or sooner to take advantage of potential discounts, a cooperative may better manage its cash flow and accounts payable.

Finally, many banks include fraud protection tools in their integrated payables processes, including dual control for file processing and transaction approval, matching checks issued against checks presented for payment and debit protection for ACH payments.

Of course, there may be initial challenges in setting up an integrated payables platform. Some banks require specific file formats that may or may not be compatible with existing IT systems. Also, depending upon the bank, not all of the services and tools discussed above may be available as part of a particular bank’s process. And there will be some degree of education and training necessary to prepare the finance team to use an integrated payables system to the full extent of its capabilities.

Notwithstanding these challenges, incorporating an integrated payables process into a cooperative’s finance function allows the finance team to focus on what matters. Instead of spending an inordinate amount of time writing checks and processing vendor payments, the finance team can focus on strategic initiatives and growing the business.

Summer 2022 | The Cooperative Accountant

Published January 17, 2022 Whether you’re a fan of remote work or not, leadership skills for virtual teams are increasingly becoming essential for managers everywhere.

According to Gallup, 76% of remote workers say their employer will allow people to work remotely going forward, at least partly. And while there is a fair amount of overlap between effective in-person and virtual leadership, there are some key differences to consider.

“Virtual leadership provides a unique set of challenges compared to in-person leadership,” said Dom Barnard, co-founder of VirtualSpeech, a soft-skills training platform based in London. “For example, it can be harder to build rapport over video calls with the lack of body language cues and presence.

It can be more difficult to build a strong work culture. And leaders need to have more trust in their employees, as there is less visibility on when the employee is working.”

50

Tips to Effexctively Lead Virtually

If you’re struggling to effectively lead through your computer screen, Barnard and executive coach Jennifer Elder, CPA/CFF, CGMA, suggest you consider these five tips on how to be a better virtual leader: Get Everyone on the Same Page About Communication and Expectations One of the primary challenges of leading remote teams is figuring out how to communicate and coordinate. If you haven’t done so already, get everyone together and decide on rules of engagement, including how everyone should communicate in various situations, when to expect a response, how often meetings will be held and for what purpose, and how team members will collaborate on projects.

As David Burkus points out in his book Leading From Anywhere: The Essential Guide to Managing Remote Teams, communication is actually more important for remote teams, but it should be used sparingly and Summer 2022 | The Cooperative Accountant

BEST PRACTICES strategically.

Working remotely allows team members to focus on value-creating tasks for long, uninterrupted stretches of time, according to Burkus. But that advantage evaporates quickly if remote workers are expected to always be available.

For that reason, he recommends that remote teams rely primarily on asynchronous communication channels, such as email, Slack, or Microsoft Teams, for anything that doesn’t require an immediate response, and give everyone at least 24 hours to reply so they can focus on their work. He then suggests phone calls for one-on-one discussions and video calls for team meetings so that people are less likely to speak over one another.

However, it’s important to be aware that when teams rely heavily on written communication, there is an increased risk of misunderstandings, according to Elder, who is owner of The Sustainable CFO, a consulting and executive coaching business in the Boston area. For example, you could send an email with straightforward feedback to a team member, but because they can’t hear your tone of voice, it’s possible they assume you’re upset with them when you’re not, Elder said.

“Our brains have a tendency to err on the side of the negative, so if I don’t know whether you’re happy or angry, I will assume that you’re angry,” she said.

With that in mind, she said it’s always a good idea to infuse your written communications with as much positivity as possible, while also assuming positive intent from messages you receive.

Regularly Remind Team Members of Their Individual Impact and Shared Mission Toiling away alone at your computer can get lonely, and it’s often easy to lose sight of why you’re putting in the work at all.

Reminding employees of why their work matters is important for both in-person and remote teams, but it’s essential in virtual environments because it helps unify team 51

members regardless of how far apart they might be.

“No matter what position somebody is in, no matter what generation they’re from, we all want meaning in our lives, we all want to know that we matter and what we do matters,” Elder said. “So, remind people how what they do connects to the mission of the department, the mission of the organization, and the greater good of the world.”

She recommended regularly reminding your team how their work is making a difference and showing specific appreciation to individual employees.

“In the office, people would walk by and say, ‘Great job on that’, but we’re not hearing that as much anymore, so make sure your staff knows you appreciate their work,” she said. “And be specific about it. Don’t just say ‘Thank you for doing a great job’, but ‘Thank you for working on that spreadsheet. I love how you organized and color-coded it.’”

Forge Individual Connections, and Tailor Your Leadership Approach to Each Team Member.

Without the benefit of face-to-face interaction, virtual managers will likely need to make a concerted effort to connect with each of their team members.

“You need to be proactive about staying in contact with your entire team,” Barnard said.

“This can be done in a number of ways, from setting up weekly catch-up calls to having frequent team meetings. These will help you stay abreast of what they’re working on, how projects are going, what obstacles they’re facing, and importantly, how you can help them.”

Elder recommended leaders make time to regularly connect one-on-one with each team member to get to know them, see how they’re doing, and talk about anything unrelated to work.

“An effective leader recognises that everyone on their team is a unique individual with a distinctive communication and productivity style,” she said. “They Summer 2022 | The Cooperative Accountant

BEST PRACTICES understand that some people need more direction and guardrails on what they do and how they do it, while other people need to be left to their own devices and will be more productive that way.”

Even if you have team members who have been with you for ten years, Elder recommended taking the time to ask them what you can do to support them. And if you think your soft skills could use some work, she suggested completing any course on servant leadership, communication, empathy, active listening, or understanding generations in the workplace.

Facilitate Team Bonding In a virtual world, we tend to jump right into meetings and get straight to work, but that leaves little room for team bonding, which is essential for morale, culture building, and effective collaboration.

Virtual leaders can try to facilitate team bonding by assigning random pairs of employees to have a virtual coffee during work hours, opening conference calls ten minutes early to allow for pre-meeting chit-chat, designating a Slack channel as a “virtual water cooler”, encouraging team members to schedule virtual office hours, planning occasional inperson team retreats throughout the year, and starting off meetings on an interesting note.

“Start off every meeting with an out-of-thebox question, like what was the most fun thing you did this weekend, what’s your favorite restaurant, what’s your comfort food, or what’s the weirdest name of an animal you’ve ever heard,” Elder suggested. “Anything that encourages conversation about something other than work or COVID.” And if you’re looking for more ways to 52

make the virtual workplace more engaging, consider consulting the increasing number of books on the subject, including Rituals for Virtual Meetings: Creative Ways to Engage People and Strengthen Relationships by Kürsat Özenç and Glenn Fajardo.

Give Your Team as Much Autonomy as Possible In virtual environments, you can’t simply glance around the office to make sure your team is hard at work. In an attempt to regain that sense of control, some managers have resorted to employee monitoring software to “spy” on their teams, but research actually demonstrates that increased autonomy raises productivity.

Barnard recommended resisting the urge to monitor employees and instead to trust and support your team by setting objectives, offering feedback, and giving team members all the tools they need to focus on their work.

Elder added that managers should involve their employees in any decisions that are going to impact their lives.

“We don’t like change when it’s imposed on us, and we have had almost two years of imposed change,” Elder said. “Effective leaders are really learning to involve their staff in any change and give them as much control as possible.”

Leaders should consider involving employees in decisions big and small, from return-to-office plans, all the way down to what they would like as a holiday bonus.

“The more you can involve your staff, the better,” Elder said. “Then it becomes change by choice, versus imposed change.”

(Source: AICPA & CIMA – CPA Letter Daily Financial Management – January 10, 2022) Summer 2022 | The Cooperative Accountant