The Cooperative Accountant: Winter 2019

Winter 2019 | The Cooperative Accountant

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CONTENTS

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

FEATURES 3 From the Editor

By Frank M. Messina, DBA, CPA

4 Utility Cooperative Forum: Challenges in Selecting and Paying for Grid Modernization

By Peggy Boldissar, Ph.D.

10 ACCTFAX Bulletin Board

By Phil Miller, CPA

20 TAXFAX

By George W. Benson

30 Small Business Forum: Leading a Team to High Performance

By Shawn Miller

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

(806) 747-3806 bmiller@bsgm.com

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

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

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

Vice President David Antoni, CPA KPMG, LLP

(267) 256-1627 dantoni@kpmg.com

Secretary-Treasurer Eric Krienert CPA Moss Adams LLP

IMMEDIATE PAST PRESIDENT: *Jeff Brandenburg, CPA, CFE (608) 662-8600 Great Lakes Chapter jeff.brandenburg@cliftonlarson ClifftonLarsonAllen LLP 8215 Greenway Boulevard, Suite 600 82 ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS ––––––––––––– Middleton, WI 53562 PRESIDENT: *Indicates Executive Committee Member *William Miller, CPA (806) 747-3806 NATIONAL OFFICE Electric Co-op Chapter bmiller@bsgm.com Bolinger, Kim Fantaci, Executive DirectorSegars, Gilbert & Moss, LLP136 S. Keowee Street 8215Executive Nashville Avenue Jeff Roberts, Association Dayton, Ohio 45402 Lubbock, TX 79423 Tina Schneider, Chief Administrative Officer info@nsacoop.org

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

Krista Saul, Client Accounting Manager Bill Erlenbush, Director of Education VICE PRESIDENT: *Nick Mueting (620) 227-3522 Phil Miller, Assistant Director of Education Mid-West Chapter nickm@.lvpf-cpa.com THE COOPERATIVE ACCOUNTANT Winter 2018 Lindburg, Vogel, Pierce, Faris, Chartered P.O. Box 1512 Dodge City, KS 67801

At Large Erik Gillam, CPA Aldrich CPAs +Advisors

NATIONAL DIRECTORS

At Large Kent Erhardt CoBank, ACB

SECRETARY-TREASURER: *Dave Antoni Kent Chapter Erhardt Capitol KPMG, LLP Director 1601 Market St. CoBank, ACB Philadelphia, PA 19103

(267) 256-1627 dantoni@kpmg.com

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

For a complete listing of NSAC’s National Board of Directors and Director Committees, visit Alabama Farmers *Indicates Executive Committee Member National Society of Accountants for Cooperatives

Jeff Krejdl Director Ag Valley

Cooperative, Inc.

www.nsacoop.org NATIONAL OFFICE

Kim Fantaci, Executive Director

136 S. Keowee Street

Jeff Roberts, Association Executive

Dayton, Ohio 45402

Tina Schneider, Chief Administrative Officer

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Mark Feldm Director Crowe LLP

info@nsacoop.org

Krista Saul, Client Accounting Manager Bill Erlenbush, Director of Education Winter 2019

| The Cooperative Accountant

Eric Krienert, CPA Director THE COOPERATIVE ACCOUNTANT

Phil Miller, Assistant Director of Education

Winter 2018

Tucker Lem Director

From the

Editor

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

As the days get shorter and shorter and colder and colder for many of us, stay remindful of keeping a positive mindset. Cooperation is the key. Make a point to be nice to everyone. Fill your thoughts with positive inputs. Surround yourself with other positive people. Remember your language shapes your behavior. Use positive words like – “great”, “amazing” , and “super.” Try it and not only will it lift your spirits, but in others around you.

Winter and its accompanying weather can make it tough on many, but remaining positive and finding cooperation is always the key.

Remember, we too are always looking for you to share your knowledge (like others continue to do) with us through articles in The Cooperative Accountant.

Feel free to contact me (fmessina@uab.edu) if you have any ideas or thoughts on a potential article contribution. Sharing knowledge is a wonderful thing for all!

Knowledge can change our world!

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

Positively Yours, Frank M. Messina, DBA, CPA

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

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

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

Challenges in selecting and paying for grid modernization The nation’s electric power grid has been changing over the last decade, with an influx of solar and wind generation, electric vehicles, smart meters, battery improvements for electricity storage, and the introduction of new technologies designed to create a smarter and more efficient grid. With these changes, some challenges have emerged. These include “the risk of cyber-attacks, the overwhelming amount of data generated and a maze of regulations” (Lydersen, 2017, para. 3). Additionally, one of the most important challenges has been and will continue to be determining who should pay for grid modernization initiatives, and how to measure costs and benefits that can be subjective or based upon shifting variables.

The grid has been changing from a onedirectional flow to a grid with multi-directional flows of energy, muddying the lines between “provider” versus “consumer” and leading to more complexity in defining and measuring energy transactions. One industry expert has cited a prediction that “utilities investments in communications and information technology will exceed investment in poles and wires in coming years” (Lydersen, 2017, para. 7). These investments add an additional layer of cost that needs to be recovered, adding even further 4

complexity in how best to recover these costs in customer rates. Grid modernization costs continue to be a substantial cost incurred by a utility in providing electric service to its customers.

Over the past decade, the goal in the electric industry has been to work towards improving energy efficiencies and deploying more distributed renewable energy by deploying new and advanced technologies. Theoretically, as a customer uses less energy, the utility’s overall customer per kilowatt rates may have to increase to cover costs because there are less kilowatt-hours of electricity being sold. Thus, this trend incentivizes customers to use even less energy or further conserve in order to avoid paying the required rates. The dynamics of this consumption and rate relationship contributes to even more continued upward pressure on customer rates. The ideal goal would be to set customer rates as fairly and equitably as possible, with the customers benefitting directly from the incurred costs paying for those in their respective rates. Nevertheless, this ideal goal is not one that is easily achieved, and has been especially challenging given the technology advancements in the industry. These concerns have also directly influenced the decisions that utilities are making in their grid investment strategies and programs.

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UTILITY COOPERATIVE FORUM Traditional customer rate structures have historically had direct correlations between customers’ demand of energy, costs, and rates.

As demand rose, costs and rates typically rose over time to cover the costs required of the investment to support the increasing demand.

And, with continually increasing demand an electric company could anticipate that costs and rates might also increase. But, with the changing nature of the grid over the last decade the traditional models are no longer applicable.

With multiple-flows of electricity now on the grid, energy is “becoming more like cable TV service, where you are paying for access rather than a physical quantity of material” (Lydersen, 2017, para. 10). The rapid evolution of these changes in the electric grid over the last decade is presenting challenges in being able to determine the most fair and equitable rates that should be passed to the consumer in regards to recovering grid modernization costs. It is also presenting a trend in the industry whereby customers are taking a more active role in managing and customizing their energy usage. Going forward, success in managing electricity supply and demand requirements will need to be balanced with customer perceptions of how well their needs and desires are being met.

Many commercial and industrial customers can and do implement their own microgrids and might also rely on power purchase agreements (PPAs) to meet sustainability and resiliency energy

Winter 2019 | The Cooperative Accountant

needs, either adding energy back on to the grid or minimizing the amount of energy needed to be taken off the grid. These companies make private investments in their microgrid technologies, as part of their business planning and investment strategies. While these investments may be desirable, they do create additional complications in how they connect and interact with their utility provider’s grid. A utility company is bound by many regulations in how their operations are governed, yet a private company investing in microgrid infrastructure may deploy the infrastructure in a way that could compromise the utility’s ability to meet regulations and safety requirements of the electric grid. Additionally, the private company will operate their microgrids in the benefit of their own best interest, which could either reduce Many costs or add costs to the utility company. commercial Utilities will need and industrial to work with these customers customers to determine whether the private can and do investment adds implement their either a positive or negative impact to the own microgrids electric grid in order and might to propose customer rates that might be also rely on fair and equitable power purchase to all customers

agreements (PPAs) to meet sustainability and resiliency energy needs, either adding energy back on to the grid or minimizing the amount of energy needed to be taken off the grid.

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UTILITY COOPERATIVE FORUM that are being served by the grid. These private investments are creating a completely new scenario for utilities whereby energy needs require much more evaluation for these customers, and further analysis is required in order to determine the best way of recovering costs or spreading benefits to customers within the utilities’ serving territory.

Over the past decade, there has been much debate over the economics of solar technologies.

In many instances, there has been subsidization of these technologies in that the cost of deploying and maintaining them has been spread over multiple customers and not just born by those individual customers investing independently in solar technologies. Therefore, the electric industry has been grappling with setting rates and determining solar credits for its customers as they have tried to strike the balance in what might be fair to all customers. The dilemma with solar has been straightforward, with any controversy being “are people generating solar energy still paying their fair share for the upkeep of the grid that they benefit from” that is continuously present for them in times when their solar equipment is not generating electricity. With the introduction of more complex technologies into the grid such as battery storage capabilities, electric vehicles, and other demand-management devices, this is further complicating the decision for utility companies in how to best establish fair rates.

For those individuals or private companies that can afford to invest in technologies on their own, how much benefit or cost is being incurred by the overall utility in regards to these investments? And, what portion of these costs or benefits should be absorbed in the base rates of the entire community being served by the grid? These are important questions that each utility will need to address individually as it grapples with how best to set rates for “all” of its customers. Robert Sheridan, Utility of the Future director for the multinational utility National Grid, is quoted as stating “Utilities currently take in their revenues based on a cost formula, but now they’re being asked to take in services based on a value formula” (Lydersen, 2017, para. 25).

The industry is having to ensure that all costs are recovered in rates, even if some customers may not be completely paying in for all services provided. This change in approach has been causing upheaval in the industry.

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Another item of consideration is that of low-income customers, those who do not have the means on their own to invest in new technologies. Without having the means, the low-income population will not have the ability to take advantage of investing in energy-reducing technologies. While many government programs exist that assist in helping low-income people afford energy improvements, much still needs to be done to equalize or mitigate the low-income population’s ability to make these investments.

Very often, some minimal investment is required even to obtain government assistance. Lowincome populations may not even have any money to make even small investments. This is prohibiting them from taking advantage of these government incentive programs.

One recent example of the challenges that a utility company faces in choosing the best grid modernization program is with PG&E in California.

Recent wildfires have caused substantial harm and damage to those living in affected areas.

Some of the fires have been attributed to high winds and dry ground conditions where fires were sparked by transmission lines being blown into vegetation or blown down altogether. PG&E, the power provider in the area, has implemented a process of shutting down power to millions in rolling brownouts across California in order to prevent more wildfires. PG&E has acknowledged that it does have a responsibility in implementing change to its infrastructure that will address the risk of wildfires, and has implemented new wildfire prevention methods. However, the threat of wildfires is a complex one, and requires more comprehensive solutions than just improving investments and maintenance of the electric grid.

Over time, more and more of the population in California has migrated into the hills, with housing developments and communities taking hold in hillsides where previously little population was found. California is working to take more control over power generation by further supporting and accelerating the implementation of increased renewable energy programs. They feel this is one answer to reducing these forest fires. However, those initiatives still do not address the existing massive transmission lines that are required to transport electricity over distances no matter how the electricity is generated. They also do not address the fact that affluent customers have home solar systems, battery storage, and Winter 2019 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM generators to rely on during these power outages when low-income residents have not been able to invest in these. California has had rebate programs in the past where those individuals investing in solar panels or electric vehicles have been rewarded with state rebates. However, those not being able to afford the up-front costs missed out on the savings of the investment in these technologies. Moreover, the lower-income population paid significantly more for power because the cost of electric power is spread to those who use the power. While the more affluent had means to supplement their power generation off the grid, needing to take less power from the grid, the lower income population did not. Therefore, the lower-income population can be viewed as essentially subsidizing the more affluent population. Until there is a program for the lower-income population where all upfront costs are subsidized, there could be a continued disparity between the low-income and affluent population’s absorption of costs associated with grid investments. While California works to resolve these issues, the rest of the country will be watching to learn what ideas can be transferable to other areas that may be experiencing similar issues. The equality or fair balancing of costs amongst customers will be at the center of discussions and initiatives as California grapples with how best to move forward in investing in any future solutions.

Besides the low-income population, remote and rural locations might also be deprived of the opportunities that new technologies can provide. These are the populations frequently served by electric cooperatives. For example, a farmer may own vast lands on which to set up a solar farm, but may not have the ability to invest in the infrastructure required to build the transmission and distribution facilities needed to get the power to the marketplace. While it may provide personal and greater overall social benefit to establish a solar farm on that property, it may require the partnering of the utility and the farmer, working together, to make that happen. It could also involve the intervention of the community and governmental support for the project in order for it to become a reality.

However, the fact that the farmer lives in a rural area could present challenges not experienced by those that live in an urban setting where vast amounts of grid infrastructure might already be in place.

Winter 2019 | The Cooperative Accountant

A 2019 Black & Veatch study surveyed nearly 900 “qualified, predominantly North American utility, municipal, commercial and community stakeholders� (p. 67) to determine what tools or resources are most essential for the planning, engineering, construction, operation and maintenance of a more complex grid. Survey respondents were asked to select up to three choices, by organization type. The following represents the survey responses: Tools or Providers of Providers resources Electricity to Electric identified Industry Innovative system designs that allow for 44.8% more flexibility in system configurations

59.2%

Better modeling and forecasting 47.0% 40.0% data and programs More real time telemetry and control devices (SCADA) Staff training and development in new systems Risk identification tools and mitigation options

41.6%

28.5%

37.8% 32.3%

29.6%

40.8%

Access to consultants who have experience 10.4% 23.1% with an ever-changing, complex grid (p. 14) These survey responses are indicative of the fact that utilities are challenged with planning for 7

UTILITY COOPERATIVE FORUM today – and what is concretely and immediately known in latest advancements – yet also need to plan for what may be anticipated as coming down the road. ● Deloitte describes the benefits that emerging grid IT technologies can provide: ● Reduced outage times and improved reporting. ● Streamlined integration of distributed energy resource management systems. ● Better operational analytics. ● Optimized power quality. ● Improved system reliability and efficiency. ● Improved maintenance planning and forecasting. (p. 13) Some of the challenges, though, the industry has been experiencing by introducing these technologies include inadequate standards not yet developed, changing regulatory requirements, and unforeseen cyber threats. The industry is advised to learn from the challenges of the adoption of AMI technologies over the last decade, with a few of the lessons learned shown below: ● Grid modernization is a program, not a project ● Security is critical and will need to evolve with technology

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● New opportunities also introduce new risks (Deloitte, 2018, p. 14-15) Minnesota (through its e21 Initiative), Ohio (through its PowerForward Initiative), and other states are deploying modernization initiatives that they believe are focusing on the utility of the future. Generally, these initiatives are moving companies towards a more “consumer-centric, performance-based regulatory approach” (Deloitte, 2018, p. 6). Grid modernization programs are being designed to “ensure the two-way flow of energy and information as well as the efficient coordination of many more participants within the system” (Deloitte, 2018, p. 7). Gridwise Alliance (2018) has published “Grid Modernization Index 2018: Key Indicators for a Changing Electric Grid.” Many states are actively exploring options for modernizing their electric grid, and the initiatives for each state are outlined in this publication. They also developed a Grid Modernization Index (GMI) which is a measurement based upon a list of questions regarding state support, customer engagement and pricing, and grid operations.

Data was obtained in the public domain and from interviews with industry stakeholders. Each state is ranked and assigned a GMI, which is designed to indicate the progress made in grid modernization for that state.

Aggarwal and O’Boyle (2017) published a paper titled “Getting the Most from Grid

Winter 2019 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM Modernization”. The paper offers five key assessment steps and three measurable outcome categories to help a utility to determine whether a grid modernization expenditure may be prudent.

The five key assessment steps include: 1. Evaluating costs and benefits 2. Defining policy goals 3. Linking metrics 4. Conforming targets 5. Tying revenue to performance Each type of grid modernization presents unique questions. Each project should be evaluated for its own merits, but still within the context and alignment of the overall grid modernization program plan.

Summary The grid needs to continue to evolve to handle many complexities. Among these complexities include changing load conditions, changing regulations, changing technologies, and changing consumer expectations. Renewable energy will continue to grow, and its impacts will continue to influence decisions on grid investments in addition to offering alternative power sources.

Customers will continue to want increasingly sophisticated tools to help them manage their power consumption, and energy costs. These tools could be offered by the utility company, by other market providers, or by a combination of these entities. Utilities will need to actively engage with regulators and customers in the evolution of these changes. Commercial and industrial customers will continue to influence the utility company’s decision on grid investments, as the load of power needed to be maintained by the utility company may be impacted by private investments of these customers. Information, and the effective analysis of information, will be the key to making the best decisions on how to invest in the grid moving forward. Utilities will continue to maintain the traditional mission to provide safe, reliable, and cost-effective power to its customers.

However, generation and grid-connected assets will increasingly be owned and/or managed by third parties outside of the organization not under their control. This will require more investments in technologies needed to see what is installed on the customer side of the meter, for infrastructure Winter 2019 | The Cooperative Accountant

not in the control of the utility but needing to be considered when providing power to the customer.

For accountants and finance managers assisting their organization to navigate through all of these changes, there is a key role to be played in strategic planning of any grid improvements.

The company is advised to deploy a meaningful program cost/benefit analysis of proposed solutions. Additionally, the financing of proposed projects should be considered before any program is deployed. Ultimately, all costs will need to be recovered in some fashion, and keen analysis and considerations of both traditional and nontraditional customer rate design approaches may be needed to balance stakeholders’ interests in recovering grid investments.

References Aggarwal, S., & O’Boyle, M. (2017). Getting the most from grid modernization. Electricity Policy. com. Retrieved November 15, 2019 from the following website: https://cnee.colostate.edu/ wp-content/uploads/2017/07/Clean-EnergyLeg-Academy-Grid-Modernization-AggarwalOBoyle-2017.pdf Black and Veatch. (2019). 2019 Strategic Directions: Electric Report, Repowering the Power Industry. Retrieved November 15, 2019 from the following website: https://pages.bv.com/SDRElectric-Download.html Deloitte. (July 2018). Power and Utilities Accounting, Financial Reporting, and Tax Research Guide. Retrieved November 15, 2019 from the following website: https://www2.deloitte.com/ content/dam/Deloitte/us/Documents/energyresources/us-er-power-utilities-accountingfinancial-reporting-and-tax-research-guide.pdf Gridwise Alliance. (2018). Grid Modernization Index 2018: Key Indicators for a Changing Electric Grid. Retrieved November 15, 2019 from the following website: https://gridwise.org/wpcontent/uploads/2018/12/GWA_18_GMI-2018_ FinalReport_12_17_18.pdf Lydersen, K. (April 7, 2017). Modernizing the grid: Who pays, who profits, who participates?

Retrieved November 15, 2019 from the following website: https://energynews.us/2017/04/07/ midwest/modernizing-the-grid-who-pays-whoprofits-who-participates/ 9

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

By Phil Miller, NSAC Assistant Education Director

FASB SEEKS PUBLIC COMMENT ON PROPOSAL TO DELAY EFFECTIVE DATES FOR PRIVATE AND CERTAIN PUBLIC COMPANIES AND ORGANIZATIONS

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

Would Extend Implementation Deadline for Credit Losses, Leases, and Hedging Standards

would benefit from additional time to apply major standards,” stated FASB Chairman Russell G. Golden. “This represents an important shift in the FASB’s philosophy around effective dates, one we believe will support better overall implementation of these standards.”

On August 15, 2019, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would grant private companies, not-for-profit organizations, and certain small public companies additional time to implement FASB standards on current expected credit losses (CECL), leases, and hedging. Stakeholders were encouraged to review and provide comment on the proposed ASU by September 16, 2019.

The proposed ASU describes a new FASB philosophy that extends and simplifies how effective dates for major standards are staggered between larger public companies and all other entities. Those other entities include private companies, smaller public companies, not-forprofit organizations, and employee benefit plans.

Under this philosophy, a major standard would first be effective for larger public companies.

For all other entities, the Board would consider requiring an effective date staggered at least two years later. Generally, it is expected that early application would continue to be permitted for all entities.

“Based on what we’ve learned from our stakeholders, including the Private Company Council and the Small Business Advisory Committee, private companies, not-for-profit organizations, and some small public companies

FASB PROPOSES EFFECTIVE DATE DELAY FOR ALL INSURANCE COMPANIES APPLYING STANDARD ON LONG-DURATION CONTRACTS On August 21, 2019, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would grant all insurance companies that issue longduration contracts, such as life insurance and annuities, additional time to apply a standard that addresses this area of financial reporting.

Stakeholders are encouraged to review and provide comment on the proposed ASU by September 20, 2019.

On August 15, 2018, the FASB issued Accounting Standards Update No. 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The ASU made targeted amendments to improve, simplify, and enhance the financial reporting requirements for long-duration contracts issued by insurance companies.

Since that time, the FASB received an agenda request to delay its effective date by one year. In response, FASB members and staff conducted outreach with numerous insurance companies that issue and/or reinsure long-duration contracts

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ACCTFAX to better understand their implementation challenges and progress.

And Then…

FASB APPROVES PROPOSED EFFECTIVE DATE DELAYS AT OCTOBER 16 MEETING On October 18, 2019, the Financial Accounting Standards Board (FASB) approved its August 2019 proposal to grant private companies, not-for-profit organizations, and certain small public companies various effective date delays on its credit losses (CECL), leases, and hedging standards.

The FASB also approved its proposal to delay effective dates of its long-duration insurance standard for all insurance companies that issue long-duration contracts, such as life insurance and annuities.

The FASB expects to issue two final Accounting Standards Updates (ASUs) containing these decisions in mid-November.

The chart below details how effective dates will change. (A complete overview of all FASB decisions reached at the October 16 meeting is also available on the FASB website.)

Hedging: SEC filers – January 2019; all other public business entities – January 2019; private and all others change from January 2020 to January 2021.

Leases: SEC filers – January 2019; all other public business entities – January 2019; private and all others change from January 2020 to January 2021.

CECL: SEC filers – January 2020; all other public business entities - change from January 2021 to January 2023; private and all others change from January 2021 to January 2023.

Insurance: SEC filers – January 2022; all other public business entities - change from January 2021 to January 2024; private and all others change from January 2022 to January 2024.

FINANCIAL ACCOUNTING FOUNDATION NAMES TWO AND REAPPOINTS TWO TO THE PRIVATE COMPANY COUNCIL On August 20, 2019, the Board of Trustees of the Financial Accounting Foundation (FAF) appointed Holly Nelson and Zubin Avari to the Private Company Council (PCC), each for a three-year term. The Board of Trustees also reappointed current PCC members Yan Zhang and Richard Reisig to three-year terms. All four appointments are effective on January 1, 2020.

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Zubin Avari serves as a managing partner with Charter Oak Equity LP, located in Westport, CT. His first term on the PCC will conclude on December 31, 2022.

Holly Nelson is a director on the board of Silver Star Brands, Inc., of Oshkosh, WI, from which she retired as chief financial officer in April. Her first term on the PCC concludes on December 31, 2022.

Richard Reisig is a shareholder and director, attest services, at Anderson ZurMuehlen & Company, P.C., in Great Falls, MT. He began his first term on the PCC on January 1, 2017, and his second and final term will conclude on December 31, 2022.

Yan Zhang is a partner at EisnerAmper LLP in New York, NY. She joined the PCC on January 1, 2017, and her second and final term will conclude on December 31, 2022.

The PCC, which can comprise 9 to 12 members, currently consists of 11 members from financial statement user, preparer, and practitioner backgrounds. FASB member Susan M. Cosper serves as the FASB’s official liaison with the PCC and attends all PCC meetings.

More information on the PCC can be found on its website.

FASB PROPOSES EFFECTIVE DATE DELAY FOR ALL INSURANCE COMPANIES APPLYING STANDARD ON LONG-DURATION CONTRACTS On August 21, 2019, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would grant all insurance companies that issue longduration contracts, such as life insurance and annuities, additional time to apply a standard that addresses this area of financial reporting.

Stakeholders are encouraged to review and provide comment on the proposed ASU by September 20, 2019.

On August 15, 2018, the FASB issued Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The ASU made targeted amendments to improve, simplify, and enhance the financial reporting requirements for long-duration contracts issued by insurance companies.

Since that time, the FASB received an agenda request to delay its effective date by one year. In 11

ACCTFAX response, FASB members and staff conducted outreach with numerous insurance companies that issue and/or reinsure long-duration contracts to better understand their implementation challenges and progress.

The proposed ASU would amend the effective dates for the long-duration insurance standard as follows: FASB PROPOSES GUIDANCE TO ASSIST IN TRANSITION AWAY FROM INTERBANK OFFERED RATES TO NEW REFERENCE RATES On September 5, 2019, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would provide temporary optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. Stakeholders are asked to review and provide comment on the proposed ASU by October 7, 2019.

“The FASB is committed to providing stakeholders with the guidance they need to ease the process of migrating away from LIBOR and other interbank offered rates to new reference rates,” said FASB Chairman Russell G. Golden.

“The Board’s proposal will address operational challenges they have raised and ultimately help simplify the process while reducing related costs,” he added.

Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make shortterm loans to each other.

With global capital markets expected to move away from LIBOR and other interbank offered rates toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition.

The Proposed ASU would provide optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships affected by reference rate reform.

The guidance would apply only to contracts or hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.

The guidance is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, the guidance 12

would be in effect for a limited time. That is, the guidance would be effective upon issuance of final guidance and would not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022.

The proposed ASU, including a “FASB in Focus” overview and information about how to submit comments, is available at www.fasb.org.

IASB AMENDS IFRS STANDARDS IN RESPONSE TO THE IBOR REFORM On Sept. 26, 2019, the International Accounting Standards Board (Board) amended some of its requirements for hedge accounting. The amendments are designed to support the provision of useful financial information by companies during the period of uncertainty arising from the phasing out of interest-rate benchmarks such as interbank offered rates (IBORs).

The Board has amended its new and old financial instruments Standards, IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement, as well as the related Standard on disclosures, IFRS 7 Financial Instruments: Disclosures.

The amendments modify some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the IBOR reform. In addition, the amendments require companies to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties.

The amendments come into effect from January 1, 2020 but companies may choose to apply them earlier.

FASB ISSUES REVISED PROPOSAL TO IMPROVE BALANCE SHEET DEBT CLASSIFICATION On September 12, 2019, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) intended to improve guidance used to determine whether debt should be classified as a current or noncurrent liability in a classified balance sheet.

Stakeholders are encouraged to review and comment on the proposed ASU by October 28, 2019.

In January 2017, the FASB issued its first proposal on the project, which contained Winter 2019 | The Cooperative Accountant

ACCTFAX provisions to replace the current, fact-specific guidance with an overarching, cohesive principle for determining whether debt, or other instruments within the scope of the proposal, should be classified as a current or noncurrent liability as of the balance sheet date.

Much of the guidance in this revised proposal is similar to the original 2017 proposal on which the Board has received extensive feedback. Based on input received from stakeholders – including the Private Company Council – the Board added proposed requirements related to unused longterm financing arrangements, such as a line of credit, and grace periods. The revised proposal reflects and seeks comments on these changes, as well as the expected costs and expected benefits of the proposed amendments.

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

Speaking of Whistleblowers…

SEC AWARDS MORE THAN $1.8 MILLION TO WHISTLEBLOWER On Aug. 29, 2019, the Securities and Exchange Commission announced an award of more than $1.8 million to a whistleblower whose information and assistance were critically important to the success of an enforcement action involving misconduct committed overseas.

After alerting the agency to the violations, the whistleblower provided extensive and ongoing cooperation during the course of the investigation, including the review of documents and the provision of sworn testimony, and continued to provide additional new information that advanced the investigation.

The SEC has awarded approximately $387 million to 66 individuals since issuing its first award in 2012. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards. Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action.

Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.

As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and Winter 2019 | The Cooperative Accountant

does not disclose information that could reveal a whistleblower’s identity. For more information about the whistleblower program and how to report a tip, visit www.sec.gov/whistleblower.

PCAOB STAFF PROVIDES GUIDANCE FOR NEW REQUIREMENTS ON AUDITING ESTIMATES & AUDITOR’S USE OF WORK OF SPECIALISTS ON Aug. 22, 2019, The Public Company Accounting Oversight Board released four staff guidance documents to raise awareness and assist auditors in advance of the effective date of new estimates and specialists audit requirements.

The requirements are effective for audits of financial statements for fiscal years ending on or after December 15, 2020.

The staff guidance consists of: ● Auditing Accounting Estimates ● Auditing the Fair Value of Financial Instruments ● Supervising or Using the Work of an Auditor’s Specialist ● Using the Work of a Company’s Specialist The first two documents highlight aspects of the new standard and enhancements made to integrate the Board’s risk assessment requirements when auditing accounting estimates, including fair value measurements.

The other two documents highlight aspects of new requirements that apply when auditors use the work of specialists in an audit and when an auditor uses the work of a company specialist as audit evidence.

As outlined on the implementation webpages for the new estimates standard and amendments for the auditor’s use of the work of specialists, the PCAOB is utilizing a variety of avenues to provide useful information to auditors. The Board and staff will continue to monitor firms’ implementation efforts and determine if further guidance is needed.

THE AICPA HAS ISSUED A PRACTICE AID, “ALLOWANCE FOR CREDIT LOSSES – AUDIT CONSIDERATIONS.” The practice aid addresses “key considerations in auditing the allowance for credit losses (ACL) related to loans under [ASC] 326-20 and disclosure considerations.” Specific topics covered include “obtaining an understanding 13

ACCTFAX of the entity, assessing the risks, identifying the controls relevant to the audit, designing an audit response, performing audit procedures, and evaluating the audit results.”

This practice aid has been developed to help auditors in their communications with both management and audit committees as they address FASB Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. As management, regulators, and auditors gain more experience with FASB Accounting Standards Codification (ASC) 326, Financial Instruments – Credit Losses, additional challenges and insights may emerge. The practice is expected to evolve over time and the expectations of both regulators and auditors may change along with it. As such, questions, examples, and risks listed in this practice aid should not be considered exhaustive. Auditors, management, and those charged with governance need to stay abreast of developments and consider the implications of those developments.

Resources: Deloitte IASPLUS (November 2019). News.

Retrieved from https://www.iasplus.com.

IFRS (November 2019). Latest News. Retrieved from https://ifrs.org.

FASB (November 2019). In The News…

Retrieved from https://fasb.org.

SEC (November 2019). Press Releases.

Retrieved from https://www.sec.gov.

PCAOB (November 2019). News Releases.

Retrieved from https://pcaobus.org.

AICPA (November 2019). Practice Aids.

Retrieved from https://www.aicpa.org.

FASB UPDATE

Editors Note: The following is a summary of FASB updates presented in August 2019 at the TFACC in Denver, and a very recent CLN (webinar}. Both were presented by Jeff Gabello, FASB Supervising Project Manager. The information included here includes my references to the material presented by Mr. Gabello in the two presentations. I supplemented Jeff’s material with material derived from FASB’s website. Official positions of the FASB on accounting matters are reached only after extensive due process and deliberations.

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The material was presented in three segments: one, an introduction to FASB and their process; two, a new standards/implementations segment; and three, a segment on current/ongoing projects.

The new standards/implementations discussed were: Leases, Credit Losses, Hedge Accounting, Cloud Computing, and Nonemployee ShareBased Payments.

The current projects discussed were: Income Tax Projects, Market Transition from LIBOR, Segment Reporting, Distinguishing Liabilities from Equity, Simplifying the Balance Sheet Classification of Debt, and Private Company Council Issues.

FASB Board Members FASB board members are appointed to five-year terms and each can serve a second five-year term.

Currently, the Board consists of seven members” Russ Golden (Chairman), Jim Kroeker (ViceChairman), Christine Botosan, Gary Buesser, Sue Casper, Marsha Hunt, and Hal Schroeder. [1] [2] Diversity of Views…

The FASB’s approach to developing and implementing new standards always includes gathering information and viewpoints from a diverse group of stakeholders. Advisory groups available to FASB include the Financial Standards Advisory Council, the Small Business Advisory Committee, the Investor Advisory Committee, and the Not-for-Profit Advisory Committee.

Input on proposals is gathered by way of Technical Inquiries, Comment Letters, and Liaison Meetings. Fasb’s outreach to investors includes Roundtables, Roadshows and calls to individual investors and groups of investors. They consult with the Private Company Council, the Emerging Issues Task Force and other project working groups. New standards always include extensive post-implementation reviews. [1] [2] FASB Technical Staff As you would expect, the FASB employs an impressive technical staff. The current Acting Technical Director is Shayne Kuhaneck who was appointed to that position in May of 2019. Shayne is directly supported by 6 Assistant Directors. Permanent staff consists of approximately 20 Project Managers. Jeff Cabello is one of this group, serving as a Supervising Winter 2019 | The Cooperative Accountant

ACCTFAX Project Manager. Standards setting activities are further supported by approximately 6 Practice Fellows from audit firms and industry – serving on a 2-year rotation. Further support comes from 13 Postgraduate Technical Assistants who serve 1-year appointments. Together the FASB, the Financial Accounting Foundation (FAF), and the Governmental Accounting Standards Board (GASB) have approximately 160 employees. [1] [2] Developing an ASU Issues that may eventually become updates to the Codification are raised through various sources.

These can include research related to active projects, outreach with stakeholders, from Board meetings and Board decisions. These issues can lead to Proposed ASUs (Exposure Drafts), followed by extensive analysis of Comment letters and re-deliberations. This will lead to issuance of a final ASU, followed by post-implementation activities. [1] [2] FASB Implementation Web Portal An important part of the FASB’s mission of developing high-quality standards is monitoring implementation. The FASB accomplishes this by assisting preparers and other practitioners in their understanding and ability to consistently apply new standards. Last month the FASB launched a new implementation web portal that acts as a “one-stop-shop” for educational materials and implementation guidance for FASB’s major standards. [3] Currently, the portal contains links to implementation guidance for the following: ● Revenue Recognition ● Leases ● Credit Losses ● Not-for-Profit Financial Reporting ● Hedging ● Other standards.

The educational resources section for each of the above topics also includes an easy-access link to the FASB Technical Inquiry Service, a service provided by FASB staff to answer questions submitted by stakeholders about various standards. Questions submitted through the portal also help staff members identify ways Winter 2019 | The Cooperative Accountant

to make accounting standards easier to use and understand. Other resources include links to FASB In Focus and Understanding Costs and Benefits documents, videos and investor podcasts, and Taxonomy implementation information.

For standards with Transition Resource Groups (TRGs) – Revenue Recognition and Credit Losses – the portal contains links to all TRG materials.

These include meeting minutes that contain solutions to commonly expressed stakeholder questions.

For the Leases and other standards that do not have TRGs, other materials are highlighted. For example, the Leases portal includes links to four educational videos, including three specifically focused on implementation: ● Putting Leases on the Balance Sheet ● Leases: A Quick Example of the Display Approach ● A Wolfe Research “Accounting for Leases” Primer featuring FASB Member Marc Siegel.

The Leases and other portals will be updated with new educational resources as they become available. To launch the new portal, the FASB also produced a video that provides an overview of how the FASB supports implementation of all its standards. [3] Leases – Standard Setting Activities On February 25, 2016, the FASB issued an Accounting Standards Update (ASU) intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment.

The ASU will require organizations that lease assets – referred to as “lessees” – to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.

Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months.

Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP – which requires only capital leases to be recognized on the balance sheet – the new ASU will require both types of leases to be 15

ACCTFAX recognized on the balance sheet.

For public companies, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Thus, for a calendar- year company, it would be effective January 1, 2019. For all other organizations, the ASU is effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all organizations.

Additional Leases standard setting related activities include: ● Land easements ASU (Issued January 2018 Update 2018-01) ● Technical corrections ASU (Issued July 2018 Update 2018-10) ● Targeted Improvements ASU (Issued July 2018 - Update 2018-11) ● Narrow-Scope Improvements for Lessors (Issued December 2018 - Update 2018-20) ● Proposed ASU – Codification Improvements for Lessors (Issued March 2019 - Update 2019-01) [1] [2] Current Expected Credit Losses (CECL) On June 16, 2016, the FASB issued an Accounting Standards Update (ASU) that improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.

The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forwardlooking information to better inform their credit loss estimates.

The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.

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The ASU on credit losses will take effect for U.S. Securities and Exchange Commission (SEC) filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other organizations, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021.

Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The scope of CECL includes: ● Debt instruments (amortized cost) ● Trade receivables ● Reinsurance receivables ● Loan commitments ● Financial guarantees ● Net investment in leases ● AFS debt securities (AFS Credit Loss Model) CECL does not apply to: ● Billed operating lease receivables ● Defined contribution employee benefit plan loans ● Policy loan receivables of insurance entity ● Promises to give (pledges receivable) of NFPs ● Related party loans between entities under common control Customer’s Accounting for a Cloud Computing Arrangement That Is Considered a Service Contract (EITF Issue) On August 29, 2018 the FASB issued an Accounting Standards Update (ASU) that reduces complexity for the accounting for costs of implementing a cloud computing service arrangement. The ASU is based on a consensus of the FASB’s Emerging Issues Task Force (EITF) (Issue No. 17-A).

The ASU aligns the following requirements for capitalizing implementation costs: ● Those incurred in a hosting arrangement that is a service contract Winter 2019 | The Cooperative Accountant

ACCTFAX ● Those incurred to develop or obtain internaluse software (and hosting arrangements that include an internal-use software license). ● Implementation costs of CCAs that are service contracts would be accounted for in accordance with the guidance in Subtopic 35040 on internal-use software ● The amortization period of the capitalized implementation costs would include periods covered by renewal options of the CCA that are reasonably certain to be exercised The ASU includes new presentation criteria: ● The amortization of the capitalized costs would be recorded in the same line item on the income statement as the hosting fees ● The capitalized implementation costs would be presented on the balance sheet in the same line item as a prepayment of the hosting fees ● Cash flow classification would be the same as the hosting fees For calendar-year public companies, the changes will be effective for annual periods, including interim periods within those annual periods, in 2020. For all other calendar-year companies and organizations, the changes will be effective for annual periods in 2021, and interim periods in 2022. [1][2] Nonemployee Share-Based Payments On June 20, 2018, the FASB issued an Accounting Standards Update (ASU) intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments.

The ASU expands the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services.

Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees.

The amendments in this ASU were effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other companies, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning Winter 2019 | The Cooperative Accountant

after December 15, 2020. Early adoption was permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers.

On March 4, 2019, the FASB issued a proposed Accounting Standards Update (ASU) intended to increase stakeholder awareness of the amendments in Update 2018-07 and to expedite the improvements process. The amendments in this proposed Update would require entities to measure and classify share-based payments to a customer by applying the guidance in Topic 718. The amount that would be recorded as a reduction in revenue would be measured on the basis of the grant-date fair value of the sharebased payment in accordance with Topic 718.

The grant date is the date at which a grantor (supplier) and a grantee (customer) reach a mutual understanding of the key terms and conditions of a share-based payment award. The classification and subsequent measurement of the award would be subject to Topic 718 unless the share-based payment award is subsequently modified and the grantee is no longer a customer. A final Update is expected in Q4 2019. [1][2] Current – Ongoing Projects Effective Dates The FASB is considering a potential change in Effective Date philosophy.

A major standard that takes effect for an SEC filer (large publicly traded company) would take effect two years later for smaller public and private organizations. Here are examples of how this change would current effective dates: Hedging: SEC filers – January 2019; all other public business entities – January 2019; private and all others would change from January 2020 to January 2021.

Leases: SEC filers – January 2019; all other public business entities – January 2019; private and all others would change from January 2020 to January 2021.

CECL: SEC filers – January 2020; all other public business entities - would change from January 2021 to January 2023; private and all others would change from January 2021 to January 2023. [1][2] Income Tax Projects – Codification Topic 740 The objective of this project is to simplify the accounting for income taxes by removing 17

ACCTFAX certain exceptions to the general principles in Topic 740, Income Taxes, and by clarifying and amending guidance that already exists within generally accepted accounting principles (GAAP). The Board has heard from stakeholders that accounting for income taxes is unnecessarily complex. Stakeholders submitted an agenda request with certain suggestions for simplifications to the accounting for income taxes, and other practitioners provided additional suggestions for simplifications during the staff’s outreach.

On May 14, 2019, the Board issued a proposed Accounting Standards Update, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The due date for comment letters was June 28, 2019. [4] Market Transition from LIBOR On September 5, 2019, the FASB issued a proposed Accounting Standards Update (ASU) that would provide temporary optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. Stakeholders are asked to review and provide comment on the proposed ASU by October 7, 2019.

Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make shortterm loans to each other. With global capital markets expected to move away from LIBOR and other interbank offered rates toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition.

The Proposed ASU would provide optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships affected by reference rate reform. The guidance would apply only to contracts or hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.

The guidance is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, the guidance would be in effect for a limited time. That is, the 18

guidance would be effective upon issuance of final guidance and would not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. [4] Segment Reporting The objective of this project is to undertake improvements to the segment aggregation criteria and disclosures to provide users with more decision-useful information about the reportable segments of a public entity. In May 2017, the Board discussed potential ways to improve the segment aggregation criteria and disclosure requirements and directed the staff to perform outreach with users, preparers, and accounting firms to assess the effect and viability of potential alternatives. In September 2017, the Board considered a summary of the outreach and decided to add a project on segment reporting to the technical agenda. [4] Distinguishing Liabilities from Equity The objective of this project is to improve understandability and reduce complexity (without loss of information for users) of the accounting for instruments with characteristics of liabilities and equity (including convertible debt). At the June 6, 2018 Board meeting, the Board decided that convertible instruments with embedded conversion features would be accounted for as a single unit of account based on the model for traditional convertible debt or traditional convertible preferred shares. This means that convertible debt would be recognized in the balance sheet as a single liability, measured at amortized cost. There no longer would be bifurcation of the conversion feature and the debt host. Similarly, convertible preferred shares would be recognized in the balance sheet as a single equity element. Convertible instruments with embedded conversion features that meet the definition of a derivative and are ineligible for the derivative scope exception are outside the scope of the project (and the embedded conversion option will continue to be bifurcated and measured initially and subsequently at fair value).

On July 31, 2019, the Board issued a proposed Accounting Standards Update, Debt – Debt with Conversion and Other Options (Subtopic 470Winter 2019 | The Cooperative Accountant

ACCTFAX 20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The due date for comment letters was October 14, 2019. [4] Simplifying the Balance Sheet Classification of Debt The objective of this project is to provide guidance that will reduce the cost and complexity of determining the current versus noncurrent balance sheet classification of debt. This project is part of the Board’s Simplification Initiative.

The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information required to be reported by an entity.

On September 12, 2019, the FASB issued a revised proposed Accounting Standards Update, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent). The due date for comment letters was October 28, 2019. [4] Private Company Council {PCC} Issues The Private Company Council (PCC) is the primary advisory body to the FASB on private company matters. The PCC uses the Private Company Decision-Making Framework to advise the FASB on the appropriate accounting treatment for private companies for items under active consideration on the FASB’s technical agenda.

The PCC also advises the FASB on possible alternatives within GAAP to address the needs of users of private company financial statements.

Any proposed changes to GAAP are subject to endorsement by the FASB. At it’s most recent meeting on September 11, 2019, the PCC discussed the following issues, organized by topic: ● Share-Based Payments (SBP): Participants discussed the view that the nature of SBP awards often depends on the stage of the company and the level of the employee. The discussion indicated that there is a continued trend towards issuance of restricted stock units and management incentive units rather than traditional stock options. Participants noted that an Internal Revenue Code Section Winter 2019 | The Cooperative Accountant

409A compliant valuation is not overly costly to obtain and suggested that absent current requirements, they would generally rely on the Section 409A valuation to determine current price. ● Effective Date: Participants expressed support for the proposed effective date philosophy and highlighted the importance of providing private companies with the opportunity to learn from public companies. ● Leases: While only one participant (whose firm invests in a company licensing lease accounting software) indicated that they have completed implementation of the lease standard, several participants noted that their leases typically are not voluminous or complex. ● Credit Losses: Participants indicated that they would not be largely affected by the new credit losses standard because they already use key elements of an expected loss model for their trade receivables. ● Software Capitalization: Participants discussed complexities associated with determining technological feasibility. ● Financial Performance Reporting: Due to concerns about a lack of consistency among reporting entities, participants suggested that the Board consider defining the terms cost of goods sold and selling, general, and administrative. When the project scope was explained to the participants, they were supportive of the project to disaggregate cost of goods sold and selling general administrative expenses. [4] FOOTNOTES [1] Jeff Gabello, “FASB Update” Accessed August 2019. Presentation at NSAC sponsored Tax, Finance,& Accounting Conference for Cooperatives, Denver, CO. [2] [1] Jeff Gabello, “FASB Update” Accessed October 2019. Presentation at NSAC Cooperative Learning Network Webinar.

[3] FASB. FASB Implementation Web Portal, Accessed October 2019. https://fasb.org.

[4] FASB. Projects / Technical Agenda, / Private Company Council, Accessed October 2019. https://fasb.org.

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TAXFAX

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

RECENT TAX DEVELOPMENTS DEPRESS THE VALUE OF ACQUIRED NOL CARRYOVERS

By George W. Benson From time to time, a cooperative may consider acquiring another corporation (or cooperative) that has a net operating loss (“NOL”) carryover.

How the acquisition is structured determines whether the carryover survives. For instance, the transaction might be structured as a tax-free merger or as a purchase of the stock of the target (without a Section 338 election), in which case any NOL carryover would be preserved subject to certain limitations. Alternatively, the transaction might be structured as a purchase of the assets of the target or as a purchase of stock of the target with a Section 338 election, in which case the NOL carryover would be eliminated, but the cooperative would receive a basis in the assets of the target equal to what it paid.

In determining how to structure the acquisition of a target with NOLs, many factors must be taken into account, not just taxes. But, normally the potential value of the NOL carryover needs to be determined as part of an analysis as to how to structure the acquisition and what, if anything, to pay the target (or its shareholders) for the NOL. The potential value of the NOL depends upon a present value computation that takes into account a projection of when and how the NOL might be used.

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It has never been easy to project when and how acquired NOLs might be used. Some of the factors that enter into valuing acquired NOL carryovers are discussed below. The treatment NOL carryovers is a very complicated subject, and this article barely scratches the surface. The focus of this article is on domestic acquisitions.

Developments in the past few years – in particular, the enactment of the Tax Cuts and Jobs Act of 2017 (the “TCJA”) and the low level of interest rates – have significantly reduced the potential value of acquired NOLs. A recently released set of proposed regulations will, if finalized in their present form, further depress the value of acquired NOLs in many cases.

Confirming the existence and character of NOLs. It should go without saying that a cooperative considering acquisition of a target with an NOL carryover should, as part of the acquisition tax due diligence, examine the origin and character of the NOLs to determine whether the NOLs or their character could be questioned by the IRS. The acquirer should not be simply assume that the reported NOLs are “good NOLs.” The fact that NOLs arose in closed years does not mean that the IRS cannot question them.

The IRS can look at closed years to confirm the existence and character of the losses arising in those years and carrying to open years. It can Winter 2019 | The Cooperative Accountant

TAXFAX also look at closed years to see whether NOLs should have been used in those years, but were, for whatever reason, not claimed. Adjustments to a closed year generally cannot result in a tax deficiency for the closed years, but they can reduce the amount or change the character of an NOL from the closed year and thereby affect what can be claimed in an open year. See, for example, the short article appearing in this issue of TAXFAX regarding the Tax Court petition filed

by Great River Energy.

The TCJA reduced the value of NOL carryovers.

When Congress reduced the corporate income tax rate from 35% to 21% as part of the TCJA, it effectively reduced the value of NOL carryovers by 40%.

The TCJA also made changes to the NOL carryover rules themselves. ● NOLs generally can no longer be carried back, but acquired NOLs could never be carried back, so this change is neutral. ● What can be done with carryovers of acquired NOLs depends upon the years the NOLs originated. Before the TCJA, NOLs could be carried over 20 years and used against 100% of taxable income. Now NOLs originating in fiscal years ending after December 31, 2017 can be carried over indefinitely. However, NOL carryovers originating in fiscal years beginning after December 31, 2017 can be used against only 80% of taxable income.

For the next few years, a target’s NOL carryovers may include both carryovers subject to the old rules and carryovers subject to the new rules. All else being equal, the 80% limitation on the use of new NOLs will reduce the value of carryovers subject to the new rules.

Section 382 limits on the use of NOLs. Section 382 limits the use of NOLs acquired in a transaction that results in an ownership change (generally a shift of ownership of more than 50%).

When the target has a net unrealized built-in loss (a “NUBIL”) at the time of the acquisition, Section 382 also limits the use of built-in losses recognized during the five year period after the acquisition (“RBILs”).

Winter 2019 | The Cooperative Accountant

Generally, the amount of losses and RBILs that can be used in a year is limited to an amount equal to the value of the stock of the target at the time of acquisition multiplied by the longterm, tax-exempt rate plus, if the target has a net unrealized built in gain (a “NUBIG”) at the time of the acquisition, the “recognized built-in gains” (“RBIGs”) during the five year period after the acquisition.

The value of the stock of the target generally is what was paid by the acquirer for the stock.

The long-term, tax-exempt rate is announced by the IRS each month. The rate that is used for Section 382 purposes is the highest rate in effect for the 3-month period ending with the calendar month of acquisition. The long-term, tax-exempt rate currently is very low – for October, 2019, the rate was 1.40% and the rate applicable to ownership changes occurring during October (the highest rate for the 3-month period ending in October) was 1.77%.

So, for example, if a target with a $10 million NOL carryover is acquired for $25 million and the applicable long-term, taxexempt rate is 1.77%, the amount of loss that can be used in any year against future income of the target is $442,500 plus, during the five years after the acquisition, the amount of any RBIGs in those years.

The decline in interest rates in recent years has reduced the long-term, tax exempt rates to a very low level. This affects the ability to use acquired NOL carryovers and thus their value.

The rules for determining RBIGs are complicated. In general, if the target’s assets are worth more than their basis at the time of acquisition, the target has a NUBIG, and, if an asset is sold during the five-year period after acquisition at a gain, then the gain recognized is treated as RBIG, but only to the extent that the asset had built-in gain at the time of acquisition and all RBIGs to date have not exceeded the NUBIG. RBIGs can also result from items of income which were earned prior to the acquisition, but which are recognized for tax purposes during the five years after the acquisition.

Generally, acquired NOLs of a target can be used only against future income of the target (or against future income of the merged corporation, 21

TAXFAX in the case of tax-free mergers) subject to the Section 382 limitations. If the target is included in a consolidated return after being acquired, the consolidated return SRLY (separate return loss year) rules generally prohibit use of acquired NOL carryovers against earnings of other consolidated entities.

Proposed Section 382(h) regulations will, if adopted, complicate the valuation.

Recently released proposed Section 382(h) regulations will, if adopted in their present form, make changes in the RBIG rules that will further depress the value of acquired NOLs. For many years, the IRS has recognized two different approaches to computing RBIGs, the “338 approach” and the “1374 approach.” See, Notice 2003-65, 2003-2 C.B. 747. Taxpayers acquiring a target with a NUBIG typically elected to follow the 338 approach, and taxpayers acquiring a target with a “NUBIL” typically elected to follow the 1374 approach. The 338 approach could be beneficial for taxpayers with a NUBIG because it allowed them to recognize built-in gain during the five years after acquisition without having to dispose of built-in gain assets.

The proposed Section 382(h) regulations require all taxpayers to use the 1374 approach.

This and some other proposed changes will reduce RBIGs (or increase RBILs) and thus reduce the ability of taxpayers to benefit from the use of acquired NOL carryovers. See, Prop. Treas.

Reg. § 1.382-7 (built-in gains and losses), REG125710-18 (September 10, 2019). The proposed rules should be studied particularly carefully if the target’s liabilities exceed assets and the acquirer plans to rehabilitate the target by getting debt relief from some creditors.

The proposed regulations state that the new rules will apply “to any ownership change occurring after [the] date of publication of [the] Treasury decision adopting these proposed regulations as final regulations in the Federal Register.” They currently do not have a “binding contract rule,” which may complicate planning for acquisition of loss companies in the months to come in situations where there likely is going to be a gap in the time between when the parties agree to do a deal and when the transaction actually closes.

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The proposed regulations promise to be controversial.

Cooperative considerations – merger with a cooperative with losses.

When two cooperatives merge, and one has a patronage NOL carryover, the survivor may be able to use the carryover (subject to the Section 382 limitations), but the combined entity may not have an appetite to use the carryover.

If the cooperatives are nonexempt, the IRS almost certainly will argue that the merged entity can use any acquired patronage NOLs against only patronage income (subject to Section 382 limitations and the 80% limitation for new NOLs). Section 1388(j)(2) confirms that, in the case of a merger, acquired patronage NOL carryovers do not need to be traced to future patronage earnings attributable to the patrons of the loss cooperative. It provides that after a merger a cooperative can, at its “option,” net patronage losses of one or more allocation units against patronage earnings of one or more other patronage units prior to paying patronage dividends to patrons of the profitable units.

However, merged cooperatives often do not want to reduce future patronage dividends which is what they must do to use acquired patronage NOLs. Moreover, because of the 80% taxable income limitation on use of new NOLs, cooperatives will have to pay tax on 20% of any income retained so that it can use the NOLs. Passing patronage losses through prior to an acquisition Over the years, the IRS has recognized that cooperatives with a patronage loss can pass the losses through to patrons.

Sometimes, in merger situations involving a cooperative with a patronage NOL carryover, the parties agree that the cooperative with a loss will pass the loss through to patrons prior to the merger. Passing losses through prior to a merger may make sense if the acquiring cooperative does not think it will be able to effectively use the loss for the reasons described above. Often passing losses through prior to a merger is viewed as the fairest alternative because the losses end up charged to the patrons of the loss cooperative, and not to the patrons of both cooperatives.

Winter 2019 | The Cooperative Accountant

TAXFAX While the IRS has over the years issued a number of private letter rulings dealing with cooperative loss pass-throughs, there are none (at least none that are publicly available) dealing with loss pass-throughs as a preliminary step to a merger. As a consequence, there is no instruction manual for passing losses through prior to a merger.

Cooperatives contemplating passing losses through prior to a merger should do so only after studying their organizational documents (their Articles of Incorporation, Bylaws, membership or marketing agreements, etc.) and applicable state law to see what, if anything, they provide with respect to losses. They need to determine how the loss should be allocated among patrons.

They need to study the mechanics of passing the loss through and to consider what can be done to assure that the loss pass-through will be viewed separately from the merger so that members will be able to recognize any losses passed through to them.

ADDITIONAL DATA ON THE SUBCHAPTER T COOPERATIVE UNIVERSE Each year, the IRS releases an updated version of Publication 55B (the IRS Data Book) which contains information about tax returns filed in the prior year.

Since cooperatives began to file Form 1120-C, the Data Book has provided some information regarding the users of Subchapter T and IRS audits of the returns they file. So, for example, the 2018 Data Book revealed that 9,294 cooperatives filed Form 1120-C in calendar 2017. The TAXFAX Column has reported on that information in recent years, but the information contained in the Data Books is limited.

Recently the IRS provided a further glimpse of the Subchapter T universe in the preamble to the proposed Section 199A(g) regulations.

The preamble reveals that many of the filers of Form 1120-C are small: “Approximately 4,050 (45 percent) of the 9,000 filers of Forms 1120C reported annual gross receipts of less than $750,000.” REG-118425-18, 84 F.R. 28682 (June 19, 2019).

However, most of the small cooperatives appear involved in something other than Winter 2019 | The Cooperative Accountant

agriculture. The IRS estimated that approximately 2,000 of the Form 1120-C filers are cooperatives involved in agriculture or horticulture. This is in line with the most recent USDA statistics which reported 1,871 agricultural cooperatives in 2017.

“Agriculture Cooperative Statistics 2017,” USDA Service Report 81 (December, 2018). The IRS preamble states that most farmer cooperatives were not “small” by its measure: “Of the 2,000 filers of Forms 1120-C identifying as Specified Cooperatives, only 175 filers (less than 1 percent) reported annual gross receipts of less than $750,000.” REG-118425-18, 84 F.R. 28683 (June 19, 2019).

The preamble contains one other tidbit of information. After observing that there were 3,954,000 taxpayers required to file Form 1065 (the partnership return) in 2017, the IRS stated: “The IRS also identified approximately 407 different partnerships that issued a Schedule K-1 to 680 different Cooperatives in 2017.” REG118425-18, 84 F.R. 28683 (June 19, 2019). The IRS then estimated that 344 of those partnerships would be required by the proposed regulations to provide additional information to their partners because they were conducting eligible activities.

The IRS concluded that the bulk of these partnerships were “small entities,” based upon number of employees for some and reported income for others.

GREAT RIVER ENERGY FILES A PETITION IN TAX COURT Great River Energy (“GRE”) is a federated electric generation and transmission cooperative that provides electricity to its members, 28 rural electric distribution cooperatives located in Minnesota, and to others. As a nonexempt rural electric cooperative, GRE is taxed under the law that was applicable to nonexempt cooperatives before the enactment of Subchapter T. GRE recently filed a petition in Tax Court contesting the results of the IRS audit of its 2012, 2013 and 2014 tax years. See, Great River Energy v. Commissioner, Tax Court Docket No. 11956-19.

According to the statutory notice of deficiency attached to the petition, GRE reported no tax due for those years on its original tax returns. Exam has proposed a number of adjustments which 23

TAXFAX result in approximately $63 million of proposed taxes and interest for the years under examination as well as penalties. All of the proposed adjustments are in dispute.

The first adjustment, and likely the most significant, is an adjustment to how GRE allocates expenses between its member and nonmember income.

GRE sells electricity to both members on a patronage basis and to nonmembers on a nonpatronage basis. According to the petition, “[i]n computing its Member and nonmember net margin, GRE starts with the respective revenues attributable to Members and nonmembers, subtracts the allocated COGS [cost of goods sold] for the respective electricity sold to Members and nonmembers and subtracts the respective Member and nonmember non-COGS expenses.” For this purpose, “GRE allocates the costs of production of electricity [i.e., COGS] proportionately to electrons produced based upon MWh [megawatt hours] of electricity produced.” It has done so consistently for many years. Its rationale for doing so is that “[e]ach electron, whether produced for a Member or a nonmember customer, is identical.”

While each electron of electricity is identical, it is likely that each electron is not sold for the same price and that the average price of electricity sold to nonmembers is lower than the average price to members (because, for instance, nonmember power may principally be sold at a spot market price). If that is true, allocating COGS based upon megawatt hours may very well consistently result in nonmember losses. It appears that the IRS has proposed to allocate COGS between member and nonmember sales on some other basis, not described in the petition, but likely resulting in nonmember income, not nonmember losses (and reducing member income). However, the petition does not contain enough information to confirm precisely what the IRS has done.

The second adjustment relates to three kinds of income which GRE treated as reducing the cost of producing electricity at its coal-fired plants, thus reducing the COGS allocated between member and nonmember income based on MWHs. The IRS has treated each of these kinds of income as nonmember/nonpatronage 24

income. It appears that not only has the IRS recharacterized these kinds of income, but it has also taken the position that no expenses should be allocated to the recharacterized income. ● The first kind of income is described in the petition as “lease income on the DryFining™ equipment.” Section 45 provides a production tax credit for “refined coal” that is “sold by the taxpayer (producer), to an unrelated person, with the reasonable expectation that it will be used for the purpose of producing steam.”

The refined coal must be a product produced from coal or high carbon fly ash and must result in a “qualified emission reduction.” It is not uncommon for users of coal to enter into structured arrangements with third parties who will buy coal from the user, process the coal into refined coal, sell the refined coal back to the user, claim the production credit, and then share that credit with the user in some manner. The Tax Court recently sustained such an arrangement where third parties purchased coal from a utility, processed it, and then sold the coal back to the utility for less than they paid the utility for the coal, sharing a portion of the credit with the utility in the form of the reduced price on refined coal sold back to the utility. Cross Refined Coal, LLC v. Commissioner, Docket No. 19502-17 (bench opinion after trial; entered into the record August 29, 2019). In that case, the processor owned the coal for only the 3 to 5 minutes it took to run the coal through its processing facility which was adjacent to the utility’s power plant. It appears that GRE entered into an arrangement with a third-party processor that effectively allowed it to reduce the cost of the coal it used by sharing indirectly in the production tax credit, not through reduced coal prices, but through what were characterized as lease payments. ● The second kind of income being recharacterized is income from fly ash sales.

Fly ash is a residue of burning coal. Often companies must pay to safely dispose of fly ash. GRE is able to sell some of its fly ash to third parties to use as a filler product in the production of concrete. GRE views what it Winter 2019 | The Cooperative Accountant

TAXFAX realizes from fly ash sales as a reduction in the cost of electricity produced at its coalfired plants. The IRS views fly ash sales as nonmember/nonpatronage sales. ● The third kind of income being recharacterized is “income from the sale of heated water and steam produced from its power plants.”

These sales almost certainly are the result of cogeneration arrangements designed to minimize the cost of producing electricity through more efficient use of fuel because otherwise wasted heat from electricity generation is put to a productive use. GRE views what it realizes from sales of heated water and steam as a reduction in the cost of electricity produced in its coal-fired plants.

The IRS views the sales as nonmember/ nonpatronage sales.

The third adjustment is the result of the first and second adjustments. After recharacterizing income and reallocating expenses, it appears that the IRS substantially reduced (or eliminated altogether) GRE’s member patronage income.

The IRS then apparently disallowed either in whole or in large part the patronage dividends exclusions claimed for 2012 ($43.9 million), 2013 ($42.8 million) and 2014 ($52.0 million).

The fourth adjustment is to “current year member losses.” From the petition, it is difficult to determine what this adjustment is. It may be that, after making the first three adjustments, the IRS determined that GRE had patronage losses and nonmember/nonpatronage income and is not letting GRE use the patronage losses against the nonmember/nonpatronage income.

The fifth adjustment relates to GRE’s net operating loss carryovers from prior years. It appears that GRE had a large net operating loss carrying into its 2012 year. The tax footnote to GRE’s 12/31/2012 financial statements (available at GRE’s website) reports that GRE had unused federal net operating loss carryovers of $342.6 million, most of which must have come from prior years. The petition states that the IRS examined the 2005 to 2011 tax years to determine the correct amount and character of net operating Winter 2019 | The Cooperative Accountant

loss carryovers available to be used during the 2012 to 2014 years and in so doing made adjustments to the allocation of COGS and income between member and nonmember like the first and second adjustments described above. Presumably, this review led the IRS to significantly reduce (or perhaps eliminate) GRE’s net operating loss carryovers to 2012 and to characterize any carryover that was left as largely patronage. Besides disagreeing with the first adjustment, GRE raises various challenges to the IRS authority to redetermine the amount and character of its carryovers.

The sixth adjustment relates to the use of certain business credits. GRE had significant carryovers of business credits coming into 2012 (approximately $7 million) and earned some business credit in each of the years under audit.

Apparently the IRS in its computation of the tax due as a result of its proposed adjustments did not allow GRE to use any of the credits.

According to the petition, the IRS “determined that certain section 38 tax credits are attributable to patronage activities and can only be used by the Petitioner to offset any potential Federal income tax liability resulting from the proposed adjustments set forth in the Notice that are patronage sourced.” GRE argues that it is “entitled to use such credits to offset any Federal income tax liability resulting from any of the Service’s proposed adjustments.”

The final adjustment is the imposition of the substantial understatement penalty under section 6662. GRE, of course, disagrees with this, not only because it believes that no tax is due, but also because: “Petitioner had engaged outside expert professionals who advised them as to allocation methodology and other patronage matters. The service audited Petitioner’s tax returns twice, reviewed Petitioner’s method of patronage allocation and accepted such allocations without any change. Petitioner computed its allocation methodology in accordance with such advice and the Service’s concurrence in such methodology through its acceptance of such methodology in the prior audits.”

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TAXFAX GRE’s case is interesting because of the available at https://www.regulations.gov/ issues it raises, which are, of course, relevant to

By Barbaradocket?D=IRS-2019-0028.

A. Wech other taxable rural electric cooperatives. They The comments included: are also potentially of interest to nonexempt ● A letter from the National Council of Farmer Subchapter T cooperatives. However, the Cooperatives dated August 19, 2019 purpose of this short description is to note criticizing many aspects of the regulations the existence of this case and, to the extent and asking that a number of changes and possible from the information contained in corrections be made. This letter addresses the petition, to describe what appears to be the regulations from the perspective of at issue. It is not to critique the positions of farmer cooperatives. This letter is by far the parties or to speculate upon the possible the most substantive of the comment outcome of the case. letters. It points out that many aspects of Only a small fraction of Tax Court petitions the proposed regulations are inconsistent that are filed each year result in trials with with the plain language of the statute, its written opinions. Most cases settle prior to history and the existing rules of cooperative trial. The terms of settlements normally are taxation and represent changes from Section not public. They do not set any precedent for 199 and the regulations under Section 199. other taxpayers. Those cases that do end up ● Letters from the American Farm Bureau going to trial often take years to go through Federation dated August 15, 2019 and the process. Even then, whoever loses can the New York Farm Bureau dated August appeal.

19, 2019. These letters, which are almost While the process can be slow, this is identical, focus on the regulations from definitely a case worth watching. a farmer perspective. They characterize the portion of the proposed regulations PROPOSED SECTION 199A(G) dealing with the impact of membership in a REGULATIONS RELEASED The Treasury/IRS released proposed cooperative on a farmer’s qualified business regulations implementing Section 199A(g) income as “very technical and somewhat on June 19, 2019. See, REG-118425-18, 84 confusing.” A number of recommendations F.R. 118. Minor corrections were released on for improvement are made.

August 6, 2019. The proposed regulations ● Two e-mail comments from an anonymous were accompanied by Notice 2019-27, CPA who prepares farmer returns and also providing guidance on the calculation of W-2 is involved in farming. The CPA requested wages for purposes of Section 199A(g). that the expense allocation safe harbor be At the time of release, questions and made available for most farmers other than answers were added to the IRS website those operating large corporate farms, not explaining Section 199A. See “Tax Cuts and just farmers whose taxable income falls Jobs Act, Provision 11011 Section 199A – below the threshold set in Section 199A(e) Qualified Business Income Deduction FAQs,” (2) (initially $315,000 for farmers filing joint FAQs 34 to 47, https://www.irs.gov/newsroom/ returns, subject to an inflation adjustment). tax-cuts-and-jobs-act-provision-11011-section199a-qualified-business-income-deduction-faqs ● A letter from Cargill, Incorporated dated (as updated June 18, 2019).

August 19, 2019. This letter recommended In the preamble to the proposed that the proposed regulation “be finalized regulations, Treasury/IRS solicited in its current form.” It warned against any comments from the public and a few were change that would permit a cooperative to received. The comments are all publicly 26

Winter 2019 | The Cooperative Accountant

TAXFAX pass through an allocable share of its wages and property to patrons for use in patrons’ Section 199A(a) computations. Among other things, it expressed concern that doing so “would undermine the competitive balance that existed between cooperative and private industry market participants under prior Section 199 and which was restored by the March 2018 amendments to Section 199A.” ● A short letter from the National Grain and Feed Association (“NGFA”) dated August 19, 2019. The NGFA includes in its membership both cooperative and commercial businesses and, as a result, has been very interested, as well as conflicted, regarding preserving the benefits of Section 199 for cooperatives and their patrons through Section 199A(g).

It describes what it believes were the two principal objectives of the “fix,” namely, “(1) It reestablished the competitive market balance that previously existed between cooperatives and privately-held firms by removing the tax incentive for farmers to sell solely to cooperatives; and (2) it replicated, to the maximum extent possible, the tax treatment of the previous Section 199 for cooperatives and their farmer patrons.” It recommended the “the IRS, as it considers submitted comments and crafts a final rule, first and foremost ‘do no harm’ that would in any way skew, disrupt or undermine the intent of Congress in achieving these two overarching objectives.” However, it did not comment on whether it regarded the proposed regulations as achieving those goals and made no recommendations for changes and improvements. ● A letter from Staple Cotton Cooperative Association (“Staplcotn”) dated August 19, 2019. This letter focused on the treatment of patrons of cooperatives that for one reason or another do not claim the Section 199A(g) deduction. Staplcotn asked that the rules of Section 199A(b)(7) apply only if the Winter 2019 | The Cooperative Accountant

cooperative retains or passes through some or all of its Section 199A(g) deduction, but not if the cooperative claims no deduction.

Alternatively, it asked that cooperatives be given the ability to elect out of Section 199A(g) so that Section 199A(b)(7) will not apply to patrons. ● A letter from the American Institute of CPAs dated September 5, 2019. This letter contains several recommendations. It recommends elimination of the definition of patronage and nonpatronage and the prohibition on netting contained in Prop.

Treas. Reg. § 1.1388-1(f). It requests guidance with respect to the treatment of the protion of a cooperative’s Section 199A(g) DPAD that, in the past, would have been allocated to C corporation patrons. It advocates allowing cooperatives to “elect out” of Section 199A(g). After observing that “[p]atrons are uncertain as to the amount of QBI with respect to trade or business income received from Specified Cooperatives,” it requests further guidance in this area. It asks the Treasury and IRS to clarify whether a cooperative and its patrons can agree that a crop payment is not a “qualified payment.”

It advocates restoring the examples dealing with the farm products exception that were contained in the Section 199 regulations and were left out of the proposed regulations.

All of the comments were written before the recent Tax Court decision in Ag Processing Inc a cooperative v. Commissioner, 153 T.C. No. 3 (October 16, 2019), which will should have an impact of the final regulations.

Normally, after reviewing comments and making any modifications that Treasury/IRS decides to be appropriate, final regulations are issued. Occasionally, where significant modifications are determined to be required, the Treasury/IRS issues a second set of regulations in proposed form. Just what comes next for the Section 199A(g) regulations project is anyone’s guess.

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SMALL BUSINESS COOPERATIVE FORUM TAXFAX

Shawn Miller

Team…

1. A diverse group of people functioning in a healthy environment producing results exponentially greater than individual contributors.

2. A group of flakes snowballing into disaster.

In the course of our careers, we’ve no doubt seen both definitions realized.

A well-constructed team of people with diverse skills, experience, and perspective will accomplish tasks and solve problems with effectiveness and efficiency. A single part of any device is relatively useless, whether it is a cam shaft for an engine or a single circuit in a phone, but when combined into its intended final product, it allows us to go anywhere, see almost anything, and communicate all over the world. The same is true in a team environment. A team with diverse talents, knowledge, and abilities, can accomplish more than a dozen individuals working in isolation, utilizing their limited knowledge, gifts, and experience alone.

Teamwork and collaboration is an essential part of doing business today. However, for those of us who have had bad experiences, or have been around long enough to remember a time when teamwork in the workplace seemed like a new concept, there can be skepticism regarding its overall effectiveness.

Are teams at work just a fad? A generational thing?

Some of the more gimmicky approaches to team building may cause us to think that this whole teamwork thing may just be the management tool of the decade, but in reality, teamwork has been around 28

EDITOR Barbara A. Wech, Ph.D. Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham Collat School of Business bawech@uab.edu GUEST WRITER Shawn Miller, Principal Morrison 10 Landing Circle, Suite 5 Chico, CA 95973 530-809-4680 smiller@morrisonco.net www.morrisonco.net

since the beginning, and it’s here to stay. Teamwork is more than “trust falls”, and when executed properly it has proven its effectiveness over and again.

Early cave paintings show hunters working in collaboration to bring home dinner. One can only assume that they had well defined roles as they chased, cornered, and killed their prey. Those with a high degree of endurance may have run ahead and scouted. Those that were fast may have been part of the group that made the final push to isolate an animal from the herd. Those that were strongest and / or the most skilled with the spear, would deal the final blow. These early teams would have quickly learned that if they only sent the sprinters, they would often go hungry.

Another early record of teamwork comes from ancient Greek warfare tactics. Though not the first to adopt the concept, the Greeks perfected a strategy where soldiers would lock or hold their shields together to form a defensive line. The tactic, referred to as the phalanx, relied heavily on trusting Winter 2019 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM the person next to you. If no one broke rank, the line was virtually impenetrable. If the person next to you panicked and moved out of formation, the soldiers on each side were in harm’s way, and the whole line could collapse. Alexander the Great conquered much of the world using this method, along with other team-oriented techniques such as the flanking maneuver and the well-coordinated use of cavalry and archers. These techniques and maneuvers required very careful teamwork and coordination of actions. It was no doubt in this context that Alexander was known to say “remember upon the conduct of each depends the fate of all.”

Fast forward a few centuries to the industrial era.

Andrew Carnegie is one that is often quoted on teamwork webpages and by conference speakers.

One of his most well know quotes is: “Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational objectives.

It is the fuel that allows common people to attain uncommon results.”

We don’t tend to think of leaders in the early era of industrialization as engaging in teambuilding exercises, yet Carnegie seems to see the value of teamwork. Who was Andrew Carnegie and what was he really thinking when he said this? He was somewhat unique among the ranks of 19th century industrialists, or “Robber Barons” as they were derogatorily called. Whereas many of them came from wealth and simply grew that wealth, Carnegie was of the relatively few who were seemingly selfmade. He came from poverty; his first job at age 13 was as a bobbin boy earning $1.20 a week.

He would go on to eventually amass a fortune of approximately $300 billion in today’s dollars – richer than any one person today. However, he would not refer to himself as self-made but rather as one whose success came through his reliance on others and their particular talents and expertise. In a speech in 1901, Carnegie stated that he wished to have his tombstone inscribed with the words, “Here lies a man who knew how to enlist in his service better men than himself.” Though those words never made it to his tombstone, it certainly sums up an attitude of teamwork and collaboration.

Teamwork would certainly have looked different in Carnegie’s world. There were no team building retreats and certainly no fire walking exercises, but there was a collection of people with diverse talents, knowledge, and abilities, that worked together to ensure success. At one time Carnegie employed 43 millionaires. A reporter once asked him how he was able to attract and retain that many millionaires. He responded “they were not millionaires when they Winter 2019 | The Cooperative Accountant

began working for me”. He found talented people and not only utilized them, but developed and rewarded them.

For a modern example, we can look at the construction of the world’s tallest building, the Burj Khalifa, completed in 2009 in Dubai (many know it as the building that Tom Cruise scaled with his high tech gloves in the movie “Mission Impossible, Ghost Protocol”). The Burj Khalifa is 2,722 feet high, roughly half a mile. It contains 160 stories, which include 300,000 square feet of residential space and 1.8 million square feet of office space. During peak construction, as many as 12,000 people worked onsite at any given time and logged a total of 22 million labor hours over a six-year period. There were 30 onsite construction firms from around the world, speaking almost as many languages. Imagine the teamwork that had to be at play. Work had to be precisely executed in particular order, with supplies, labor, tools, and equipment coordinated at very specific times and places. No one person had the expertise to create a structure of the magnitude of the Burj Khalifa: it took many people with diverse experiences, talents, and knowledge, working in careful coordination.

Teamwork has been an essential element of success from ancient times to the modern world.

We may never tackle a project like the world’s tallest building, but teams can bring organizational success to the simplest or the most complex projects.

If teams are an excellent way to manage and solve problems, why do we struggle to make them effective? We are, after all, social beings. Most of us want and need to be in relationships with others.

We need people, yet creating and sustaining an effective team of people is always a challenge - that is why the teambuilding industry is a multi-million dollar business.

Though we need each other, we don’t always get along well with others. We are social beings with a tendency to engage in anti-social behavior. We tend to be selfish, project our shortcomings onto the team, to be suspicious of others, and generally just tend to put ourselves and our ambitions first.

Effective teams are able to overcome those selfish tendencies and keep their eyes on the overall objective. A primary factor in team success could be summarized as selfless acts toward a common goal – which is easier said than achieved.

When my son was going to college in Chicago, he volunteered at an inner city youth center coaching a community basketball team. Certain neighborhoods in Chicago were known for producing some of the best basketball players in the nation; one local high 29

TCA SMALL BUSINESS FORUM school saw all five of their senior starters drafted directly into the NBA. The high school teams were so competitive that many exceptional players were cut from the roster, or not even considered. As a result, good players found themselves without an opportunity to play, and highly competitive leagues developed around the city.

My son would often comment that the players he saw coming through the program were amazingly talented and that it was hard to believe that they had not been able to earn a position on a high school team. It soon became obvious to him that the reason most of them had been cut had nothing to do with talent. Talent in that part of the world was so prevalent that high school coaches took that for granted. There would always be talented players trying out for the team. The deciding factor for making the cut was the person’s ability to play in a way that made a team successful. Many of the young men did not understand how to be part of a group of people collectively working toward a common goal.

The young men in the neighborhood where my son coached were some of the most talented players in the city, but had an especially hard time with the notion of team. They would show up for games on a mission to highlight their particular ability, rather than work together to win. As a result, they often lost to less talented teams. The team was dysfunctional.

Many of the dynamics that prevent a basketball team from playing well together and winning can also prevent a cross-functional team from accomplishing its objective.

We can have a skewed view of the best way to overcome team dysfunction. When a team is not functioning the team members may be sent on a weekend retreat where they engage in team building exercises. The problem with this approach is that it does not address the root cause of the dysfunction or provide a particular avenue to create effectiveness. When the root problem is known there can be exercises that help teams address the root problem, better understand each other and work toward a solution, but simply sending a group on a retreat to engage in “trust falls” will not overcome the dysfunction.

In addition to an ability to address the root cause of dysfunction, the most effective teams develop a sense of camaraderie, the deep functional relationship that is an earmark of great teams. The well-meaning thought process that considers a ropes course or fire walking event as a way to achieve this does not understand camaraderie. A couple people may become friends on a ropes course, may have fun, and may even learn a few things about 30

themselves and their colleagues, but that alone will not create the type of relationship that endures and is able to do effective and hard work together.

Teams build an enduring sense of camaraderie as they work together. This happens as they solve problems, both within the team dynamic and as they address the organizational issues and tasks they were formed to resolve. Camaraderie does not come before good work but rather develops during the course of the work.

A sense of accomplishment builds camaraderie and strengthens a team’s ability to work well together. As they work more and more effectively, camaraderie increases, and the team in turn becomes even more effective. This deep functional relationship becomes a catalyst for effectiveness and also an immune system for the team. When the sickness of dysfunction rises, they have the relational tools to deal with the problem, because they have successfully tackled problems before.

A group of soldiers does not develop a deep lifelong bond after completing an obstacle course.

They achieve that bond first by completing basic training and then as they engage in battle together.

Those soldiers may not all be friends, but they are comrades in arms, a bond that can’t be broken easily.

It is a relationship that can create a high degree of effectiveness, and while most of the teams we lead will never go to war, the dynamic is the same.

In short, when a team accomplishes something together, it truly becomes a team.

Teamwork has been around a long time. It’s not trendy, it’s not gimmicky, and when it’s utilized effectively, it’s not awkward. Effective teams directly address the root causes of team dysfunction and correct it. Camaraderie is not developed during events but as the team does hard work.

The difference between an effective team and an incompetent one is how the team functions. The team leader has the most direct influence and has the greatest ability to create success. The team leader, more than anyone, has the ability to be a catalyst in addressing the root causes of dysfunction and guide the team toward accomplishing its objective. Applying a few principles to team leadership can almost guarantee that success.

Trust falls, ropes courses, and fire walking may have a role, but at the very least these activities are overdone and miss developing the foundational aspects of a team. In reality, there are two essential elements of an effective team: 1) teammates who are committed to the success of the team rather than their own success, and 2) good team leadership.

The team leader, more than anyone else, can Winter 2019 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM determine the success or failure of the team. Team leaders come in all shapes and sizes. This person might be a CEO of a large organization, leading a team of diverse executives, or this person might be someone with no title and no rank, who is largely unnoticed in the organization, but who is effectively exercising positive influence over a group of people doing good work. Though it might not be original to him, John Maxwell is known for his primary definition of leadership: “Leadership is influence, nothing more, nothing less.” It’s the best definition out there.

Although the main emphasis of this article is the official team leader or facilitator, it’s important to note that anyone can exercise positive influence.

The best team leaders create a dynamic where anyone can “lead” or have positive influence.

Moment by moment influence (leadership) can gravitate from one individual to another in any given circumstance. The healthiest teams have structure, and there will always be a primary lead or facilitator, but they also recognize the value of individual contribution. One of the best compliments a team leader can receive is if an outsider, walking into a team meeting, is unable to readily distinguish who the leader is. One of the primary indicators of success as a leader is when the team can function on their own in the absence of their leader.

Being an effective leader is foundationally related to who we are as a person. Who we are as a person is the foundation of the way we think and behave as a leader. The team will emulate and reflect the leader. If a team leader is self-serving, the team members will focus more on what they can get than on what they can give. If the leader is sacrificial and values the contributions of others, the team members will tend to respect and support each other.

Following are universal principles of good team leadership. In this context they will be applied more toward the leadership of a cross-functional work team. Whether it’s the CEO who leads a large group of executives or someone who leads a small team on an assembly line, the same principles apply.

The Principle of Humble and Dedicated Resolve Good team leaders should always see themselves as part of the process, not above it.

One of the most important evolutions in our popular understanding of team leadership was Jim Collins’ study on what it takes to create a truly great organization. Published in 2001 in the book “Good Winter 2019 | The Cooperative Accountant

to Great”, and since validated by numerous more “scholarly” studies, the characteristics of a great leader as described in Collins’ work are as true today as they were in 2001.

“We were surprised, shocked really, to discover the type of leadership required for turning a good company into a great one. Compared to highprofile leaders with big personalities who make headlines and become celebrities, the good to great leaders seem to have come from Mars. Selfeffacing, quiet, reserved, even shy – these leaders are a paradoxical blend of personal humility and professional will. They are more like Lincoln and Socrates than Patton and Caesar.”

The characteristics that allow people to lead the most successful companies are also true of leaders of effective teams. Effective leaders are humble – truly humble. There are leaders who are humility posers, but in the end, they will be called out if they are not genuine. The humble leader’s agenda is the same as that of the team. The leader desires to see the organization look great, not make themselves look great in the organization.

A humble leader credits the team for success and takes personal responsibility for shortcomings. A genuinely humble leader values others’ individual contributions and regards the collective thoughts higher in value than their own, recognizing that most (though not all) of the best ideas come from others.

Humble leaders are focused and have a dedication and resolve that keeps them on track and inspires others. They are steadfast in their mission. They are obsessed with thinking about the people and talent in their organization, and nurturing that to achieve great things. Yet they still recognize that they have a primary and key role in the success of the team. As C.S. Lewis once wrote.

“Humility isn’t thinking less of yourself but thinking of yourself less.”

The Principle of Instilling Trust Good team leaders will instill trust in themselves and create an atmosphere where the team members trust each other.

If humility is something we give as a gift to others (putting others first), trust is something we receive. There are two aspects of trust for the team leader: 1) be a trustworthy person and 2) foster an environment where trust is created between members of the team. The former is earned and then received by the leader while the latter is earned and received by the members of the team.

The environment that allows trust to build is created by the leader more than anyone else.

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TCA SMALL BUSINESS FORUM To create trust, a leader must first be trustworthy.

To be trustworthy, one must be honest and competent. It goes without saying that a dishonest leader will not be trusted. But honesty goes beyond simply not telling lies. Honesty is a quality of character in which someone thinks in the context of integrity in all that they do. It’s a demonstration of good faith in all of one’s dealings. When a leader provides a team with a sense that it will not be betrayed or treated unfairly, the team members will behave in a manner that befits their better selves.

For a team to trust its leader, the leader must exhibit a level of competency. He or she must have at least a basic grasp of the subject matter the team is working with. This does not mean the leader must be the subject matter expert, and in fact it’s best if the team leader is not always the smartest person in the room. Ideally, the leader knows the subject well enough to facilitate the discussions, keep the team on track, but does not dominate the process.

Secondly, a leader must create an environment of trust. Team members’ ideas should be freely volunteered and discussed without bias or preconceived judgements. Leaders must create an environment in which relevant ideas and expressions are respected and heard, and bad news and mistakes are freely shared without undue consequence. The moment people hesitate to share a thought or disagree with an idea is the moment that much of the benefit of a team approach is lost.

If team members feel they need to constantly think about how their contribution will be perceived and continually assess the politics in the room, the leader has failed to create an environment of trust. Political intrigue has no place on a team or in the mind of a team leader. Leaders should enable and trust the team members by working to assure them that they have what they need to be successful, and then let them know that they are trusted to get the job done.

Of course, trust is always a good thing to also verify.

The Principle of Authenticity A good leader is the real deal.

Authentic leaders do not hide who they are. What they portray of themselves is factual. They are the real deal, not trying to pass themselves off as something they are not. They have legitimacy through honest relationships, self-awareness, and an openness regarding mistakes, shortcomings, and abilities. They authentically present themselves for who they are and accept and encourage team members to do the same.

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Authentic – “That (which) can be believed or accepted; trustworthy; reliable” (Collins Dictionary) – “Worthy of acceptance or belief as conforming to or based on fact.” (Merriam –Webster) There are several words that have been used to convey this principle. One that is often used today is “vulnerability.” On the surface, it seems like a reasonable descriptor and an admirable trait, however, let’s look at the definition of vulnerable.

Vulnerable – “Able to be easily hurt, influenced, or attacked” (Cambridge Dictionary) – Capable of being physically or emotionally wounded, open to attack or damage (Merriam – Webster) What is usually intended by “vulnerable” in a leadership context is that one does not hide who they are, their shortcomings, their weaknesses, or their mistakes. By that definition, the word vulnerable works. However, based on the actual dictionary definition “authentic” is more fitting.

Placing oneself in a situation where one might be easily hurt, easily influenced, or easily attached is not the most desirable of situations, and is ultimately not helpful. Leaders must be thoughtful and purposeful, seeking to move forward towards a goal, rather than leading in a defensive posture.

The Principle of Service and Sacrifice The leader serves the members of the team, supporting them in their contribution to the success of the project, and absorbing pain so the team can focus on success.

The most effective leaders live a life of sacrifice and servanthood. That may seem contrary to the way leaders are often portrayed, living a life of privilege and having their every desire catered to. However that is a more apt description of celebrity than a leader - and the two are very different.

Humble leaders see themselves as servants and facilitators. The best leaders seek to serve their people and their organizations by doing all they can to bring out the best in them for the collective benefit of the team. They don’t see themselves as the primary answer, they see themselves as catalysts that allow for the best ideas to be presented and implemented effectively. They are willing to sacrifice their own equally effective ideas and place greater value on the collective contribution and results of the group.

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TCA SMALL BUSINESS FORUM A leadership role exists for the benefit of the people and the organization, not for the benefit of the leader. One who uses people for personal gain is a tyrant, not a leader. One who works to facilitate the success of the team for the benefit of an organization is engaging in leadership. The leader serves the team by making others the priority, enabling others to be as successful as possible, and giving credit to the team for their accomplishments.

Team leaders also serve and sacrifice by absorbing some of the painful aspects of a team project so the team can stay on track. The leader absorbs the most difficult stress of the project. The leader also addresses painful issues inside the team, such as poor team member performance. A leader steps out to clear the road so the team can travel smoothly toward its destination.

The Principle of Valuing Others’ Contributions Good team leaders understand that the best ideas are not their own.

The primary benefit of the team process is the collective ideas that come through diverse knowledge and experience. The leader should know each team member’s unique role and celebrate this in front of the team. The leader is in a unique position to promote each member to the team and bring value to each member.

A leader must make team members feel their opinions are valued, even though not all may turn out to be accurate or helpful. Our opinions are emotional things. We own them and they are part of who we are. It’s difficult and hurtful when our opinions and ideas are devalued. A good team leader will work to minimize the damage of a rejected view by thanking and recognizing the value in creating a diversity of options. It can help if the leader can gently and respectfully help the person see that the idea won’t work or is impractical.

Sometimes, the leader may need a side meeting to discuss why a view was rejected.

The Principle of Genuine Personal Connection The good team leader makes a genuine and personal connection with each member of the team, and creates an atmosphere where each person can connect with other members of the team.

People work best when they feel connected with a leader who has demonstrated genuine care and concern for who they are as an individual. That level of connection does not need to be equal with everyone, it simply must exist with everyone. And if it’s not genuine they will know it before you do.

We are relational beings and do not function Winter 2019 | The Cooperative Accountant

well in isolation. It is said that the loneliest place is in a crowd where you don’t know anyone, and the same is true on a team. Team members won’t function well if they don’t feel a sense of belonging and acceptance. Leaders should show an interest in people and get to know them personally without crossing the line of overly personal questions or conduct. When a leader gets to know his or her team members, the team will show more of an interest in getting to know each other as individuals, leading to a greater general acceptance of everyone.

If a leader neglects to connect with a team member, that person has a higher chance of becoming relationally isolated on the team.

The Principle of Care and Concern The old adage that people don’t care what you know until they know that you care is true of team leadership.

Demonstration of appropriate care and concern for team members is foundational to successful leadership. It reflects a fundamental way in which we think about people. Do we think of them as objects, capital, or simply a means to an end? Or do we think of them as having intrinsic value and worthy of our genuine care and concern for their ultimate wellbeing?

We don’t often use the term “love” at work. In the modern vernacular it’s generally associated with romance – or behavior that is not by any stretch loving – but that’s not the idea here. In our culture we tend to think of love as a feeling, but in a leadership context it’s a direct choice that a leader makes in how he or she thinks about and treats people. In fact, genuine care and concern for the members of our teams should transcend any particular feelings we have about them. And it certainly has nothing to do with the very bad behavior that has been prevalent in some leadership circles lately. In fact it’s very much the opposite of that bad behavior.

The English language is exceptional in its ability to adapt and evolve, but it’s not terribly precise, and our word for love is a good example. The ancient Greeks utilized a much more precise language, and their specific definitions for love are helpful as we discuss appropriate care and concern in leadership.

The Greeks had no less than six different words for love. Some were of a more romantic nature, but the one that is applicable here is their word agape. It is used in a famous Greek writing from the first century, found in the book of First Corinthians. Agape reflects a love that we should have for all people at all times. The type we should display as leaders.

It’s a very purposeful and direct choice we make regarding how we are toward others.

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TCA SMALL BUSINESS FORUM “Love is patient and kind; love does not envy or boast; it is not arrogant or rude. It does not insist on its own way; it is not irritable or resentful; it does not rejoice at wrongdoing, but rejoices with the truth.”

First Corinthians 13: 4 – 6 There is probably not a better description of how we should act as team leaders than this one sentence. Let’s look first at “patient and kind”. The Greek word here for “patient” here is “makrothumia”. It is a compound of two other words, which when combined denote the idea of longsuffering, or the idea that one endures suffering and offenses without retribution. It’s not a condition of weakness but a reflection of self-control. The fact that the word for patient is combined with the idea of kindness, reflects the idea that when a leader is offended or hurt, he or she should exercise selfcontrol and respond with kindness, and kindness is never boastful, arrogant, or rude. A leader should never “envy” the abilities or knowledge that a team member has. In fact, those abilities should be celebrated and appreciated. Leaders should not insist on their own way, but defer to what is best for the team, and always focus on what is true and doing the right thing.

The Principle of Navigation A team leader is the navigator. The leader more than anyone else should know the destination, chart the course, and keep everyone on track.

Leadership expert John Maxwell cites navigation as one of his 21 laws of leadership. It is certainly true that if a team leader cannot chart a course and keep the team on track, the team will become lost and never reach their destination.

A leader’s ability to navigate is the ability to move the team toward the accomplishment of a goal.

The leader must be familiar with the terrain and anticipate the challenges and threats that may come along. The leader must know what success looks like and know how to guide progress. The leader is ultimately responsible for the project plan and the end result.

The Principle of Accountability and Performance Management A good team leader understands that the team will rise to the level of one’s expectations.

A leader must not only chart the course but must keep everyone on track. This can be one of the most difficult aspects of team leadership, and this is where many teams fail. There must be very clear and concise expectations and well-communicated criteria for success, and a leader must ensure that 34

everyone is held accountable for their contribution.

Most everyone is familiar with S.M.A.R.T. objectives, an old idea that still works: Specific, Measurable, Achievable, Relevant, Time Bound. There should be team objectives and individual objectives that support the team. The leader’s role is to keep these in front of the team and not allow anyone to get sidetracked.

If team members are held accountable as a team, they will tend to hold themselves accountable as individuals. This is a form of positive peer pressure that will self-regulate individual performance 80 percent of the time.

The leader should mentor and coach to the team members’ strengths. The team is only as strong as its weakest member. Coaching is caring, and to coach, one must know the person, their strengths, weaknesses, experiences, and challenges. If the person is not performing to expectations, the leader should coach the person to success. The earlier that performance issues are addressed the better.

None of us like to deal with poor performance, so we tend to procrastinate and hope that it goes away.

If poor performance is not addressed early, it will become like an infection and with an infection, early intervention is key.

If a team member is being isolated because of their own issues or behavior, the leader can address this as well, and address it with a higher level of effectiveness than any other person.

The Principle of Healthy Conflict A good team leader knows that conflict will exist.

The key is to make it work for the benefit, not the detriment of the team.

Conflict exists on every team, and if it’s not readily visible, it must be uncovered. Hidden conflict undermines performance. It will surface in some form, either through a dramatic emotional outburst or simply through failure. Hidden conflict can be transitioned to healthy conflict if managed well.

Conflict that exists on a management team, such as a board or a group of executives, will surface at a lower level in the organization if it is not addressed by the team members. If that conflict is ignored it will inevitably be discussed at other levels in the organization and people will take sides. The farther and wider the issue disseminates, the more dangerous and difficult it is to address. Though dealing with conflict is never easy, it’s much more manageable at the team level than in the larger organization.

When there is disagreement on a team, it’s important that the leader determines the source of Winter 2019 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM the disagreement. Sometimes it’s an interpersonal situation which at first glance can seem very subjective and insurmountable. However, if the leader continues to ask questions and is able to get to the root issue, it’s often fairly objective. It can get petty if the parties involved have allowed it to grow beyond the original issue. Taking the individuals back to the original root of the conflict or the cause in its infancy can provide a good starting point for resolution. Seek to help them find some common ground or understanding and see the other person’s perspective. If they have said things that have been offensive, help them to see the value in apologizing, and in truly accepting apologies. They may never be best friends but they should reach a point where there is mutual respect and a healthy working relationship.

Working through conflict helps create camaraderie, so conflict is not a bad thing if it is handled correctly.

Conflict is often a legitimate philosophical disagreement. When we form teams, we intentionally bring people together with diverse experience, skillsets, and perspectives; so philosophical differences are par for the course. The very thing that makes teams effective also threatens to undermine the entire process if not handled properly. When there is a fundamental disagreement, some try to work toward full consensus. Consensus by definition is “general agreement, unanimity, and group solidarity in sentimental belief” (MerriamWebster). It’s rare that a group of more than two or three sentient and thoughtful beings can ever achieve general agreement and solidarity of belief on everything, but what can be achieved is an agreement on direction. Patrick Lencioni is known for coining the phrase “disagree and commit” (The Advantage). This is a much more achievable outcome than consensus.

The outlier that has agreed to disagree can be a valuable contributor and a long-term asset. They can be the sentinel that is able to keep the team from losing sight of the forest through the trees. The outlier has not been so smitten with the particular idea that they develop a bias for its success. If the idea turns out to have been the right one, most reasonable people will recognize and acknowledge its success. If it turns out to be the wrong direction, or needs adjustment in its implementation, the sentinel will often be the first to see it objectively. The sentinel should never take an “I told you so” position, but simply be a voice of objectivity.

Recognition and Rewards A good team leader understands that no one works for free, but it’s not just money.

The highest reward a team will ever experience is the Winter 2019 | The Cooperative Accountant

satisfaction of achieving a goal together, and the sense of camaraderie and accomplishment that comes with it.

It’s also important that the team members be publicly recognized as a collective group for their achievement.

Public recognition can be an effective way to not only recognize the team, it can also be an excellent way to promote the concept and benefits of teamwork.

It’s also a good idea to plan some type of fun activity that the team can participate in together. A fun and relaxing activity following the accomplishment of a goal is the perfect capstone to a project well done. It’s important that the fun activity not be a burden. If the team has been working evenings and weekends, they may view a night out or a weekend activity as work - one more thing that takes them away from family, friends, and hobbies. Find out what works best for the individual team members and plan accordingly, during regular work hours if possible.

There should also be an individual aspect to performance evaluation. Not everyone will make an equal contribution, and not everyone will play as well with others as they should. It’s been stated that when a member falls short, the leader must have the courage to deal with the individual and address the issues early.

Individuals should also be rewarded for exceptional contributions.

When considering rewards, don’t exclude monetary rewards. Though studies have shown again and again that money is not a primary motivator, it is a motivator.

There are not many people in the world that are independently wealthy and work only for personal satisfaction. It’s best to assume that your team is not in that minority group. Monetary awards and variable compensation is a complex issue with wide implications. It’s important that monetary rewards be very well thought out and planned with a long-term perspective in mind. The development of monetary rewards might be a good project for a team.

A team is a collection of people just like us, flawed and fickle, and success is never guaranteed.

However, the application of a few simple common sense principles of leadership will go far in achieving exceptional results. Teamwork is here to stay because it’s integral to who we are as humans, and because it works. As we are not perfect there is no such thing as a perfect team, but understanding the threats to team function and leading team members to their better selves allows for the highest degree of accuracy and effectiveness. In business it’s ultimately about competitive advantage. The one with the best team wins.

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