The Cooperative Accountant - Winter 2023

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Winter 2023 | The Cooperative Accountant

CONTENTS FEATURES 3

From the Editor

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Utility Cooperative Forum FERC Tackles Transmission Reform

By Frank M. Messina, DBA, CPA

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

10 ACCTFAX Bulletin Board

By Editor Greg Taylor, MBA, CPA, CVA

22 TAXFAX

By Editor George W. Benson & Christopher R. Duggan

30 Small Business Forum: Assisting Cooperatives in Understanding ESG Reporting

By Editor Barbara A. Wech, Ph.D.; Mark Edmonds, Ph.D., CPA Marena M. Messina, Ph.D., CPA

EXECUTIVE COMMITTEE President Eric Krienert, CPA Moss Adams LLP

Vice President Erik Gillam, CPA Aldrich CPAs +Advisors 82 ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS –––––––––––––

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

Treasurer Kent Erhardt CoBank, ACB

(806) 747-3806 bmiller@bsgm.com

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

Secretary Jim Halvorsen CLA (CliftonLarsonAllen)

Immediate Past President (267) 256-1627 David Antoni, CPA dantoni@kpmg.com Moss Adams LLP

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

Executive Committee Julia Sevald, CPA Land O'Lakes, Inc.

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

S. Keowee Street For a complete listing of136Dayton, NSAC’s Ohio 45402 Tina Schneider, Chief Administrative Officer info@nsacoop.org National Board of Directors and Krista Saul, Client Accounting Manager Committees, visit Bill Erlenbush, Director of Education Kim Fantaci, Executive Director

Jeff Roberts, Association Executive

www.nsacoop.org

Phil Miller, Assistant Director of Education THE COOPERATIVE ACCOUNTANT

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Winter 2018

Winter 2023 | The Cooperative Accountant

From the

Editor

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

What many cooperatives may to be totally unaware of is the major decline in college accounting graduates in recent years. In addition, the largest undergraduate accounting enrollment decline is the largest percentage it has been in 50 years with the worst consecutive 2-year period in history. The accounting profession plays a critical role in ensuring financial transparency and sound decision-making within cooperatives. Accounting is truly the language of business. It will be up to everyone to move the profession forward. Our NSAC members need to take a hands-on approach to helping.

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

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

Positively Yours, Frank M. Messina, DBA, CPA

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

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

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Winter 2023 | The Cooperative Accountant

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

Introduction This article will be of interest to those responsible for managing a business impacted by rising electric rates, in attempting to understand the challenges before us in the transition of our transmission power grid from current to a more modern system that better meets our needs related to increased electricity demand while still maintaining best-possible prices and supporting a clean energy infrastructure. It will be of specific interest to those responsible for managing electric cooperatives, as transmission costs are a direct component of costs in electricity retail sales. The better we are able to understand the current transmission grid environment and ensuing industry changes, the better the management of electric cooperatives can plan and anticipate future impacts of transmission costs in their retail consumer rates.

Transmission Industry in Reform Inflation remains high today even with the Federal Reserve’s interest rate increases over the last couple of years. Energy has been one of the biggest drivers of inflation. Energy costs are up 8.7% over last year (Millsap, 2023, para. 1). Millsap contends that bringing 4

energy prices down and keeping them low will require “prudent investments in energy supplies and transmission lines” (para. 1).

He also notes that electricity prices are up nationwide, anywhere from 7% to 57% from January 2021 to January 2023 (para. 2). We will need to generate, transmit, and distribute more energy to keep prices low and stable.

A monthly electricity bill is typically made up of three types of costs: power supply or generation costs, power transmission costs, and power distribution costs. The power supply or generation portion covers the actual cost of generating the energy, and the transmission and distribution portion covers the infrastructure that is needed to get that energy from its generation source to the end consumer. The basic difference between transmission and distribution power lines is that transmission power lines are for long-distance and high-voltage electricity transportation, whereas distribution power lines are for shorter-distance and lowervoltage electricity delivery.

Transmission is the bulk transfer of electrical energy from a generating site, such as a power plant, to electrical substations located near demand centers. The U.S. Winter 2023 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM electric transmission grid consists of more than 200,000 miles of extra high-voltage transmission lines (230 kilovolts and greater).

Transmission lines, when interconnected with each other, become transmission networks. Transmission is distinct from power distribution, which is the local wiring between high-voltage substations and customers.

Transmission infrastructure may be owned, operated and maintained by electric utilities or independent transmission owners.

Einberger (2023) explains that the U.S. power grid is highly fragmented. It consists of three different sections: the Eastern, Western, and ERCOT interconnections.

These are three separate power grids that are almost completely isolated from one another in regard to providing electricity to consumers. The transmission lines that form the backbone of each of these three grids are largely planned in even greater local isolation. There are 12 different transmission planning regions, all of which are under the jurisdiction of the Federal Energy Regulatory Commission (FERC) except for the Electric Reliability Council of Texas (ERCOT). And, only six of these are full Regional Transmission Organizations (RTOs), also referred to as Independent System Operators, and are authorized to conduct transmission planning for their regions. The remaining five are planning regions in the West and Southeast that consist of dozens of vertically integrated utilities which tend to plan transmission with just their local territories in mind. The European Union and China both have continental and national-scale grid development plans, but the U.S. does not.

Doying, Goggin, and Sherman (2023) have published a report “Transmission Congestion Costs Rise Again in U.S. RTOs” for GridStrategies, a power sector consulting firm. They note that congestion costs are incurred on the U.S. electric transmission grid when there is “inadequate capacity to deliver the lowest-cost generation to consumers” (p.

1). The congestion costs increased by 100% from 2020 to 2021, and about 56% from 2021 to 2022. This trend is somewhat reflected by 5

the increase in thermal generation in place of renewables that were curtailed due to inadequate transmission capacity. Additionally, other congestion was the result of insufficient regional and interregional transmission capacity, fuel prices, transmission outages, extreme weather, and increases in electricity demand.

Peskoe (2022) explains that FERC has broad authority over the power sector’s interstate operations and planning activities and is a key player in facilitating the clean energy transition. FERC’s decisions will influence the mix of resources generating electric power.

FERC is a national independent regulatory commission. Members are nominated by the president and confirmed by the Senate. FERC has exclusive jurisdiction over transmission operations and planning. They have recently proposed major reforms to transmission infrastructure development in order to facilitate clean energy deployment, control costs, and provide for an efficient and effective transmission system (a resilient and reliable transmission grid). Peskoe notes that “Today, transmission expansion is needed to exploit remote renewable energy resources and enable a more flexible network that can keep increasingly complex systems in balance and able to withstand severe weather or other disruptions” (para. 2). The Department of Energy has also undertaken several transmission studies and funding initiatives recently, including some mandated by the Infrastructure Investment of Jobs Act of 2021.

In July, 2023, FERC issued a new rule (Order No. 2023) in hopes of streamlining interconnection processes for transmission providers in order to provide “greater timing and cost certainty to interconnection customers and prevent undue discrimination against new sources of power generation” (FERC News Release 7/27/2023, para. 1).

FERC Chairman Willie Phillips, as cited in the aforementioned FERC News Release, states that “at the end of 2022, more than 2,000 gigawatts of generation and storage were waiting in interconnection queues throughout the country – that is as much electricity Winter 2023 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM generation capacity as all the power plants now operating around the country. Projects now face an average wait of up to five years to connect to the grid” (para. 3).

Per FERC’s Order No. 2023, dated July 28, 2023,18 CFR Part 35 [Docket No. RM22-14000]: The electricity sector has transformed significantly since the issuance of Order Nos. 2003 and 2006. The growth of new resources seeking to interconnect to the transmission system and the differing characteristics of those resources have created new challenges for the generator interconnection process.

These new challenges are creating large interconnection queue backlogs and uncertainty regarding the cost and timing of interconnecting to the transmission system, increasing costs for consumers (p.

4).

FERC is attempting to regulate the transition of regional transmission planning to a grid that can support the future electricity demands and ensure costs are allocated in a just and reasonable manner. And, at its core, FERC is regulating to ensure reliability of electric supply and resilience of the grid.

Their desire is to decrease the time it takes to move electric generation projects through the interconnection queues and bring electric generation online. The current backlog of transmission projects submitted to FERC for approval is considered a root cause of slowing the U.S. transition to a cleaner electric grid and contributing to reliability issues. Currently, the average time it takes a project to move through the interconnection process for FERC approval is approximately five years, which is an approximate 40% increase from only a few years ago.

Some of the key areas of reform included in the FERC News Release include: • Institution of a first-ready-first-served cluster study process. A cluster study process is a more efficient way of processing a large interconnection queue because it allows transmission providers 6

to study numerous proposed generating facilities at the same time, rather than study each individual interconnection customer’s request separately and serially. As part of the cluster study process, the new rule also requires increased financial commitments for interconnection customers to enter and remain in the interconnection queue. These commitments come in the form of increased study deposits, more stringent site control requirements, and pay commercial readiness deposits.

Additionally, withdrawal penalties are placed on interconnection customers that withdraw their requests from the interconnection queue. These reforms are meant to discourage speculative or nonviable interconnection projects and allow transmission providers to have a greater focus on processing interconnection requests that have a greater chance of reaching commercial operation. Cluster study timelines have been streamlined to 495 to 585 days (1.4-1.6 years).

Imposition of firm deadlines and penalties • are required if transmission providers fail to complete their interconnection studies on time. This reform is intended to increase the speed of interconnection queue processing. The rule also requires transmission providers to use a standard systems study process that includes uniform modeling standards.

• Incorporation of technological advancements into the interconnection process is required. This includes addressing the charging behavior of electric storage resources in the interconnection study. Additionally, transmission providers are to evaluate alternative transmission technologies in their study to determine if any of these alternate technologies should be used.

• An update of modeling and performance requirements for inverter-based resources. (para. 5) FERC initially considered interconnection process reforms in its July 2021 Advanced Winter 2023 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM Notice of Proposed Rulemaking (NOPR) initiative, and later issued the June 2022 NOPR proposing specific reforms. Over four thousand comments and replies were processed by December 2022, which all informed the draft final rule (FERC Staff Presentation, 2023, para. 1). The rule is applicable to all public utilities and requires them to “adopt revised pro forma generator interconnection procedures and agreements to ensure that interconnection customers can interconnect to the transmission system in a reliable, efficient, transparent, and timely manner, and to prevent undue discrimination” (FERC, Fact Sheet, para. 1). It also requires public utility transmission providers to conduct long-term regional transmission planning on a sufficiently forward-looking basis to meet transmission needs driven by changes in the resource mix and demand.

The new rule hopes to address concerns that were identified in previous rulings whereby the most efficient or cost-effective transmission facilities were not always being identified in the planning and approval process for transmission investments.

Significant issues were identified with the approach taken to transmission planning, project selection, and cost allocation. Another concern identified was a lack of sufficient long-term regional planning and cost allocation to consumers given the changes anticipated in resource mix and demand.

The new ruling is intended to provide added benefits to consumers such as enhanced reliability, improved resource adequacy, access to lower cost and diverse resources, and other benefits that result from regional transmission planning. FERC had found that regular and consistent proper planning had not been occurring uniformly across the U.S. Then FERC Chairman in 2021, Chairman Glick, introduced the new rule-making initiative stating the following: “Today’s action is a critical first step in ensuring that FERC is thinking innovatively and actually anticipating transmission that will meet the needs of new generation as our nation continues to aggressively transition 7

to a clean energy future,” Chairman Glick said. “This is the Commission’s first effort at major transmission reform in a decade and I look forward to moving as expeditiously as possible to advance these conversations.”

(FERC, FERC Begins Reform Process, 2021, para. 4) Order No. 2023 compliance filings by transmission providers are due to FERC on December 5, 2023, which is 90 days after publication of the final rule in the Federal Register. There will be a transition period process whereby interconnection customers who have projects pending FERC review and approval are offered options in transitioning their projects to the new rule requirements. Some of these transition points may include additional project deposit requirements or the ability to withdraw from the queue without penalty. Transition options will depend on the current project approval phase at the time this new ruling took effect.

Gamache & Rymut (2021) note that Congress has approved the infrastructure package that includes a $73 billion investment in transmission infrastructure to facilitate growth of the renewable energy industry.

Perhaps even more significant than the dollar commitment is the role that FERC will play in regulating and approving the deployment of these investments. FERC, working alongside the Department of Energy, will be in a position of authority to direct and drive transmission investments. Their goal will be to expand the planning and deployment of transmission investments to bridge regional needs and look to represent the entire U.S. population in attempting to bring the most affordable and reliable electric service to all citizens. The industry is faced with changing technologies, new clean energy policies, and the fact that the current electricity grid is aging. It will be a balancing act for FERC in driving the reforms needed to address each of these challenges while crossing the current fragmented RTOs Winter 2023 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM and local transmission associations, and the three distinctly separate electric power grids.

National Rural Electric Cooperative Association (NRECA) is a national service organization that represents America’s electric cooperatives. NRECA’s website notes that one of their top regulatory priorities for 2023 is “ensuring sound transmission policy as the Federal Energy Regulatory Commission contemplates first-in-a-decade transmission reform” (Kelly, 2023, Section “What are NRECA’s top regulatory priorities for 2023?”, para. 4). They will be advocating for electric cooperatives throughout this transition reform and will be a good source of updates and information about latest activities.

Summary Howland (2023) notes that moving to a required cluster study planning approach may not speed up the FERC transmission investment approval process as much as some might think because there are large areas of the country where transmission providers already were performing cluster studies for interconnection projects. Those regions include the California Independent System Operator, the Midcontinent Independent System Operator, the New York Independent System Operator, the PJM Interconnection, the Southwest Power Pool, NV Energy, PacifiCorp and Public Service Co. of Colorado (Howland, para. 4).

Interconnection projects in the queue awaiting approval in 2022 totaled about 10,000 projects, which represented an increase of about 40% from the prior year. The majority of these projects included solar, wind, or electricity storage projects. Some experts believe the new FERC rule is a step in the right direction but warn that more needs to be done to address the interconnection delays currently experienced. Some analysts believe that the root cause of the interconnection delays are the limited spare capacity of the existing transmission grid and the lack of forward-thinking planning in taking into consideration future generation and storage requirements. More holistic reform may be 8

needed after the adoption of this latest rule to solve some of the planning and delivery challenges being faced by transmission interconnection customers. Just to note, the latest rule eased requirements on transmission providers but increased regulatory hurdles for interconnection customers.

Einberger (2023) agrees that FERC should not stop their reforms with Order No. 2023.

He suggests that FERC should also mandate a robust inter-regional transmission planning process. This process should “rely on forwardlooking, multi-value, and scenario-based modeling to ensure regional planners identify and seize the multiple additional benefits of inter-regional transmission beyond a minimum requirement — and fairly allocate the associated costs commensurately” (para. 13).

Doying, Goggin, and Sherman (2023) suggest a short, medium and long-term solution to address the current transmission project congestion backlogged and awaiting FERC approval.

In the long-term, large-scale, high-voltage transmission lines are needed to address the causes and effects of congestion. However, major transmission projects can take more than a decade to develop. This is a lengthy time horizon to address an issue that needs to be resolved sooner rather than later.

In the short-term, solutions such as GridEnhancing Technologies (GETs) are able to increase transmission capacity on existing wires to relieve 40% of congestion or more in many cases. (Note: There are three main types of GETs—dynamic line rating (DLR), flexible alternating current transmission system (FACTS), and topology optimization (TO)).

In the medium term, reconductoring with advanced conductors involves replacing traditional steel and wire cores for conductors with carbon and/or composite cores on the same or new towers and on existing rights of way, allowing the lines to carry more capacity. (p. 8) Readers are advised to stay abreast of latest developments on this topic as the new FERC reforms are implemented.

Fall 2022 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM References Doying, R., Goggin M., & Sherman, A. (July 2023). Transmission Congestion Costs Rise Again in U.S RTO’s.

Grid Strategies LLC. Retrieved November 27, 2023 from the following website: https://gridstrategiesllc. com/wp-content/uploads/2023/07/GS_Transmission-Congestion-Costs-in-the-U.S.-RTOs1.pdf Einberger, M. (January 12, 2023). Reality Check: The United States Has the Only Major Power Grid without a Plan. Retrieved November 27, 2023 from the following website: https://rmi.org/the-united-states-has-theonly-major-power-grid-without-a-plan/ Federal Energy Regulatory Commission (FERC). (July 15, 2021). FERC Begins Reform Process to Build the Transmission System of the Future. Retrieved November 27, 2023 from the following website: https://www. ferc.gov/news-events/news/ferc-begins-reform-process-build-transmission-system-future Federal Energy Regulatory Commission (FERC). (July 27, 2023). FERC News Release: FERC Transmission Reform Paves Way for Adding New Energy Resources to Grid. Retrieved November 27, 2023 from the following website: https://www.ferc.gov/news-events/news/ferc-transmission-reform-paves-way-addingnew-energy-resources-grid Federal Energy Regulatory Commission (FERC). (July 28, 2023). Fact Sheet | Improvements to Generator Interconnection Procedures and Agreements. Retrieved November 27, 2023 from the following website: https://www.ferc.gov/news-events/news/fact-sheet-improvements-generator-interconnection-proceduresand-agreements Federal Energy Regulatory Commission (FERC). (July 28, 2023). 18 CFR Part 35 [Docket No. RM22-14000; Order No. 2023] Improvements to Generator Interconnection Procedures and Agreements. Retrieved November 27, 2023 from the following website: https://www.ferc.gov/media/e-1-order-2023-rm22-14-000 Federal Energy Regulatory Commission (FERC). (July 27, 2023). Staff Presentation | Improvements to Generator Interconnection Procedures and Agreements. Retrieved November 27, 2023 from the following website: https://www.ferc.gov/news-events/news/staff-presentation-improvements-generatorinterconnection-procedures-and Gamache, C. & Rymut, R. (August 13, 2021). FERC and Congress tackle transmission. Retrieved November 27, 2023 from the following website: https://www.projectfinance.law/publications/2021/august/ferc-andcongress-tackle-transmission/ Howland, E. (August 4, 2023). FERC interconnection rule may not speed process in much of US: experts.

Retrieved November 27, 2023 from the following website: https://www.utilitydive.com/news/fercinterconnection-queue-reform-spp-miso-pjm-rto/689965/ Kelly, E. (January 3, 2023). Q&A: Electric Co-ops’ Top Policy Priorities for 2023. National Rural Electric Cooperative Association (NRECA), The Cooperative Advantage. Retrieved November 27, 2023 from the following website: https://www.electric.coop/qa-electric-co-ops-top-policy-priorities-for-2023 Millsap, A. (March 9, 2023). High Electricity Prices Will Go Even Higher Unless We Change Course. Retrieved November 27, 2023 from the following website: https://www.forbes.com/ sites/adammillsap/2023/03/09/high-electricity-prices-will-go-even-higher-unless-we-changecourse/?sh=52efb6b416a8 Peskoe, A. (October 26, 2022). The Federal Energy Regulatory Commission (FERC). 10/26/2022 - Biden Administration Status Update - Electricity Law Initiative. Retrieved November 27, 2023 from the following website: https://eelp.law.harvard.edu/2022/10/the-federal-energy-regulatory-commission-ferc/ 9

Winter 2023 | The Cooperative Accountant

UTILITY UTILITY COOPERATIVE COOPERATIVE FORUM FORUM

By Greg Taylor FASB ISSUES ASU ON SEGMENT REPORTING (ASU 2023-07 November 2023) IMPROVEMENTS TO REPORTABLE SEGMENT DISCLOSURES (TOPIC 280) Summary Why Is the FASB Issuing This Accounting Standards Update (Update)?

Investors, lenders, creditors, and other allocators of capital (collectively, “investors”) have observed that segment information is critically important in understanding a public entity’s different business activities.

That information enables investors to better understand an entity’s overall performance and assists in assessing potential future cash flows.

Feedback on the Post-Implementation Review (PIR) Report on FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which was issued in 2012, indicated overall support from stakeholders for the management approach to segment reporting. That report stated that investors were generally satisfied with the segment note disclosures. A minority of investor survey respondents, approximately one-third, indicated that they were somewhat dissatisfied. Those investors were interested in exploring ways to require additional disclosures about segment information by public entities. Practitioner and academic 10

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

survey respondents were interested in exploring additional guidance for determining and aggregating segments.

In 2016, the Board obtained additional feedback from stakeholders on the Invitation to Comment, Agenda Consultation, about the major areas of financial reporting in need of improvement. Investors expressed continued support for the management approach to segment reporting; however, many investors indicated that they would prefer that public entities report more segment information. To address those suggestions, the Board decided to undertake a project in 2017 to improve the segment disclosure requirements. The Board evaluated different ways in which the guidance could be changed to be responsive to that feedback.

Investors observed that although information about a segment’s revenue and measure of profit or loss is disclosed in an entity’s financial statements, there generally is limited information disclosed about a segment’s expenses and, therefore, investors supported enhanced expense disclosures.

Accordingly, the Board is issuing this Update to improve the disclosures about a public entity’s reportable segments and address requests from investors for additional, more detailed information about a reportable segment’s expenses.

Winter 2023 | The Cooperative Accountant

ACCTFAX Who Is Affected by the Amendments in This Update?

The amendments in this Update apply to all public entities that are required to report segment information in accordance with Topic 280, Segment Reporting.

What Are the Main Provisions?

The amendments in this Update improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this Update: 1. Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss (collectively referred to as the “significant expense principle”).

2. Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss.

3. Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods.

Clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent 11

with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements. In other words, in addition to the measure that is most consistent with the measurement principles under generally accepted accounting principles (GAAP), a public entity is not precluded from reporting additional measures of a segment’s profit or loss that are used by the CODM in assessing segment performance and deciding how to allocate resources.

4. Require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.

5. Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this Update and all existing segment disclosures in Topic 280 How Do the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Are They an Improvement?

The amendments in this Update improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decisionuseful financial analyses.

Currently, Topic 280 requires that a public entity disclose certain information about its reportable segments. For example, a public entity is required to report a measure of segment profit or loss that the CODM uses to assess segment performance and make decisions about allocating resources. Topic 280 also requires other specified segment items and amounts, such as depreciation, amortization, and depletion expense, to be disclosed under certain circumstances. The amendments in this Update do not change or remove those disclosure requirements.

Winter 2023 | The Cooperative Accountant

ACCTFAX The amendments in this Update also do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments.

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

The amendments in this Update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted.

A public entity should apply the amendments in this Update retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption.

RECENT ACTIVITIES OF THE PRIVATE COMPANY COUNCIL The Private Company Council (PCC) met on Tuesday, September 12, 2023. Below is a summary of topics addressed by the PCC at the meeting:

• Summary of the September 11, 2023,

Liaison Meeting with the AICPA Private Companies Practice Section (PCPS) Technical Issues Committee (TIC): PCC members reported on the issues discussed with TIC members during their annual liaison meeting. PCC members shared observations on a variety of topics, including current expected credit losses (CECL) implementation; the implementation of Topic 842, Leases, including the accounting for sale and leaseback transactions and lease modifications; simple agreements for future equity (SAFEs); debt modifications; distinguishing related parties from entities under common control; and stock compensation disclosures.

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• Improvements to Income Tax

Disclosures: FASB staff provided a project update and summarized recent Board decisions from the August 30, 2023 Board meeting relevant to private companies.

PCC members discussed the materiality considerations of the 5 percent threshold related to the disclosure of income taxes paid by jurisdiction. PCC members commented on the estimates and costs involved in providing disaggregated (a) income (or loss) from continuing operations before income tax expense between domestic and foreign and (b) income tax expense (or benefit) from continuing operations between federal, state, and foreign.

• Leases Implementation: FASB staff provided the PCC with an update on the status of the Leases Post-Implementation Review. PCC members discussed recent observations from the implementation of Topic 842, Leases, and feedback received at the PCC Town Hall held at the AICPA Peer Review Conference in August 2023 and the PCC-TIC Liaison meeting. PCC members discussed feedback received on sale and leaseback transactions, materiality and capitalization thresholds, practical expedients, determination of the incremental borrowing rate and use of the risk-free interest rate, and capitalization of operating leases. PCC members also discussed issues that they have recently observed in practice.

• Stock Compensation Disclosures (PCC Research Project): FASB staff and members of the PCC’s stock compensation disclosures working group summarized outreach the working group has conducted since the June PCC meeting with private company preparers and practitioners. PCC members noted that they are receiving helpful feedback from stakeholders on the working group’s research to date.

• Accounting for and Disclosure of Crypto Assets: FASB staff summarized recent Winter 2023 | The Cooperative Accountant

ACCTFAX Board decisions made at the September 6, 2023 Board meeting. FASB staff members noted that private company stakeholders provided mixed feedback on the proposed reconciliation of opening and closing balances of crypto assets, and that feedback, as well as feedback from prior PCC meetings, were considered in redeliberations. PCC members expressed overall support for the project. A preparer PCC member asked for additional clarification on the Board’s decision not to provide guidance on transaction costs.

Town Hall/Liaison Meeting Update: FASB • staff and PCC members discussed feedback received during the PCC Forum at the AICPA Peer Review Conference and discussed upcoming liaison meetings.

PCC members highlighted feedback received from conference attendees about Leases—Implementation, Revenue—PostImplementation Review, and other private company financial reporting topics. FASB staff also noted that the PCC will hold a liaison meeting with the Risk Management Association’s Accounting Working Group on October 19, 2023.

• The next PCC meeting is scheduled for Thursday, December 14, and Friday, December 15, 2023.

THE FOLLOWING ARE SELECTED TOPICS FROM THE WEEKLY ACCOUNTING HIGHLIGHTS PUBLISHED BY THOMSON REUTERS – FULL ATTRIBUTION TO SOYOUNG HO (SEC matters) and DENISE LUGO (FASB, AICPA matters), WHO WRITE THESE SUMMARIES FOR THOMSON REUTERS New FASB Accounting Rules on Segment Reporting, Income Taxes, Crypto—Coming

by Mid-December November 15, 2023 The FASB will publish new accounting standards on income taxes and crypto assets in the middle of December, the Board’s Technical Director Hillary Salo told a press panel late on November 13, 2023.

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The standard to revise segment expense disclosures will be issued earlier, “the earliest the last week of November…going into the first week of December,” Salo added. “I’m not going to surprise anybody with a ‘Wednesday before Thanksgiving’ – so no worries.”

Her remarks were in response to a question from Thomson Reuters during the virtual press event—hosted by Financial Executive International’s 2023 Corporate Financial Reporting Insights (CFRI) Conference.

The issue was raised because the three standards will be the last of U.S. GAAP that will be issued this year by the FASB, and there have been much speculation in the accounting profession about them.

Other documents planned by the board for publication by year-end will be proposals.

The coming standards were developed because of demand from investors—“people who use the financial statements to make capital allocation decisions and those that work with them to help them make those decisions,” FASB Chair Richard Jones said during an earlier panel at the FEI conference.

“That’s the group we’re focused on when we talk about investors and we heard what their priorities were,” he said. “And if you look at our agenda and you look at some of the projects that we’re wrapping up – whether it’s segment reporting, income tax disclosures and disclosure of crypto assets, all of which we expect to issue final standards here in the fourth quarter, those were some of the top projects that those investors pointed out to us.”

Segment Reporting to Take Effect in 2024 The new segment reporting standard will require more public companies to disclose information about significant segment expenses—and more frequently. The standard will require retrospective application and will take effect in 2024 for annual reports and in 2025 for interim reports.

Under the guidance, public companies will be required to disclose in both annual and quarterly periods any significant segment Winter 2023 | The Cooperative Accountant

ACCTFAX expense that is regularly provided to the chief operating decision-maker (CODM) that is included within the measure of segment profit, and other expenses; a description of the composition and other segment items for each of the reportable segments; and the segment’s profit or loss and assets. All public companies will be required to disclose the title and position of the CODM as well as an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance in deciding how to allocate resources.

Further, public companies that only have one reportable segment will also be required to provide segment disclosures that currently exist in Topic 280, Segment Reporting, as well as those in the new expense disclosures.

Today, they do not have to provide those disclosures.

Income Tax Disclosures to Bring Transparency The standard on income tax disclosures was developed to bring transparency about taxes companies pay both in the U.S. and in foreign countries.

The guidance will enable a company to tell its story about its effective rate reconciliation, how it works, and the factors that influence it. The standard will expand on an existing disclosure on taxes paid, by requiring a company to break down the figures by jurisdictions. This will enable investors to see where there is potentially opportunities and/ or risks to that company related to its tax burden, according to board discussions in the past.

The changes received “very positive” feedback from investors, which was “one of the reasons why we took the project on and finalized it so quickly,” Jones said at the board’s Standard-Setting Oversight Committee meeting on November 13. “We focused on information that a company should have and should underline their existing accounting and providing that in a more standardized and additional detail 14

format to provide investors that information.

We’ve heard very positively about that,” he said. “Anytime we touch a project that has the word income tax in it, it gets a lot of passions excited. And to be fair there are some who have an interest in this area for more public policy purposes. And there are others who are focused simply on the capital allocation.”

Jones added that the board had extensive discussions with those who were concerned about the rules “to share that it was an investor-led project based on people who would use the financial information to make capital allocation decisions.” Providing “that insight, that transparency to those folks, it certainly helped, and many of them certainly understand why we have the project at this point in time.”

Rules for Crypto Assets to Require Annual and Interim Disclosures In relation to crypto assets, the standard will require certain types of fungible crypto assets to be measured at fair value and changes recognized in net income. The assets will be required to be separately presented from other intangible assets on both the balance sheet and the income statement.

If an entity receives crypto assets in the ordinary course of business as a payment from a customer or as a donation and those assets are converted nearly immediately into cash, the assets should be presented as a cash flow from operating activities.

Moreover, entities will need to apply the disclosures that are in Topic 820, Fair Value Measurement, as well as additional specific disclosures in both interim and annual periods.

Entities will be required to disclose items like the number of units held, the cost basis, the fair value as well as if there are any restrictions on the sale of those crypto assets and the nature and the remaining duration of that restriction. In annual periods, the entity should provide or disclose a rollforward of crypto activities during the period with Winter 2023 | The Cooperative Accountant

ACCTFAX certain supplemental information such as historical realized gains and losses.

Proposed Concepts for Measurement Coming Early Next Week Separately, two new proposals on other topics will also be issued for public comment, according to the board’s technical agenda.

Specifically, a proposal is expected to be issued for public comment early next week on the concept of measurement, a source familiar with the matter said.

The guidance will add new Chapter 6, Measurement, to complete Concepts Statement (CON) No. 8, Conceptual Framework for Financial Reporting.

Measurement addresses the concepts for amounts that get recorded in financial reports for items that bring economic benefit—e.g. assets. The conceptual framework is a theoretical guide that is used by the FASB to develop GAAP. The second proposal is related to induced conversions of convertible debt instruments (an Emerging Issues Task Force issue). The public will be able to weigh in by yearend on the guidance, which is being very narrowly scoped to clarify a reporting issue that stemmed from a prior standard that the board issued.

Dozens of Firms, Groups Balk Over Proposed FASB Disclosure Rules on Income Statement Expenses November 1, 2023 Some of the nation’s biggest companies and trade organizations told the FASB that its proposed disclosure rules to disaggregate income statement expenses would be tough and costly to adopt—recommending alternatives they say would be a better fit.

Aspects of Proposed Accounting Standards Update (ASU) No. 2023-ED500, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, would wreak havoc on systems with little benefit to investors, 15

according to comment letters submitted to the FASB by the Oct. 30, 2023, deadline— coming from big companies, and groups like the Retail Industry Leaders Association (RILA), Financial Executives International’s (FEI) Committee on Corporate Reporting (CCR), and the U.S. Chamber of Commerce.

The push back on costs is not a surprise, as the FASB already alluded to it during discussions, stressing there was no way around that if investors are to get some of the information they have pressed for, for years.

But the letters say the full benefits are not that apparent, and thus the guidance needs to be aligned. “…a better understanding from investors is needed regarding what information they are looking for that would be relevant across all industries (e.g., compensation) and how that information will be used in making decisions,” said RILA in a letter of suggestions. Similarly, the Chamber of Commerce urged the board to reconsider the proposal “and what, if any, expense information would be meaningful for investors, while cost-effective for public companies to provide.”

Moreover, others such as FEI’s CCR said some changes would be “inoperable for many preparers without significant, time-intensive, and costly system and process redesign,” and suggested “alternatives with the goal of meeting the project objectives while allowing companies to continue with the consolidated reporting approaches a company’s management determines are most appropriate for the business.”

The FASB issued the proposal in July to address investor feedback requesting more detailed information about expenses to better understand a company’s performance, prospects for future cash flows, and make comparisons over time and to peers. The guidance would require disclosure in footnotes of items like employee compensation, depreciation, amortization, and costs incurred related to inventory and manufacturing activities in income Winter 2023 | The Cooperative Accountant

ACCTFAX statement expense captions such as cost of sales; selling, general and administrative; and research and development. (See FASB Proposes New Disclosure Rules for Public Companies on Income Statement Expenses in the Aug. 2, 2023, edition of Accounting & Compliance Alert.)

The rules were developed after investors asked for guidance, stressing that companies traditionally obscure certain income statement expense figures, which leaves them clueless about sums that can affect company profits.

The proposal received 69 comments by Oct. 31, including from Big four and other accounting firms, according to the board’s website. More letters will come. Some of the feedback suggest that the changes could be as impacting for financial statement preparers as some of the larger standards that were issued in the past.

The FASB plans to hold a public roundtable on the proposal on Dec. 13. (See FASB Planning Public Roundtable This Year on Proposed Income Statement Expense Rules in the Aug. 8, 2023, edition of ACA.) Large Companies from Various Sectors Flag Concerns In line with industry trade groups, large companies from various sectors raised their own sets of concerns, including systems challenges, the potential for misinterpretation – many urging alternatives, among other suggestions.

Specifically, Exxon Oil said that while the proposal was intended to enhance financial reporting transparency, the FASB should consider the “increased complexity, ERP systems challenges, potential for misinterpretation, and additional administrative burdens would likely outweigh the expected benefits of additional disclosures.”

Similarly, The Boeing Company said the proposal “may not provide particularly useful information to investors for certain industries such as ours,” stressing that “from a financial 16

statement preparer perspective, the proposal would require significant and costly process and systems changes.”

Apple Inc. said it generally agrees with the changes to enhance the transparency and decision usefulness of income statement expenses, but believes “certain adjustments would improve the final amendments, such as to modify or combine certain required captions, allow for an alternative disaggregation methodology for inventory and manufacturing expenses, and clarify a number of matters.”

Starbucks Corp. suggested that the board consider a principles-based approach, stressing that the prescriptive approach within the proposal is a vast departure from revisions to segment reporting, and as a result, “may not achieve the intended outcomes, and its current requirements would be administratively difficult to implement.” The proposed guidance “may also distract from more meaningful qualitative and quantitative trends disclosed as part of management’s discussion and analysis (MD&A) section of the quarterly and annual reports per Item 303 of Regulation S-K,” the firm wrote.

Metlife, Inc. said the disclosures “do not provide additional meaningful information that would be considered necessary to evaluate the performance of a life insurance entity, period-over-period, or with other insurance entities,” and would ”introduce additional costs to the financial reporting process for limited incremental benefits.”

IBM said it supports the FASB’s efforts and attempts to provide the changes but cited “significant concerns about the operability of the proposed standard, the significant cost of compliance, and whether the resulting disclosure will provide additional decision-useful information to users of our financial statement.”

Ford Motor Company said that although it supports the proposal to disclose the details in the notes to the financial statements rather than on the face of the income statement, Winter 2023 | The Cooperative Accountant

ACCTFAX “we foresee significant costs in implementing the proposed updates,” and stressed that “a significant number of our systems are not presently capable of providing disaggregated functional expenses in the manner required by the Exposure Draft, which would require us to invest in modification, redesign or replacement of those applications.”

Uber Technologies, T-Mobile US Inc., Pfizer, General Motors Co., Bristol Myers Squibb Co., All State Corp., Cigna Group, and the Sherwin Williams Co. were also among the companies who wrote in with concerns and/suggestions.

TENTATIVE FASB BOARD DECISIONS FROM MOST RECENT MEETINGS – SELECTED HIGHLIGHTS Wednesday, November 8 2023 FASB Board Meeting Statement of cash flows—targeted improvements. The Board decided to add a project to its technical agenda to make targeted improvements to the statement of cash flows to provide investors with decisionuseful information.

Scope The Board decided that the scope of the project is to (1) reorganize and disaggregate the statement of cash flows for financial institutions to improve the decision-usefulness of that statement and (2) develop a disclosure about an entity’s cash interest income received.

The FASB chair retained a project about the statement of cash flows on the research agenda to explore further potential improvements.

Conceptual framework: measurement.

The Board continued initial deliberations on FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting—Chapter 6, Measurement. The Board decided on the following issues related to the Chapter: The Chapter’s current level of specificity regarding the exit price system is appropriate.

FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value 17

in Accounting Measurements, will be superseded, and none of the Concepts Statement will be included in the proposed Chapter.

The Board directed the staff to draft a proposed Concepts Statement Chapter for vote by written ballot. Additionally, the Board decided to expose the proposed Chapter for public comment for 90 days.

Wednesday, November 1, 2023 FASB Board Meeting Scope application of profits interest awards: compensation—stock compensation (Topic 718). The Board discussed feedback received and issues for redeliberation on the proposed Accounting Standards Update, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest Awards, and made the following decisions.

Scope and Applicability The Board affirmed its decision that the amendments apply to all entities, including public business entities (PBEs) and entities other than PBEs. The Board clarified that the amendments apply to awards to both employees and nonemployees.

Illustrative Example and Other Requested Improvements The Board decided to revise the proposed illustrative example to: 1. Add a case that demonstrates how an entity would evaluate whether it has “issued (or offered to issue) its shares, share options, or other equity instruments” in applying paragraph 718-10-15-3 2. Clarify, in Cases A and B, how an entity should consider periodic distributions in applying paragraph 718-10-15-3.

The Board also decided not to address additional award characteristics or additional improvements to stock compensation guidance highlighted by stakeholders as part of this project.

Winter 2023 | The Cooperative Accountant

ACCTFAX Transition and Transition Disclosures The Board affirmed its decision that an entity should apply the amendments either (1) retrospectively or (2) prospectively with disclosure of the nature of and reason for the change in accounting principle.

Effective Date and Early Adoption The Board decided that the amendments will be effective for PBEs for fiscal years beginning after December 15, 2024, and interim periods within those fiscal years. The Board decided that the amendments will be effective for entities other than PBEs for fiscal years beginning after December 15, 2025, and interim periods within those fiscal years.

The Board also decided that early adoption will be permitted.

Analysis of Benefits and Costs The Board concluded that it has received sufficient information and analysis to make an informed decision on the expected costs and expected benefits of the amendments and that the expected benefits of the amendments would justify the expected costs.

Next Steps The Board directed the staff to proceed to a draft of a final Accounting Standards Update for vote by written ballot.

Accounting for government grants.

The Board decided to add a project to its technical agenda on the accounting for the recognition, measurement, and presentation of government grants received by business entities. The project would apply to all business entities.

Scope The Board decided that the scope would include transfers of monetary and tangible nonmonetary assets from a government to a business entity, including forgivable loans.

The Board also decided to specify that the scope would exclude exchange transactions, including transactions with a government that 18

are within the scope of Topic 606, Revenue from Contracts with Customers, and Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets. The scope would also exclude items accounted for under Topic 740, Income Taxes, as well as below-market interest rate loans and government guarantees.

Recognition, Measurement, and Presentation The Board decided that a government grant should be recognized when it is probable that (1) the entity will comply with the conditions of the grant and (2) the grant will be received.

Grants Related to Income The Board decided that a government grant related to income (that is, a government grant other than a grant related to assets) should be recognized in the income statement in the periods in which the entity incurs the grantrelated costs.

The Board decided to require presentation of the grant on the balance sheet as deferred income and on the income statement, separately, as a credit balance in the related income statement category.

Grants Related to Assets The Board decided that a government grant related to assets (that is, a monetary grant for the acquisition or construction of an asset as well as a grant of a nonmonetary asset) should be recognized as part of the cost of the asset (that is, a cost-accumulation approach).

Statement of Cash Flows The Board decided that cash flows from government grants should be presented on the basis of the principles in Topic 230, Statement of Cash Flows.

Disclosure The Board decided that entities that have government grants within the scope of this project would apply the applicable Winter 2023 | The Cooperative Accountant

ACCTFAX disclosures in Topic 832, Government Assistance. The Board also agreed to consider additional disclosures that may be decision useful at a future meeting.

Wednesday, October 11 2023 FASB Board Meeting Topic 815—hedge accounting improvements.

The Board discussed comment letter feedback on proposed amendments related to two issues included in the 2019 proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Codification Improvements to Hedge Accounting— Dual Hedging Relationships and Use of the Term Prepayable in the Shortcut Method. The Board also discussed a third issue that arose as a result of the cessation of LIBOR—Net Written Options as Hedging Instruments. The Board reached the following decisions on those issues.

Dual Hedging Relationships The Board decided to affirm the proposed amendments to eliminate the recognition and presentation mismatch related to dual hedges, in which a foreign-currencydenominated debt instrument is designated as both a hedging instrument in a net investment hedge and a hedged item in a fair value hedge, that resulted from the amendments in Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The proposed amendments would eliminate that mismatch by requiring an entity to exclude the foreigncurrency-denominated debt instrument’s fair value hedge basis adjustment from the net investment hedge effectiveness assessment.

As a result, an entity would immediately recognize the gains and losses from the remeasurement of the debt instrument’s fair value hedge basis adjustment at the spot exchange rate in earnings. Entities would be prohibited from applying this guidance by analogy to other circumstances.

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Use of the Term Prepayable in the Shortcut Method The Board decided not to affirm the proposed amendments to replace the term prepayable with early settlement feature for purposes of applying the shortcut method guidance.

Net Written Options as Hedging Instruments The Board decided to amend the guidance for applying the written option test when the designated hedging instrument in a cash flow hedge is a compound derivative made up of a written option and a non-option derivative.

The amendment would permit entities to assume that certain terms of the hedged forecasted transactions match those of the hedging instrument for purposes of applying that test.

Next Steps The Board will meet in the future to discuss the remaining three issues in the scope of the project: Change in Hedged Risk of a Cash Flow Hedge, Contractually Specified Components in Cash Flow Hedges of Nonfinancial Forecasted Transactions, and Shared Risk Assessment in Cash Flow Hedges of Loan Portfolios.

Accounting for environmental credit programs. The Board discussed staff research and outreach performed since the project was added to the Board’s technical agenda on scope and asset recognition and measurement. The Board made the following decisions.

Asset Scope The Board decided that an item that meets the following definition of an environmental credit would be within the scope of the project: An enforceable right that is acquired, internally generated, or granted by a regulatory agency or its designees that meets all of the following: 1. Lacks physical substance and is not a Winter 2023 | The Cooperative Accountant

ACCTFAX financial asset (as defined in the Master Glossary of the Codification) 2. Is represented to prevent, control, reduce, or remove emissions or other pollution 3. Is separately transferable in an exchange transaction 4. Is not an income tax credit that may be used to settle an entity’s income tax liability, regardless of whether the entity has a tax liability or intends to use the credit for that purpose.

An environmental credit may be represented by a variety of forms, including credits, certificates, allowances, and offsets.

The Board decided to clarify that the existence of active markets would not be a consideration for determining whether a credit is separately transferable in an exchange transaction.

The Board decided not to change the accounting requirements for nontransferable credits that meet all of the other criteria in the environmental credit definition.

The Board decided that the acquisition of environmental credits from related parties would be within the project’s scope.

Liability Scope The Board decided that an obligation that meets the following definition of an environmental credit obligation would be within the scope of the project: An obligation arising from existing or enacted laws, statutes, or ordinances represented to prevent, control, reduce, or remove emissions or other pollution that may be settled with environmental credits.

The Board also decided that obligations within the scope of Subtopic 410-30, Asset Retirement and Environmental Obligations— Environmental Obligations, are not environmental credit obligations regardless of whether those obligations can be settled using environmental credits.

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Asset—Recognition The Board decided that an entity would recognize an asset for an environmental credit when it is probable that the credit will be used to settle an environmental credit obligation or separately transferred in an exchange transaction (for example, sold or traded). Costs incurred to obtain all other environmental credits would be recognized as an expense when incurred unless the costs are included in the carrying amount of another asset in accordance with other GAAP. Asset—Initial Measurement The Board decided that an entity would initially measure environmental credits, other than those obtained through a grant from a regulator or its designees or internally generated by the entity, in accordance with paragraphs 805-50-30-1 through 30-4, unless those environmental credits were obtained as part of a transaction subject to other GAAP. The Board decided that an entity would initially measure environmental credits (1) obtained through a grant from a regulator or its designees or (2) internally generated by the entity at cost, limited to transaction costs, if any, associated with obtaining the environmental credit.

Asset—Subsequent Measurement The Board decided that an entity would not remeasure environmental credits that are probable of being used to settle environmental credit obligations (hereinafter referred to as compliance environmental credits).

The Board decided that an entity would subsequently measure environmental credits recognized as assets that are not compliance environmental credits (hereinafter referred to as noncompliance environmental credits) at historical cost, less impairment losses, if any. The Board also decided that noncompliance environmental credits would be tested for impairment at the end of each reporting period. An entity would recognize Winter 2023 | The Cooperative Accountant

ACCTFAX an impairment loss when the carrying value of the noncompliance environmental credit exceeds its fair value, measured as the excess of the carrying value over fair value. Subsequent reversal of a previously recognized impairment loss would be prohibited.

Asset—Costing Methods The Board decided to allow an entity to use average cost, first-in, first-out (FIFO), and specific identification costing methods and to require an entity to consistently apply the costing method to similar environmental credits.

Asset—Portfolio Approach The Board decided to allow an entity to use a portfolio approach for similar environmental credits for applying the asset recognition and measurement requirements. An entity would be required to establish an accounting policy for using a portfolio approach and apply that policy consistently.

Asset—Derecognition The Board decided that for a transfer of an environmental credit in a contract with a customer, an entity would derecognize an environmental credit in accordance with Topic 606, Revenue from Contracts with Customers.

The Board also decided that a transfer of an environmental credit in a contract with a noncustomer would be derecognized in accordance with Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, unless a scope exception from that Subtopic applies.

Asset—Recognition Reassessment Requirements The Board decided that at each reporting period an entity would be required to reassess whether it is probable that an environmental credit will be used to settle an environmental credit obligation or transferred in an exchange transaction. An entity would 21

be required to perform that reassessment before applying the corresponding subsequent measurement requirements. For environmental credits an entity previously determined were not probable of being used to settle an environmental credit obligation or separately transferred in an exchange transaction, the Board decided that an entity would be prohibited from subsequently recognizing those environmental credits as assets.

The Board decided that for situations in which an entity determines that an environmental credit is no longer probable of being used to settle an environmental credit obligation or transferred in an exchange transaction, an entity would be required to derecognize the environmental credit through earnings, unless those costs are required to be included in the carrying amount of another asset in accordance with other GAAP. Asset—Measurement Reassessment Requirements The Board decided that at each reporting period date, an entity would be required to reassess whether it is probable that an environmental credit recognized as an asset will be used to settle an environmental credit obligation. If, based on that reassessment, an entity reclassifies an environmental credit from a compliance environmental credit to a noncompliance environmental credit or vice versa, an entity would be required to test that environmental credit for impairment before applying the corresponding subsequent measurement guidance.

Additional Comments from the Editor: After the PCAOB proposal to expand auditor responsibility for auditing an auditees NonCompliance with Laws and Regulations, significant forces swung into action to at least water down the proposal. Very little news has come to light other than that conveyed in the Fall 2023 issue of ACCTFAX.

Winter 2023 | The Cooperative Accountant

TAXFAX EDITOR George W. Benson Counsel McDermott Will & Emery LLP 444 West Lake Street, Suite 4000 Chicago, Illinois 60606-0029 tel: (312) 984-7529 fax: (312) 984-7700 e-mail: gbenson@mwe.com

IRS Holds that Gain from Sale of Wireless Assets by Consolidated Subsidiaries of Nonexempt Telephone Cooperative is Patronage-Sourced

By Christopher R. Duggan In private letter ruling 202326010 (April 5, 2023) (the “Ruling”), the IRS ruled that gain from the sale of wireless assets owned through a partnership by corporate subsidiaries of a nonexempt telephone cooperative could be treated patronage-sourced to the extent that the gain “is allocable to” the cooperative’s patrons’ use of the wireless network. The two subsidiaries at the time of the sale were corporations wholly-owned by the telephone cooperative (directly or indirectly) and part of an affiliated group that filed a consolidated federal income tax return.

The cooperative formed the partnership in the past with three other telecommunications companies to pool their resources in building a cellular network in their respective service regions in rural areas of the state.

The partnership owned FCC licenses, telecommunications towers, facilities and equipment. Over the years, subsidiaries of the taxpayer bought out the other partners, and the cooperative eventually decide to exit the wireless business by selling substantially all the assets of the partnership to three unrelated 22

buyers. The Guest Writer cooperative Christopher R. Duggan intended to Dorsey & Whitney LLP use the sale 50 South Sixth Street, Suite 1500 proceeds Minneapolis, MN 55402-1498 tel: (612) 340-7888 build out and fax: (612) 340-2868 improve its fiber e-mail: duggan.chris@dorsey.com optic networks and services to patrons and other customers in its rural service area.

The Ruling is not, of course, the first time that the IRS has issued rulings to telephone cooperatives with respect to investments into new technology that benefits their members, such as wireless and fiber-optic networks. The IRS has issued nearly 30 private letter rulings in the past two decades, largely in response to Farmland Industries, Inc. v. Commissioner, 78 T.C.M. 846 (1999), acq., AOD 2001-03, which is often quoted in the rulings. Though some private letter rulings concerned income from investments in wireless entities, most addressed involved capital gain from the sale of assets (generally FCC licenses) or, more often, investments in wireless entities.

The original investment vehicle was often a partnership or limited liability company, but often changed and covered a larger geographical region because of mergers or Winter 2023 | The Cooperative Accountant

TAXFAX acquisitions into other entities, sometimes a public corporation.

I found two notable facts about the Ruling.

First, the Ruling makes no issue about the fact that the investments were held by corporate subsidiaries of the telephone cooperative that were members of the same affiliated group as the cooperative and joined the cooperative’s consolidated federal income tax return. The Ruling does not state whether the subsidiaries were themselves cooperatives; I assume not on grounds that the Ruling otherwise would have said so. The Ruling also does not specify that the subsidiaries transferred the gain from the sale in the year of the sale to the telephone cooperative; I assume that they did, otherwise the cooperative might have difficulties allocating the gain to patrons. Second, the Ruling gives no indication about how to measure the amount of the gain that is “allocable” to the use of the network (funded by the investments) by the cooperative’s patrons. In the absence of elucidation, I assume that the IRS is using the same rule that it applies to joint ventures, i.e., that a cooperative’s distributive share from a joint venture is essentially “earmarked” as patronage sourced to the extent it is “attributable” to business transacted with the joint venture by a cooperative’s patrons. But the Ruling does not offer any details on the allocation issue.

The California Office of Tax Appeals Addresses Apportionment for a Cooperative

By George W. Benson The California Office of Tax Appeals (the “OTA”) recently released a decision of potential interest to cooperatives, particularly those doing business in California. In the Matter of the Appeal of: Southern Minnesota Beet Sugar Cooperative and Subsidiary, OTA Case No. 19034447 (March 17, 2023), petition for rehearing denied (June 26, 2023).

Southern Minnesota Beet Sugar Cooperative (“Southern Minnesota”) is a marketing cooperative whose members are 23

sugar beet producers. It processes sugar beets for its members and others and sells the resulting sugar and sugar by-products.

Southern Minnesota’s business with members is conducted on a patronage basis. Its business with nonmembers is conducted on a nonpatronage basis. Pursuant to Section 24404 of the California Revenue and Taxation Code (“R&TC”), Southern Minnesota is permitted to deduct member patronage income. It is taxed on its nonmember income.

During the years at issue, Southern Minnesota owned a subsidiary known as Spreckels Sugar Company (“Spreckels”). Like Southern Minnesota, Spreckels was engaged in processing and marketing sugar, but it did so on a for-profit, nonpatronage basis. Thus, Spreckels was subject to taxation in California on its net income.

Southern Minnesota and Spreckels were engaged in a unitary business. As a result, they were required to file a California combined report. Companies filing a combined report are first required to determine the separate income of each entity included in the report before allocation and apportionment. The separate incomes of each are then aggregated to determine the total group combined business income. That income must then be apportioned to determine the portion subject to California income tax.

The principal issue in the case involved apportionment.

The parties agreed that a three-factor formula should be used. The formula equaled the sum of a property factor, a payroll factor, and a double-weighted sales factor, with the sum divided by four. The parties disagreed over how Southern Minnesota’s property, payroll and sales should be computed for this purpose.

The State argued that the computation should not include Southern Minnesota’s property, payroll and sales to the extent attributable to its member patronage business activities since those activities effectively were not subject to California tax. Southern Minnesota disagreed.

It argued that all its property, payroll and sales should be enter into the calculation.

Winter 2023 | The Cooperative Accountant

TAXFAX Under the State’s approach, roughly 95% of the combined income during the years at issue would be allocated to California.

Southern Minnesota’s approach allocated only approximately 30% of the combined income to California. This difference arose because Spreckel’s property, payroll and sales were predominantly in California and Southern Minnesota’s were not.

The OTA concluded that there was no basis under California law for excluding a portion of Southern Minnesota’s property, payroll and sales from the apportionment formula.

“There is no language in the UDITPA [the California version of the Uniform Division of Income for Tax Purposes Act] to support FTB’s [the Franchise Tax Board’s] position that unitary business activities are excluded from the apportionment formula if they relate to deductible income …

Since OTA discerns no, and FTB has not pointed to any, ambiguity in the relevant UDITPA statutes and its regulations, the analysis need go no further.”

Interested readers are referred to the decision for the OTA’s full analysis. The analysis largely rests on statutory construction.

Among other things, the State argued that there was authority for excluding property, payroll and sales related to exempt income from the apportionment formula. The OTA distinguished this authority, reasoning that California law does not exempt member income of a cooperative – “[u]nder the CTL [Corporation Tax Law], member income is thus first considered gross income and then deducted under R&TC section 24404 to determine net income subject to tax.”

It seems likely that the State will appeal this decision. As noted, it requested a rehearing without success. Southern Minnesota’s combined business income (prior to apportionment) was largely attributable to Spreckels, and Spreckels’ income was almost all attributable to California. Yet a significant portion of that income escapes California tax.

This appears to particularly trouble the State.

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The case addressed two other questions.

First, the OTA rejected Southern Minnesota’s attempt to allocate interest expense incurred to acquire Spreckels against its taxable income from Spreckels. The OTA appears to concede that such an allocation would have been permissible if Southern Minnesota had been able to establish that its “dominant purpose” for incurring and continuing the indebtedness was to generate income from Spreckels.

However, there is evidence in the record that the acquisition of Spreckels was motivated at least in part as a way to obtain additional federal sugar marketing rights which would help Southern Minnesota sell more member sugar and generate more member income.

The OTA observed: “Since OTA is unable to discern appellant’s dominant purpose, and the acquisition produced both taxable and nontaxable income for the combined group, Zenith instructs an allocation formula must be employed. … However, appellant, which carries the general burden of proof, has not shown what allocation formula should be used. …

Because appellant did not clearly set forth a reasonable allocation formula supported by evidence, it is not entitled to deduct its interest expense at issue.”

Second, the OTA rejected what it characterized as Southern Minnesota’s effort to “deduct depreciation expense – incurred from assets used to produce deductible income under R&TC section 24404 – against its taxable nonmember income.” The opinion regarding this issue is rather cryptic. Apparently, the assets generating the depreciation in question largely related to Southern Minnesota’s member patronage activities, the income of which was not subject to tax. According to the OTA, “R&TC section 24425(a) … generally prevents taxpayers from deducting expenses that enable them to earn income that is not included in the measure of tax.” According to the OTA, that section dictates the result.

Winter 2023 | The Cooperative Accountant

TAXFAX The OTA summarized and then rejected Southern Minnesota’s arguments: “… appellant asserts the theory underlying depreciation is that by using property and subjecting it to wear and tear, the taxpayer makes a ‘gradual sale’ of the property. Appellant believes it is ‘inconsistent’ to deny depreciation deductions when cooperative property is used to generate deductible income, yet if that property is sold, treat the sale proceeds as a taxable event (because such sales to third parties do not give rise to deductible income). On this ground, it argues FTB should, under R&TC section 24651, make an adjustment to reflect the annual loss suffered by its for-profit activities due to the ‘gradual sale’ of a piece of property. …

Simultaneously deducting depreciation expenses as well as deducting the income those assets produce arguably also leads to yearly income distortion.

The result appellant advocates would essentially allow cooperatives to use otherwise nondeductible expenses to offset taxable income those expenses did not produce, which can only exacerbate the problem. … In addition, as appellant acknowledges, cooperative businesses ultimately benefit from an upward basis adjustment in the amount of the disallowed depreciation deductions, which may reduce (or entirely eliminate) taxable gain when the property is sold.”

Eleventh Circuit holds a taxpayer liable for a preparer’s failure to e-file return

By George W. Benson Almost 40 years ago, the U.S. Supreme Court concluded that a taxpayer cannot delegate the duty to timely file a tax return to an agent.

United States v. Boyle, 469 U.S. 241 (1985).

In that case, the executor of an estate hired an attorney to assist on matters related to the estate including preparing and filing the federal estate tax return. The executor “cooperated 25

fully with the attorney” and provided him “with all relevant information and records.” He and his wife contacted the attorney “a number of times … to inquire about the progress of the proceedings and the preparation of the tax return” and they were “assured that they would be notified when the return was due and that the return would be filed ‘in plenty of time.’”

However, the return was filed three months late, and a late filing penalty was imposed.

The executor contested the penalty, arguing that his failure was due to reasonable cause, namely reliance on an attorney. Observing that “deadlines are inherently arbitrary; fixed dates, however, are often essential to accomplish necessary results,” the Supreme Court concluded that the “failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent.” The Supreme Court stated that the “time has come for a rule with as ‘bright’ a line as can be drawn consistent with the statute and implementing regulations.”

The Boyle case involved a paper return and filing by mail. Does the same conclusion apply to an e-filed return? A recent case, Wayne Lee v. United States, 132 AFTR 2d 2023-XXXX (11th Cir. October 24, 2023), concluded that it does.

Lee’s case for penalty relief appears, at least on the surface, to be quite sympathetic.

Mr. Lee relied upon a CPA to prepare and file his returns for 2014, 2015 and 2016. In each year, he was substantially overpaid. Lee reviewed the returns and signed a Form 8879 authorizing the CPA to e-file the returns on his behalf. However, the CPA did not file the returns, and it was several years before Mr. Lee learned what had happened because the CPA also failed to notify the IRS of a change in Lee’s address as he had agreed to do.

By the time that the returns were filed in 2018, it was too late to credit the refund due Lee for 2014 to subsequent year estimated payments. This resulted in underpayments for 2015 and 2016 and resulting failure to file penalties for those years.

Lee argued that he should not be liable for the penalties because he had “reasonable cause.” The Eleventh Circuit, following Winter 2023 | The Cooperative Accountant

TAXFAX Boyle, concluded that the duty to file was nondelegable and that the reasonable cause defense was inapplicable. It also concluded that if the defense was applicable, the circumstances did not give rise to reasonable cause.

Lee largely based his arguments on differences between the process of preparing and filing paper returns and preparing and filing e-returns which he argued made the person hired to e-file the return responsible.

Among other things, his argument focused on his signing the Form 8879, a step not present in Boyle, and his overpaid status.

The Eleventh Circuit observed: “To be sure, Lee showed some diligence by reviewing his tax returns, signing the Form 8879, authorizing Walsh [the CPA] to e-file the returns each year, and overpaying his 2014 taxes. But Lee’s 2014 overpayment cannot cure his failure to file. … More importantly, however, Lee never confirmed – either with Walsh or the IRS – that the returns were filed. The duty to file tax returns on time lies with the taxpayer, not the agent, and it remains invariable whether e-filing or paper filing.

Unfortunately, Lee blindly relied on his agent to his detriment.”

The Lee appeal was heard by a threejudge panel, and the decision was unanimous.

However, one judge wrote a separate concurring opinion to warn taxpayers of the risk they take when they e-file. She observed: “In many ways, Lee acted prudently. He hired an accountant to prepare his tax returns, sent large amounts of money to the IRS each year to avoid underpayment penalties, and reviewed all of his returns before telling his accountant to file them electronically. The fact that Lee nonetheless owes additional monies to the IRS is reflective of the current e-filing system and the precarious situation in which it places taxpayers who rely on accountant.

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… When it comes to return filing deadlines, the taxpayer is essentially alone. … Taxpayers need to fully understand both the hidden dangers and available protections when relying on an agent to file their tax returns, and accountants and other professional tax preparers should advise their clients of taxpayers’ responsibilities to ensure the submission of their returns regardless of their reliance on an agent.”

The opinion suggests several “available protections” for taxpayers: “First, taxpayers can confirm independently with the IRS on the phone or its website that the IRS received its return. Second, taxpayers can affirmatively choose to file the return independently on paper…”

Also, the opinion notes that an aggrieved taxpayer may have recourse against a preparer who fails to e-file: “No doubt, if the facts are as Lee alleges, then Walsh breached his contractual and ethical obligations to Lee. Walsh may be liable to reimburse Lee for the damage his negligence has caused. But Walsh did not assume Lee’s legal duties to file timely tax returns and to pay taxes. Walsh’s potential liability to Lee (which they have already litigated and settled) does not extinguish Lee’s liability to the IRS.” It will be interesting to see whether the taxpayer requests the Supreme Court to review the decision and to reconsider Boyle.

Federal Credit Unions eligible for some COVID relief credits, but not others

By George W. Benson Credit unions are “cousins” to Subchapter T cooperatives but have their own tax rules.

Winter 2023 | The Cooperative Accountant

TAXFAX Federally chartered credit unions generally are governmental instrumentalities exempt from tax (and the unrelated business income tax) as governmental instrumentalities under Sections 501(c)(1) and 501(a) of the Code. Statechartered credit unions are also exempt from tax but are subject to the unrelated business income tax. To be exempt, they must meet the requirements of Section 501(c)(14). They are not governmental instrumentalities. Since they are exempt, both kinds of credit unions are excluded from Subchapter T pursuant to Section 1381(a)(2)(A).

The IRS recently released two Chief Counsel Advice Memoranda regarding the eligibility of federal credit unions to claim the benefits of certain COVID relief provisions.

In ILM 202326018 (May 30, 2023), the IRS announced that federal credit unions could not claim tax credits and expanded family and medical leave under the Families First Coronavirus Response Act (applicable during the period April 1, 2020 through March 31, 2021) (“FFCRA”), but could claim such credits under the American Rescue Plan Act (applicable during the period April 1, 2021 through September 30, 2021) (“ARPA”).

FFCRA provided that the credit “shall not apply to the Government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing.” ARPA similarly provided that no credits “shall be allowed under this section to the Government of the United States or to any agency or instrumentality thereof” but then provided that the limitation “shall not apply to any organization described in section 501(c)(1) and exempt from tax under section 501(a).”

This difference in language resulted in the different treatment of credits earned during the two periods.

In ILM 202333001 (July 18, 2023), reached a similar split decision as to the eligibility of federal credit unions to claim the employee retention credit (“ERC”). The IRS concluded that federal credit unions were not eligible for the ERC for wages paid after March 12, 2020 and before January 1, 2021. On the other 27

hand, it concluded that federal credit unions were eligible to claim the ERC for wages paid after December 31, 2020 and before October 1, 2021 (or January 1, 2022, in the case of wages paid by any federal credit union which was a recovery startup business). Here, as well, the distinction was based upon the language of the applicable statutory provisions.

The conclusions in these ILMs are not surprising since it has been recognized elsewhere that federal credit unions are Government instrumentalities. One wonders what might have caused the IRS to devote resources to this issue.

Note that ILM 202333001 simply concludes that a federal credit union is eligible to claim ERC during the first three quarters of 2021.

It does not describe the other eligibility requirements.

Aggressive ERC claims generated by “credit mills” are currently a large concern of the IRS. The IRS believes that many are fraudulent. The IRS has a page on its website devoted to the ERC, with links to guidance it has issued and warnings it has made. See, https://www.irs. gov/coronavirus/employee-retention-credit.

All taxpayers (not just federal credit unions) who have filed or who are considering filing ERC claims should carefully review IR-2023-169 and this website.

In September, the IRS announced a moratorium on processing new ERC claims.

IR-2023-169 (September 14, 2023). This announcement contained a detailed description of steps the IRS has and will be undertaking to crack down on overlyaggressive claims.

In October, the IRS followed up the moratorium by announcing that companies will be permitted to withdraw claims they have filed. The announcement stated: “The IRS created the withdrawal option to help small business owners and others who were pressured or misled

by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose Winter 2023 | The Cooperative Accountant

TAXFAX claimed generated a $35.5 million dollar loss

By Barbara for A. the Wech year. Seaview allocated the loss to its Those who willfully filed a fraudulent members. For a reason not described in the claim, or those who assisted or conspired opinions, Seaview failed to file a return for in such conduct, should be aware that 2001. That failure was called to its attention by withdrawing a fraudulent claim will not the IRS, and Seaview provided a return for that exempt them from potential criminal year first to an IRS agent and several years later investigation and prosecution.” to an IRS attorney. The issue in the case was whether that constituted “filing” of the return, This withdrawal procedure is available if a starting the running of the statute of limitations claim has not yet been processed or if the claim for 2001. has been processed, a check sent, but the The Tax Court concluded that the return was taxpayer has not yet cashed the check. not “filed” because it had not been sent to the The claim must have only been for ERC and appropriate IRS Service Center. As a result, must be withdrawn in full. the Tax Court concluded that the statute of Once a request is made to withdraw the limitations remained open. claim, according to the IRS: Seaview appealed to the Ninth Circuit Court of Appeals.

“Taxpayers will get a letter from the IRS A three-judge panel (voting 2-1) reversed about whether their withdrawal request the Tax Court. Writing for the majority, Judge was accepted or rejected. The approved Patrick J. Bumatay succinctly described how he request is not effective until the taxpayer viewed the facts and why he felt reversal was has the acceptance letter from the IRS. appropriate: If the IRS accepts the withdrawal, the taxpayer may need to amend their income “Imagine you get a letter from an Internal tax return.”

Revenue Service official saying that the IRS never received the tax return you Details of the withdrawal program can be thought you filed four years ago. In found at the IRS website. https://www.irs.gov/ response, you fax a copy of your return newsroom/withdraw-an-employee-retentionto the IRS official. Two years go by, you credit-erc-claim. See, also, Fact Sheet FS-2023then talk with an IRS lawyer, who again 24 (October 2023) and withdrawal program asks you for the same return. After that FAQs. conversation, you send another copy of the return. penalties or interest.

Avoiding Procedural Pitfalls Another Case Study

By George W. Benson While not common, occasionally a tax advisor becomes aware that a client failed, for whatever reason, to file a tax return. A recent case illustrates what not to do in such an instance.

Seaview Trading, LLC v. Commissioner, 62 F.4th 1131 (9th Cir. 2023), aff’g, T.C. Memo. 2019122.

Seaview was formed during 2001 and entered into a straddle transaction which it 28

Three more years pass. You then get a notice that the IRS has decided to adjust your tax liability. The result: you owe the IRS a lot more money.

How can this be? — you ask. The IRS normally has only three years to adjust your taxes after you’ve filed your return.

Not so fast, says the IRS. The two times you sent copies of the return to its officials didn’t count. You never mailed a return to an IRS service center; so, the return was never ‘filed.’ And since you never ‘filed’ Winter 2023 | The Cooperative Accountant

TAXFAX a return, the IRS explains that it can still come after you at any time.

But that’s not what the IRS has said elsewhere. The IRS has alerted taxpayers many times that they can properly ‘file’ their returns by sending late returns to IRS officials who ask for them. In fact, the IRS has said doing so is the preferred way to send late returns.

That is exactly what happened here.

Seaview Trading, LLC twice responded to inquiries from IRS officials about the whereabouts of its 2001 partnership tax return. And both times, Seaview promptly delivered the return to the officials. Rather than consider the return ‘filed,’ the IRS claims Seaview never filed a return. This logic defies the statutory text, applicable regulations, IRS policies and practices, and common sense. For those reasons, we reverse.”

One of the judges on the three-judge panel dissented. To that judge, the result was not so clear. She characterized the majority opinion as a “dubious approach” and said that she “would adhere to ‘the theory of justice that requires a judge to follow the law as it is.’”

However, the matter did not end there.

The Government asked that the decision of the three-judge panel be reviewed by the full court, and the Ninth Circuit granted en banc review.

The full Court did not agree with the threejudge panel and concluded that the Tax Court decision should be affirmed. In its view, the return was not “filed” and so the year was still open.

Judge Bumatay dissented, repeating the sentiments expressed in his original opinion: “Today, our court throws our tax system into disarray. Now taxpayers can no longer trust what the IRS has told them about how to file delinquent tax returns.

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For over 20 years, the IRS has told taxpayers they can file late or untimely tax returns with requesting IRS officials. …

But the IRS now backtracks on its public statements. The IRS urges our court to hold that a delinquent return is only ‘filed’ under the Tax Code if it is mailed to an IRS Service Center. And unfortunately, our court acquiesces. As a result, any taxpayers who filed their delinquent tax returns by sending them directly to requesting IRS officials may find that their returns were never deemed filed and, even worse, they may be liable to the IRS forever.”

One can debate the merits of the Ninth Circuit decision,1 but its holding is clear. It reveals a potential trap for the unwary.

Delinquent returns should always be sent to the appropriate Service Center (with evidence of mailing obtained and retained).

That should clearly be the case for taxpayers in the Ninth Circuit (California, Arizona, Alaska, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington). Taxpayers elsewhere should do so as well. Copies can be provided to requesting IRS agents and attorneys, but, absent sending the return to a Service Center, that should not be relied upon as a “filing” which starts the running of the statute of limitations.

Note that we may not have heard the last of this case. In an August 7 filing, Seaview requested that the U.S. Supreme Court grant a writ of certiorari agreeing to hear an appeal of the Ninth Circuit decision. The petition frames the question presented as “whether the word ‘file’ in 26 U.S.C. § 6229 and used throughout the Tax Code carries its ordinary meaning for delinquent tax returns when no regulation specifies how to file delinquent returns.” The Supreme Court receives many petitions for certiorari and grants few. It remains to be seen whether the Supreme Court will grant Seaview’s petition.

Winter 2023 | The Cooperative Accountant

EDITOR Barbara A. Wech, Ph.D. Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham COLLAT School of Business 710 13th St. South Department of Management, Information Systems, & Quantitative Methods Birmingham, Alabama 35233 bawech@uab.edu

By now, you have likely heard of the threeletter acronym ESG, which has become a major focus in driving investing decisions and business reputations. ESG stands for Environmental, Social, and Governance and serves as a framework for assisting businesses in developing sustainable and responsible operations. ESG has gained significant traction over the last several years, with more than 90 percent of S&P 500 companies publishing ESG reports in some form, as do approximately 70 percent of Russell 1000 companies (Pérez et al., 2022). While ESG reporting has predominately impacted public companies thus far, all businesses, including cooperatives, should be made aware of ESG reporting practices, why they matter, and how to implement them.

Cooperatives, by their very nature, are aligned with several principles that resonate deeply with the ethos of ESG. These entities, typically owned and managed by their members, have a long-standing tradition of focusing on community welfare, equitable practices, and sustainable operations.

However, in a world where quantifiable metrics and transparent reporting increasingly dictate stakeholder trust and investment decisions, integrating ESG reporting into the 30

GUEST WRITERS Mark Edmonds, Ph.D., CPA Collat School of Business, Accounting and Finance UAB, The University of Alabama at Birmingham CSB 320 , 710 13th St S, Birmingham, AL 35233 P: 205.936.1336 maedmond@uab.edu

cooperative model can provide a significant edge that few cooperatives have fully capitalized on to Marena M. Messina, Ph.D., CPA date.

Collat School of Business, ESG Accounting and Finance reporting, a UAB, The University of Alabama practice that at Birmingham evaluates a CSB 313 710 13th Street company’s South, Birmingham, AL 35294 Mailing: CSB 313 1720 collective connd 2 Avenue South, Birmingham, scientiousness AL 35294-4460 for social and P: 205.975.2868 environmental marenamessina@uab.edu factors, offers a structured framework for cooperatives to communicate their efforts in these areas. It goes beyond traditional financial reporting to include environmental stewardship, social responsibility, and governance practices.

For cooperatives, which inherently value community, sustainability, and democratic governance, ESG reporting is not just a tool for compliance but a strategic asset that can Winter 2023 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM reinforce their core values, attract like-minded investors, and enhance their social and economic impact.

This article is intended to assist managers of cooperatives in gaining a robust understanding of the ESG reporting framework, including how to utilize ESG reporting to bolster cooperative business operations and reputations. To accomplish this goal, the remainder of this article will cover the rise of ESG reporting standards and why they matter, an in-depth analysis of each component of ESG, a discussion about the ESG rating system, and a case study of the REI Co-op’s efforts to address ESG reporting to serve as an example for other cooperatives to follow.

The Rise of ESG Reporting ESG reporting has evolved significantly over the past few decades. Initially, the concept of including environmental and social factors in business reporting was driven by the growing awareness of corporate responsibility and sustainable development. The roots of ESG can be traced back to the 1960s and 1970s, during the rise of the environmental movement and increased public awareness of corporate impacts on society.

In the early stages, ESG reporting was mainly limited to environmental issues, focusing on the impact of corporate activities on the natural environment. This evolved in the 1980s and 1990s to include broader social issues, partly influenced by high-profile cases of corporate malpractice and the increasing influence of non-governmental organizations advocating for corporate accountability.

The concept of governance was later integrated, leading to the comprehensive framework of ESG as we know it today.

This addition recognized the critical role of corporate governance in ensuring responsible environmental and social practices. In 2004, the United Nations issued a report, “Who Cares Wins,” which is generally acknowledged as the earliest significant official reference to ESG in a contemporary 31

setting (The Global Compact, 2004).

Today, ESG reporting has become a key component in assessing a company’s risk and performance. It has gained traction due to increasing recognition by investors and stakeholders that ESG factors significantly impact financial returns and long-term viability. Global trends show a surge in sustainable investing, with predictions that ESG-mandated assets could make up half of all professionally managed investments by 2025 (Collins, 2020).

The rise of international frameworks and standards, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-related Financial Disclosures (TCFD), have played a crucial role in shaping the modern version of ESG reporting.

These frameworks provide guidelines that help businesses disclose material ESG information in a structured and comparable manner. While a detailed discussion of these groups is beyond the scope of this paper, I would encourage all managers to review the websites of these organizations to gain familiarity with the frameworks they have issued.

Why You Should Care About ESG Reporting The ESG reporting frameworks are laying out a clear picture of how investor capital and regulators are viewing the future business operating environment. Over recent years, ESG scores and reputations have become significant factors in investing decisions.

Capital investments in sustainable funds rose 2,300% over the last six years, and as of 2022, global sustainable assets are now valued at $2.5 trillion (Pérez et al., 2022). There is no question that many investment decisions now put substantial weight on ESG-related factors when making capital investments. While many cooperatives rely significantly less on equity investing than public companies, many still require capital in the form of debt financing and grants, both of which are influenced by ESG factors.

Winter 2023 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM In relation to regulators, there are currently no mandatory United States (U.S.) ESG reporting requirements impacting cooperatives, but that may be changing soon. In various regions, the obligation to report on ESG factors is becoming a legal requirement or is currently being contemplated. Specifically, in the U.S., the Securities and Exchange Commission (SEC) is deliberating introducing new regulations that would necessitate enhanced reporting on risks associated with climate change and the emission of greenhouse gases (GHG).

Moreover, the SEC is considering or has proposed additional regulations covering different aspects of ESG. While these proposed regulations primarily target public companies, the growing emphasis on ESG issues could indirectly influence cooperatives, especially those with significant interactions with public markets or those seeking to align with emerging sustainability standards (Pérez et al., 2022).

ESG reporting is here to stay and likely to gain increasing traction in the future.

However, it is crucial to understand what each component of the ESG framework entails and how these elements specifically apply to cooperatives.

The Core Components of ESG Reporting ESG is comprised of three categories: Environmental, Social, and Governance.

Due to the nature of cooperatives, many are likely already over-performing in many of these areas compared to other business structures. The nature of the cooperative structure already embodies many of the tenets of ESG by being member-owned, member-controlled, and member-benefiting organizations. They operate on the principle of democracy, with decision-making processes typically based on ‘one member, one vote’ rather than the number of shares owned. By nature, cooperatives already embody much of what ESG frameworks hope to accomplish in the public company sector.

While cooperatives inherently tend to align with ESG principles, they face notable 32

challenges, particularly in communicating their ESG-related activities and achievements to external stakeholders. This issue, crucial in ESG reporting, is exacerbated by resource limitations, especially in small- and mediumsized cooperatives (Yakar-Pritchard & Caliyurt, 2021). While public companies benefit from large-scale advertising, press releases, and financial reports, cooperatives have more difficulty getting their message out.

Further, public companies have significantly more capital to invest in monitoring ESG efforts and reporting their results. However, there are less intensive capital methods of communicating ESG results, including:

• Updates using newsletters and emails • Use of social media channels • Dedicated ESG section on the company

website • Hosting webinars and workshops • Press releases • Involving employees in ESG effort Cooperatives wishing to reap the benefits of ESG must realize that communicating their alignment with the ESG framework and the results of their efforts are the key components to success. However, to begin this process, managers need a basic understanding of the categories of ESG to understand what is being measured and how their operations align with the framework.

Environmental Category The environmental component of the ESG reporting framework refers to a company’s impact on the natural environment and its management of environmental risks and opportunities (S&P Global, 2019).

This aspect of ESG focuses on how a business’s operations contribute to or mitigate environmental challenges such as climate change, resource depletion, waste management, and pollution. Common business efforts that fall within this category are: • Energy efficiency and renewable energy use • Sustainable resource management • Greenhouse gas emission reduction Winter 2023 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM

• Water conservation and management • Sustainable supply chain management • Product lifecycle analysis

By their very nature, many cooperatives already align well with the framework in this area, including those that focus on sustainable agriculture, renewable energy, forestry and fishing, and a host of other environmentally focused businesses. The more significant challenge is the ability to effectively communicate progress and results in these areas, which can often be highly capital-intensive. For example, Apple Inc., one of the world’s leading companies in ESG efforts, has spent billions developing, measuring, and communicating its environmental goals to become carbon neutral by 2030 (Apple Inc., 2020).

Nevertheless, there are ways to communicate results in this area costefficiently, including developing business plans that exhibit a focus on sustainability efforts and measuring the results of these initiatives over time to show progress.

Managers of cooperatives will have to balance the benefit of environmental reporting with the cost of doing so. However, this information is especially critical today, where environmental responsibility is increasingly linked to a company’s reputation.

Social Category The social aspect of ESG refers to how a company manages relationships with its employees, suppliers, customers, and the communities where it operates (S&P Global, 2020b). Further, the focus is on the company’s impact on people and society and how it contributes to social welfare. A strong social component in ESG reflects a company’s commitment to being a responsible and ethical actor in society, going beyond mere compliance with laws to proactively improve the well-being of various stakeholders. There are countless examples by which companies can contribute to this category, but some of the more widespread practices include: • Fair labor practices, • Employee health and safety 33

• Diversity and inclusion • Employee development and training • Supply chain ethics • Human rights compliance • Community engagement and development • Customer satisfaction The social component of ESG reporting holds particular significance for cooperatives due to their member-driven nature and community-focused philosophy. There is likely no shortage of information regarding how cooperatives align in this area, but communicating those efforts is critical to getting the recognition they deserve. It is often observed that underperformance in these areas garners more attention than overperformance, but it is crucial to realize that excelling in this category equally deserves recognition. The category embodies the company’s culture and reputation, significantly impacting its ability to stay viable over the long term.

Governance Category Governance refers to the rules, practices, and processes by which a company is directed and controlled (see S&P Global, 2020a).

It encompasses the mechanisms through which a company and its management are held accountable to internal and external stakeholders. In the context of ESG, governance is largely focused on public companies, but many of the tenants of this category do impact cooperatives.

The aspects of governance with the ESG framework that apply to cooperatives are: • Ethical business practices • Shareholder rights • Transparency and disclosure • Stakeholder engagement The cooperative structure again aligns very well with the aspirations of the ESG framework in this category. Managers should view the cooperative governance structure as a strength that investors and rating agencies seek when making ESG-based decisions. The nature of a cooperative’s structure should be something managers see worth communicating to the broader Winter 2023 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM market. Fortunately, compared to the other two categories, communicating information regarding governance efforts is often inexpensive to compile and monitor making this one of the more cost-effective categories.

Raising awareness in the broader market about the advantages of the cooperative structure and its alignment with the governance goals of ESG is a real opportunity for cooperatives looking to be successful in ESG reporting.

sometimes proprietary information provided by the companies themselves. Investors then use these ratings to make informed decisions about where to allocate their funds, favoring companies that demonstrate strong ESG practices.

There are numerous rating agencies, and it is important to note that each has its own method for determining a company’s ESG score. Concerns have been raised regarding the consistency and objectivity of ratings, the methodologies used, and potential conflicts of interest. The following in Figure 1 shows a ESG Rating Agencies and Scores listing of the most prominent rating between sustainable development goals and business operations.

As the importance of agencies This article has focused a lot on the today, including a link to their ESG scoring sustainability ethical practices business has gained prominence, ESG rating agencies have importance ofand communicating ESGinefforts methodology: taken the crucial rolewhich of evaluating and quantifying howeach companies to the on broader market is a critical Since agencyperform utilizes in itsthese own areas. role that ESG rating agencies provide. methodology to determine a company’s These rating agencies have emerged as The primary function of these agencies is to provide ESG ratings or scores, will which are use derived ESG score, stakeholders often a pivotal players in the modern financial and combination of ratings when making ESG from a comprehensive analysis of a wide range of data, including public disclosures, corporate landscape, bridging the gap evaluations.provided Different of measuring ESG sustainability reports, and sometimes proprietary information byways the companies between sustainable development goals and can and do result in widely different scores themselves.

InvestorsAs then these ratings informed decisions about where to allocate business operations. theuse importance of to make and rankings across different agencies. There their funds, favoring companies thatindemonstrate ESG practices. sustainability and ethical practices business strong are efforts underway and calls for regulators has gained prominence, ESG rating agencies to attempt to find ways to standardize ESG have on the crucial of evaluating Theretaken are numerous ratingrole agencies, and it is important to better, note that each its own accepted method for scoring but no has universally and quantifying how companies perform in determining a company’s ESG score. Concerns have been raised the Future consistency and standard exists regarding as of today. efforts to these areas. create a more standardized scoring system objectivity of ratings, the methodologies used, and potential conflicts of interest. The following The primary function of these agencies would allow for better comparability a shows a listing of the most prominent rating agencies today, including a link to their ESGand scoring is to provide ESG ratings or scores, which more straightforward path for companies methodology: are derived from a comprehensive analysis aiming to improve their ESG scores. of a wide range of data, including public Taking the time to understand the Figure 1 disclosures, sustainability reports, and methodology used by the major rating Figure 1

Rating Agency

Link to Website:

MSCI ESG Research

https://www.msci.com/

Sustainalytics

https://www.sustainalytics.com/

FTSE Russell (FTSE4Good and ESG Ratings)

https://www.lseg.com/en/ftse-russell

Bloomberg ESG Data Service

https://www.bloomberg.com/professional/product/esgdata/

LSEG Data and Analytics (formerly Refinitiv and Thomson Reuters)

https://www.lseg.com/en/data-analytics

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Winter 2023 | The Cooperative Accountant

Since each agency utilizes its own methodology to determine a company’s ESG score,

TCA SMALL BUSINESS FORUM agencies can provide a competitive edge in achieving a higher score. An in-depth understanding can also guide managers in their communication efforts by knowing which elements are most important in determining an ESG score. At the present, getting a higher ESG score often boils down to the amount of capital a company can invest to communicate their ESG efforts, but as discussed previously, there are less capitalintensive ways of getting the message out.

A strong understanding of how these scores are calculated and a focused approach to communicating the critical elements pertaining to these scores can make an impactful difference to a cooperative’s ESG reputation.

REI Co-op Case Study: The previous sections were intended to highlight the main concepts of ESG, but having an example of a cooperative that has excelled in ESG reporting can help guide your initiatives. This section will briefly discuss how REI Co-op (REI) addresses the three categories of the ESG framework.

REI is a versatile outdoor retail company known for its wide range of high-quality gear pertaining to outdoor activities. The company specifically focuses many of its ESG efforts in the environmental category, connecting the company’s love for the outdoors to the importance of sustainability.

REI explicitly expressed this in the company’s mission statement, which reads: Since 1938, we have been your local outdoor co-op, working to help you experience the transformational power of nature. We bring you top-quality gear and apparel, expert advice, rental equipment, inspiring stories of life outside and outdoor experiences to enjoy alone or share with your friends and family. And because we have no shareholders, with every purchase you make with REI, you are choosing to steward the outdoors, support sustainable business and help the fight for life outside. (REI Co-op, n.d.)

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REI mentions explicitly its commitment to supporting the environment through sustainable business operations and its governance structure to align the company’s values with the ESG framework.

Incorporating these elements into the company’s mission statement is a great communication strategy to help reach external stakeholders who value ESG reporting.

Another significant way REI aligns itself with the ESG framework is through its annual “Impact Report.” This report is highlighted on the homepage of the REI website and referenced in several places to help draw public awareness to these efforts. The Impact Report summarizes all of REI’s operations over the most recent calendar year in relation to accomplishing its goals (REI Co-op, 2022).

This report includes an ESG scorecard that tracks the company’s progress related to the three categories of the ESG framework.

A quick summary of this scorecard provides a clear example of how the cooperative addresses all three categories of ESG. The scorecard contains the following elements to align the company with the ESG framework: Environmental: • Greenhouse gas emissions • Energy usage • Waste • Product sustainability Social: • % of brands owned by founders of color • Philanthropy and Advocacy • % of board seats occupied by women Governance: • Voting structure • Requiring vendors and suppliers to have a code of conduct • % of board seats occupied by independents This Impact Report and ESG scorecard provide an excellent example of how companies can communicate their efforts to accomplish ESG objectives to the public.

Winter 2023 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM While only a summary of these reports is discussed herein, the full report and scorecard can be easily located on REI’s website for those interested in greater detail.

Conclusion ESG reporting has evolved from a niche area to a crucial element in business operations and reputation, especially as sustainability and corporate responsibility gain prominence. Cooperatives, with their inherent focus on community welfare and equitable practices, are naturally aligned with the principles of ESG. However, the challenge lies not only in adhering to these principles but also in effectively communicating their commitment and progress in these areas.

ESG reporting can be a crucial tool for cooperatives to demonstrate their dedication to environmental stewardship, social responsibility, and robust governance.

The rise of ESG reporting reflects a broader shift in the business and investment landscapes, where ethical, sustainable, and responsible business practices are increasingly valued. For cooperatives, embracing ESG reporting is not just about compliance or staying relevant in the evolving market. It is about reinforcing their core values, attracting like-minded investors, and enhancing their impact on society and the environment. By leveraging ESG reporting, cooperatives can showcase their unique strengths in environmental conservation,

social welfare, and democratic governance, thus solidifying their position as ethical and sustainable business models.

The case study of REI Co-op serves as a testament to the efficacy of wellexecuted ESG reporting. REI’s approach, particularly its annual Impact Report and ESG scorecard, exemplifies how cooperatives can effectively communicate their commitment to environmental stewardship, social responsibility, and ethical governance. This reinforces their core values and showcases their efforts in a quantifiable and relatable manner to a broader audience. If adopted more widely among cooperatives, such practices can elevate their status in the business world, aligning them more closely with contemporary corporate responsibility and sustainability expectations.

ESG reporting is not just a trend but a crucial element in the evolution of business practices, especially for cooperatives. By effectively implementing and communicating their ESG initiatives, cooperatives can enhance their reputations, foster stakeholder trust, and contribute meaningfully to a more sustainable and equitable future. Therefore, the journey of integrating ESG reporting into cooperatives is not just about compliance or market trends; it is about staying true to their foundational ethos of community, equity, and sustainability while adapting to the changing dynamics of the global business environment.

References

Apple Inc. (2020, July 21). Apple commits to be 100 percent carbon neutral for its supply chain and products by 2030. Apple Newsroom. https://www.apple.com/newsroom/2020/07/apple-commits-to-be-100-percent-carbon-neutral-for-its-supplychain-and-products-by-2030/ Collins, S. (2020, February 20). Advancing environmental, social, and governance investing. Deloitte Insights. https://www2. deloitte.com/us/en/insights/industry/financial-services/esg-investing-performance.html Pérez, L., Hunt, D. V., Samandari, H., Nuttal, R., & Biniek, K. (2022, August 10). ESG is essential for companies to maintain their social license. McKinsey & Company. https://www.mckinsey.com/capabilities/sustainability/our-insights/does-esgreally-matter-and-why REI Co-op. (n.d.). About REI. REI. Retrieved December 11, 2023, from https://www.rei.com/about-rei REI Co-op. (2022). 2022 Impact Report. REI. https://www.rei.com/stewardship S&P Global. (2019, October 23). Understanding the “E” in ESG. https://www.spglobal.com/en/research-insights/articles/ understanding-the-e-in-esg S&P Global. (2020a, February 24). What is the “G” in ESG? https://www.spglobal.com/en/research-insights/articles/what-isthe-g-in-esg S&P Global. (2020b, February 24). What is the “S” in ESG? https://www.spglobal.com/en/research-insights/articles/what-isthe-s-in-esg The Global Compact. (2004). Who cares wins: Connecting financial markets to a changing world. United Nations. https:// www.unepfi.org/fileadmin/events/2004/stocks/who_cares_wins_global_compact_2004.pdf Yakar-Pritchard, G., & Caliyurt, K. (2021). Sustainability Reporting in Cooperatives. Risks, 9, 117. https://doi.org/10.3390/ risks9060117

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Winter 2023 | The Cooperative Accountant