Transcript fair value

The Impact of FASB/IASB/AICPA/RUS
Standards, Form 990 and Visualizing a Trillion
Dollars
Florida Statewide Accounting Group
Meeting
Ocala FL
May 21, 2010
There is a lot going on!
• FIN 48 Accounting for Uncertainty in Income Taxes – An Interpretation of
SFAS 109
• FASB Project Disclosures About Employer’s Participation in a Multiemployer
Plan
• SFAS 141 Business Combinations
• SFAS 157 Fair Value Measurements
• FASB/IASB Project on Leases
• FASB/IASB Project on Other Comprehensive Income
• FASB/IASB Project on Financial Instruments with Characteristics of Equity
• FASB/IASB Project on Emission Trading Schemes
• FASB Project on Disclosure of Certain Loss Contingencies
• FASB/IASB Project on Financial Statement Presentation
• IASB Project on Rate Regulated Activities
• IASB Project on SMEs
• AICPA and FAF on Private Company GAAP
• RUS memo on Renewable Energy Credits
• Accounting for R&S plan contributions
• Subsequent Events
• FASB Accounting Standards Codification
• Form 990 Update
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• How Much is a Trillion Dollars?
FIN 48
• On December 30, 2008, the Board issued FASB Staff
Position, FSP FIN 48-3, Effective Date of FASB
Interpretation No. 48 for Certain Nonpublic
Enterprises. This completed phase one of the project.
Rural electric cooperatives could elect to defer the
application of FIN 48 for one more year.
• The election requires footnote disclosure as well as a
description of the process the cooperative uses to
evaluate any uncertain tax positions.
• On May 18, 2009, the FASB released FSP FIN 48d.
The purpose of the FSP is to provide implementation
guidance for pass-through and not-for-profit taxexempt entities and disclosure modifications for
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nonpublic enterprises.
FIN 48
• FIN 48d provides that nonpublic entities would
be required to disclose the following:
– The total amount of interest and penalties
recognized in the statement of operations and
statement of financial position.
– For positions for which it is reasonably possible that
the total amounts of unrecognized tax benefits will
significantly increase or decrease within 12 months
of the reporting date:
• The nature of the uncertainty
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FIN 48
• The nature of the event that could occur in the next 12
months that would cause the change
• An estimate of the range of the reasonably possible
change or a statement that an estimate of the range
cannot be made
– A description of the tax years that remain subject to
examination by major tax jurisdictions.
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FIN 48
• One issue of importance to tax-exempt rural electric
cooperatives is that the FSP concludes that
management must determine whether the entity is in
fact a pass-through entity or a tax-exempt not-for-profit
entity in the jurisdictions in which it files a return or
would otherwise be subject to income taxes.
• This requires management to access the tax positions
inherent if the calculation of the 85-15 test.
• In addition, a tax-exempt not-for-profit entity must
assess whether it has any tax positions associated
with unrelated business income subject to income
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taxes.
FIN 48
• Impact on tax-exempt rural electric
cooperatives:
– Top down approach
– Bottoms up approach
• Lack of qualified staff at tax-exempt rural
electric cooperatives to determine uncertain tax
positions and the probability matrix.
• Independent auditor judgment is going to be
critical.
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FIN 48
• What happens if a tax-exempt rural electric
cooperative determines that it has an uncertain
tax position in a key element of it’s 85/15 test?
• The new Form 990 requires that uncertain tax
positions be disclosed in Schedule D.
• Can you “fail” the 85/15 test for book purposes
but still be statutorily exempt for tax purposes?
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FIN 48
• In IRS Notice 2010-09, the Internal Revenue
Service is considering changes to reporting
requirements regarding certain business
taxpayers’ uncertain tax positions in order to
improve tax compliance and administration.
• The Service is developing a schedule requiring
certain business taxpayers to report uncertain
tax positions on their tax returns.
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FIN 48
• The schedule will require a concise description
of each uncertain tax position in sufficient detail
so that the Service can determine the nature of
the issue.
• The sufficiency of a description will depend on
the taxpayer’s particular facts and the nature of
the underlying transaction.
• As currently contemplated, this concise
description will include the rationale for the
position and a concise general statement of the
reasons for determining that the position is an
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uncertain tax position.
FIN 48
• To be sufficient, the description must contain:
– 1. The Code sections potentially implicated by the
position;
– 2. A description of the taxable year or years to
which the position relates;
– 3. A statement that the position involves an item of
income, gain, loss, deduction, or credit against tax;
– 4. A statement that the position involves a
permanent inclusion or exclusion of any item, the
timing of that item, or both;
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FIN 48
– 5. A statement whether the position involves a
determination of the value of any property or right;
and
– 6. A statement whether the position involves a
computation of basis.
• In addition, the schedule will require a taxpayer
to specify for each uncertain tax position the
entire amount of United States federal income
tax that would be due if the position were
disallowed in its entirety on audit.
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FIN 48
• The Service intends the new schedule to be filed by a
business taxpayer with total assets in excess of $10
million if the taxpayer has one or more uncertain tax
positions of the type required to be reported on the
new schedule.
• This includes a taxpayer who prepares financial
statements, or is included in the financial statements
of a related entity that prepares financial statements, if
that taxpayer or related entity determines its United
States federal income tax reserves under FIN 48, or
other accounting standards relating to uncertain tax
positions involving United States federal income tax.
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FASB Project on Disclosures of
Employers’ Participation in a
Multiemployer Plan
• Among the concerns raised is the lack of information
in the financial statements, beyond the contributions
made, about an employer’s participation in a
multiemployer plan. Additionally, several users have
published reports highlighting these concerns,
including the potential for increases in contributions as
a result of plans being underfunded.
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FASB Project on Disclosures of
Employers’ Participation in a
Multiemployer Plan
• The funded status of many of these plans deteriorated
significantly during the financial crisis of 2008 when
plan asset values dropped significantly.
• It is envisioned that expanded disclosures would
enable users of financial statements to better assess
the risks a reporting entity faces by participating in a
multiemployer plan.
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FASB Project on Disclosures of
Employers’ Participation in a
Multiemployer Plan
• At the March 17, 2010 FASB Board meeting, the
FASB chairman announced the addition of a new
project aimed at expanding disclosures about an
employer’s participation in a multiemployer plan (that
is, pension and other postretirement benefits).
• The project was added in response to concerns raised
by several constituents about the current disclosures
for multiemployer plans.
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FASB Project on Disclosures of
Employers’ Participation in a
Multiemployer Plan
• At the April 14, 2010 meeting, the Board deliberated on the disclosure
requirements of an employer’s participation in a multiemployer plan. The
Board decided on the following:
– The Board agreed on the staff’s recommendation for an employer to
disclose both quantitative and qualitative information about its
participation in a multiemployer plan. This will inform the financial
statement users about the employer’s commitment to the plan and the
effect of future cash flows. The proposed disclosures are derived largely
from the agreement between the employer and the plan. Additionally,
some of the disclosure requirements are based on information that can
be obtained by the employer from the plan under the requirements of the
Pension Protection Act of 2006.
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FASB Project on Disclosures of
Employers’ Participation in a
Multiemployer Plan
• Such disclosures might include information
such as:
– The plan’s minimum funding level
– The participant’s withdrawal liability
– The cash flow and earnings assumptions embodied
in the plan
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FASB Project on Disclosures of
Employers’ Participation in a
Multiemployer Plan
• The Board agreed to make the disclosure requirements
effective prospectively. The Board agreed to propose in the
Exposure Draft that the new guidance should be effective for
fiscal years ending after December 15, 2010, except that for
nonpublic entities the new guidance should be effective for the
first annual period beginning after December 15, 2010.
• The Board directed the staff to draft an Exposure Draft of a
proposed Accounting Standards Update for vote by written
ballot.
• The Board decided that the Exposure Draft should be exposed
for a 60-day comment period and directed the staff to solicit
comments from the constituents that may be affected by the19
final standard.
FASB Project on Disclosures of
Employers’ Participation in a
Multiemployer Plan
• The Board has directed the staff to begin drafting a proposed
Accounting Standards Update. The staff expects to issue the
proposed Update in the second quarter of 2010 and a final
Update early in the fourth quarter of 2010.
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SFAS 141 Business
Combinations
• It is going to be problematic for the boards of two rural
electric cooperatives to come to grips with the
necessity to designate an “acquirer” and “acquiree”.
• Alternatively, we may see more virtual mergers as we
have seen recently in the G&T community.
• Another issue is the requirement for the acquirer to
value the assets and liabilities of the acquiree at fair
value.
• What is fair value for a rural electric cooperative?
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SFAS 141 Business
Combinations
• Boards need to be made aware that a business
combination may result in rate increases even
though the combination was a true merger with
no cash changing hands.
• Unwillingness to raise rates, if necessary, to
recover the new level of embedded costs may
result in impairment writedowns.
• The net result could mirror that which would
have been achieved via a pooling of interest.
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Fair Value Measurements
• The independence of the FASB – was it
compromised by Congress?
• SFAS 157 – Measurement of Liabilities
– The FASB discussed potential revisions to the
scope, guidance, and effective date of proposed
FSP FAS 157-c, Measuring Liabilities under
FASB Statement No. 157.
– The FASB decided that the final FSP will apply
to the fair value measurement of liabilities under
FASB Statement No. 157, Fair Value
Measurements.
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Fair Value Measurements
• The FASB decided that the final FSP will
require that practitioners generally use the
same approach to valuing a liability under
Statement 157 as used for an asset. The
exception is that restrictions on the transfer of a
liability will not affect the fair value
measurement of that liability, whereas
restrictions on an asset are considered when
determining the fair value of that asset.
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Fair Value Measurements
• On April 3, 2009, the EU finance ministers
made it clear that they may be headed for a
showdown with the IASB over the need to have
a level playing field as a result of the FASB’s
action to modify SFAS 157 for other than
temporary impairments.
• On April 2, 2009, the IASB stated they would
not immediately adopt the FASB changes into
IFRS.
• IASB Chairman, Sir David Tweedie, threatened
to resign over “regulatory arbitrage” from having
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two sets of standards.
Fair Value Measurements
• In October 2008, the EU ministers placed a
similar demand on the IASB after the FASB
adjusted mark-to-market accounting in
response to the financial crisis.
• Initially the IASB refused to adopt the FASB
approach, but the EU ministers said that they
would unilaterally adopt their own changes and
the IASB relented.
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Fair Value Measurements
• At their combined meeting on January 10, 2010, the Boards
tentatively decided:
– To retain the term fair value
– To define fair value as an exit price. The Boards will discuss
where that definition should be used in a future meeting
when they address the scope of a converged fair value
measurement standard.
• Measuring fair value when markets become less active
The Boards tentatively decided that the guidance for
measuring fair value in markets that have become less active:
– Pertains to when there has been a significant decline in the volume and
level of activity for the asset or liability
– Focuses on whether an observed transaction price is orderly, not on the
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level of activity in a market.
FASB/IASB Project on Leases
• On March 19, 2009, the FASB and the IASB published
a discussion paper: Leases, Preliminary Views.
• The comment deadline was July 17, 2009
• If adopted as proposed, accounting by rural electric
cooperatives for leases which are now classified as
operating leases would change.
• The principle underlying lease accounting would now
be:
– Lease contracts create assets and liabilities that should be
recognized in the financial statements of lessees.
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FASB/IASB Project on Leases
• If this principle is adopted in a new standard on
lease accounting, it would result in the lessee
recognizing:
– an asset for its right to use the leased item (the
right-of-use asset)
– a liability for its obligation to pay rentals.
• The FASB and IASB think that ensuring that all
leases are depicted on the statement of
financial position would significantly increase
the transparency and the comparability of
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lease accounting.
FASB/IASB Project on Leases
• The asset and liability would be recorded at fair
value.
• The FASB and IASB noted that in most leases
the present value of the lease payments
discounted using the lessee’s incremental
borrowing rate would be a reasonable
approximation to fair value.
• The FASB and IASB tentatively decided that
the lessee should initially measure its right-ofuse asset at cost. Cost equals the present
value of the lease payments discounted using
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the lessee’s incremental borrowing rate.
FASB/IASB Project on Leases
• Rural electric cooperatives low incremental
borrowing rates will result in a larger asset and
liability at initial recognition than a comparable
investor owned utility.
• The FASB and IASB are expected to issue an
Exposure Draft in the second quarter of 2010
with a final standard in 2011.
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FASB/IASB Project on Other
Comprehensive Income
• The Boards also affirmed not to change the guidance
on determining the items that must be presented in
other comprehensive income. That guidance is
contained in other standards that are not being
amended by these new standards.
• The FASB affirmed that reclassifications between
other comprehensive income and net income should
be displayed in the same level of detail that the items
were originally reported.
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FASB/IASB Project on Other
Comprehensive Income
• Timeline for issuing an exposure draft
– The Boards directed the staff to draft an exposure
draft for vote by written ballot.
– The Boards tentatively decided that the exposure
draft should be issued simultaneously with the
FASB’s proposed update on financial instruments
and the IASB’s exposure draft on postemployment
benefits.
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FASB/IASB Project on Other
Comprehensive Income
• At the February 2, 2010 meeting, the Boards discussed the following issues:
– Presentation of the sections of the statement of comprehensive income
– The timeline for the issuance of an exposure draft.
– Presenting the sections of the statement of comprehensive income
The Boards tentatively decided that:
An entity must display total comprehensive income and its components
in a continuous statement of comprehensive income.
The continuous statement of comprehensive income must be displayed
with two sections: profit or loss or net income and other comprehensive
income. An entity reporting comprehensive income is permitted to use
different titles for these sections as long as the meaning is clear.
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FASB/IASB Project on Other
Comprehensive Income
• The current expectation is that an Exposure
Draft will be issued in the second quarter of
2010.
• This project is important because eventually
Other Comprehensive Income will move to the
income statement from the balance sheet and
may have an impact on net margins.
• If and when that happens, we may need to
consider redefining TIER etc to use net margins
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before OCI.
Financial Instruments with
Characteristics of Equity
• This project started in August 1990.
• Made much more complex as a result of financial
innovation.
• The FASB and IASB decided that a perpetual
instrument should be classified as equity. A perpetual
instrument is defined as one that lacks a settlement
requirement and entitles the holder to a portion of the
net assets of the entity in liquidation. Instruments that
are redeemable at the option of the issuer meet that
definition because, although the issuer may choose to
settle the instrument, it cannot be required to do so.36
Financial Instruments with
Characteristics of Equity
• The FASB and IASB also decided that puttable and
mandatorily redeemable instruments should be
classified as one of the following two types, which
should be considered differently in determining
classification:
– An instrument that is puttable or mandatorily redeemable
upon death or retirement of the holder would be classified as
equity. The term retirement is used broadly to include events
such as termination, resignation, or ceasing to be a member
in a cooperative or partnership.
– An instrument that is puttable at the option of the holder or
mandatorily redeemable if specified dates or events other
than death or retirement occur would generally be classified
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as liabilities.
Financial Instruments with
Characteristics of Equity
• The Board discussed and expressed support for a set of draft principles that
could be used to distinguish between equity and liabilities and a related set
of decision rules to operationalize those principles.
• The decision rules are as follows:
– An entity must classify as equity retained earnings and capital contributed without
the contributor receiving a claim against the entity in exchange, even if that entity
has issued no equity instruments.
– An issuer must classify an instrument as a liability if the instrument has a fixed
settlement date or must be settled on the occurrence of an event that is certain to
occur, excluding those instruments described in items 3(a) and 3(b) below.
– An issuer must classify the following other instruments as equity:
• Instruments that the issuer cannot be required to settle before winding up its
operations and distributing all of its assets (regardless of the amount of the claim).
• Instruments that the holder is required to own to do business with or otherwise actively
engage in activities of the issuer and that are redeemable only if the holder dies,
retires, resigns, or otherwise ceases to actively engage in the activities of the issuer.
(This includes holdings, the amounts of which vary based on the volume of business
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transacted by the holder.)
Financial Instruments with
Characteristics of Equity
• Claim Status
All claims against an entity must eventually be
satisfied (although some will not be satisfied until the
entity winds up its affairs and distributes all of its
assets). The term claim status means the order in
which the claims are satisfied. Equity interests as a
group are the claims against an entity with the lowest
claim status. There may be more than one class of
equity instruments, those classes may have different
rights and obligations, and one may have a lower
claim status than another. However, an equity
instrument is never senior to a liability.
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Financial Instruments with
Characteristics of Equity
• On January 18, 2010, the Boards decided not to adopt any of the
approaches they have previously considered. Instead, they directed the staff
to analyze a possible amendment to IAS 32, Financial Instruments:
Presentation.
• The effects of that possible amendment have not yet been specified but the
following are some possibilities:
– A requirement to classify as equity shares puttable only if specified
certain events occur, such as the death or retirement of the holder
– A requirement to separate some puttable shares into equity and liability
components
– A slight relaxation of the provision that to qualify as equity, a financial
instrument involving exchanges of equity instruments for cash must
require an exchange of a fixed number of shares for a fixed amount of
cash.
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Financial Instruments with
Characteristics of Equity
• At the joint meeting on February 18th, the
Boards concluded that the following types of
instruments should be equity in their entirety:
– Perpetual instruments (instruments not required to
be redeemed unless the entity decides to or is
forced to liquidate its assets and settle claims
against the entity) issued by entities without
specified limits to their lives. (That includes both
ordinary and preferred shares.)
– Mandatorily redeemable and puttable instruments
that meet either of the following criteria:
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Financial Instruments with
Characteristics of Equity
i. The instrument’s terms require, or permit the holder
or issuer to require, redemption to allow an existing
group of shareholders, partners, or other participants
to maintain control of the entity when one of them
chooses to withdraw.
ii. The holder must own the instrument in order to
engage in transactions with the entity or otherwise
participate in the activities of the entity, and the
instrument’s terms require, or permit the holder or
issuer to require, redemption when the holder ceases
to engage in transactions or otherwise participate.
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Financial Instruments with
Characteristics of Equity
• All other mandatorily redeemable instruments
(instruments that an entity is required to redeem on a
certain date or on the occurrence of an event that is
certain to occur) should be classified as liabilities.
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Financial Instruments with
Characteristics of Equity
• This issue is critical to rural electric
cooperatives and we have been working
closely with the FASB and the IASB during this
process to ensure that what we classify as
equity today will still be considered equity in the
future.
• The FASB and IASB are expected to issue an
Exposure Draft in the second quarter of 2010
with a final standard in 2011.
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Emission Trading Schemes
• The FASB did not reach any conclusions on the accounting
questions related to initial recognition and measurement of
tradable offsets that are issued to an entity free of charge in a
cap and trade emissions trading scheme.
• The FASB noted that the accounting for assets and liabilities in
an emissions trading scheme involves issues that are also
being discussed in the joint conceptual framework project and
the IASB project to amend International Accounting Standard
(IAS) 37, Provisions, Contingent Liabilities and Contingent
Assets. The Board directed the staff to conduct additional
research to ensure that conclusions the Board may reach on
this project are consistent with conclusions reached on those
other two projects.
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Emission Trading Schemes
• Currently, the FASB anticipates issuing an
exposure draft in the third quarter of 2010.
• The impact of a cap and trade program on rural
electric cooperatives is expected to be material.
• Key questions will be:
– are the attributes intangible assets or may they be
inventory?
– should they be fair valued, and how?
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FASB Project on Disclosure of
Certain Loss Contingencies
• The FASB issued an Exposure Draft, Disclosure of
Certain Loss Contingencies, on June 5, 2008. The
comment period ended on August 8, 2008.
• NRECA filed a comment letter with the FASB,
objecting to certain of the Exposure Draft’s
recommendations.
• On September 24, 2008, the FASB decided on a plan
for redeliberations of its Exposure Draft, Disclosure of
Certain Loss Contingencies. The FASB directed the
staff to prepare an alternative model that will attempt
to address the concerns that certain constituents
raised about the Exposure Draft. This alternative
model will be field tested along with the model in the
Exposure Draft.
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FASB Project on Disclosure of
Certain Loss Contingencies
• At the August 19, 2009 meeting, the FASB began
redeliberations of disclosure requirements for certain
loss contingencies. The FASB decided to initially focus
its deliberations on loss contingencies associated with
litigation and to consider other types of loss
contingencies at a future meeting.
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FASB Project on Disclosure of
Certain Loss Contingencies
• Disclosure Objective
– An entity shall disclose qualitative and quantitative
information about loss contingencies to enable financial
statement users to understand their nature, potential timing,
and potential magnitude.
• Disclosure Principles
– To achieve the above objective, an entity shall consider the
following principles in determining disclosures that are
appropriate for its individual facts and circumstances:
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FASB Project on Disclosure of
Certain Loss Contingencies
– During early stages of a contingency’s life cycle, an entity
shall disclose information (even though its availability may
be limited) to help users understand the nature and potential
magnitude of a loss contingency. In subsequent reporting
periods, disclosure shall be more extensive as additional
information becomes available.
– An entity may aggregate disclosures about similar
contingencies (for example, by class or type) so that the
disclosures are understandable and not too detailed. If an
entity provides disclosures on an aggregated basis, it shall
disclose the basis for aggregation.
50
FASB Project on Disclosure of
Certain Loss Contingencies
• Disclosure Threshold
– The Board decided to maintain the existing requirement to
disclose asserted claims and assessments whose likelihood
of loss is at least reasonably possible.
– The Board also decided that disclosure of certain remote
loss contingencies, due to their nature, potential timing,
or potential magnitude, may be necessary to inform
users about the entity’s vulnerability to a potential
severe impact. An entity will need to exercise judgment
in assessing its specific facts and circumstances to
determine whether disclosure about remote
contingencies is necessary. Factors that an entity may
consider in making this determination include any of51the
following:
FASB Project on Disclosure of
Certain Loss Contingencies
• a. The potential effect on the entity’s operations
• b. The cost to the entity for defending its contentions
• c. The amount of efforts and resources management may have to
devote to resolve the contingency.
– The plaintiff’s amount of damages claimed, by itself, does
not necessarily determine whether disclosure about a
remote contingency is necessary although it could be
one of the factors to be considered in this
determination.
– When assessing the materiality of loss contingencies to
determine whether disclosure is required, the entity shall not
consider the possibility of recoveries from insurance or other
indemnification arrangements.
52
FASB Project on Disclosure of
Certain Loss Contingencies
• Qualitative Disclosures
• For all contingencies that meet the disclosure
threshold, disclose the following:
– Qualitative information to enable users to understand the nature and
risks of a contingency or group of contingencies.
– During early stages of asserted litigation contingencies, disclosure shall
include, at a minimum, the contentions of the parties (for example, the
basis for the claim and the amount of damages claimed by the plaintiff
and the basis for the entity’s defense or a statement that the entity has
not yet formulated its defense). In subsequent reporting periods,
disclosure shall be more extensive as additional information becomes
available, for example, as the litigation progresses toward resolution
and/or if the likelihood and magnitude of loss increase. Furthermore, if
practicable, an entity shall disclose the anticipated timing of, or the next
steps in, the resolution of individually material asserted litigation
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contingencies.
FASB Project on Disclosure of
Certain Loss Contingencies
– For individually material contingencies, the disclosure shall
be sufficiently detailed to enable financial statement users to
obtain additional information from publicly available sources
such as court records. For example, an entity shall disclose
the name of the court or agency in which the proceedings
are pending, the date instituted, the principal parties thereto,
a description of the factual basis alleged to underlie the
proceeding, and its current status.
– When disclosure is provided on an aggregated basis, an
entity shall disclose the basis for aggregation and
information that would enable financial statement users to
understand the nature, potential timing, and potential
magnitude of loss.
54
FASB Project on Disclosure of
Certain Loss Contingencies
• Quantitative Disclosures
• For all contingencies that are at least reasonably
possible, disclose the following:
– Publicly available quantitative information, for example, in
case of litigation contingencies, the amount claimed by the
plaintiff or the amount of damages indicated by the
testimony of expert witnesses
– An estimate of the possible loss or range of loss and the
amount accrued, if any
– If the possible loss or range of loss cannot be estimated, a
statement that an estimate cannot be made and the
reason(s) therefore
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FASB Project on Disclosure of
Certain Loss Contingencies
– Other nonprivileged information that would be relevant to
financial statement users to enable them to understand
and/or assess the possible loss
– Information about possible recoveries from insurance and
other sources only if, and to the extent that it has been
provided to the plaintiff(s) in a litigation contingency, it is
discoverable either by the plaintiff or by a regulatory agency,
or it relates to a recognized receivable for such recoveries. If
the insurance company has either denied or contested the
entity’s claim for recovery, the entity shall disclose that fact.
56
FASB Project on Disclosure of
Certain Loss Contingencies
• For those remote contingencies that meet the
disclosure threshold, disclose the following:
– Publicly available quantitative information, for
example, in case of litigation contingencies, the
amount claimed by the plaintiff or the amount of
damages indicated by the testimony of expert
witnesses
– Other nonprivileged information that would be
relevant to financial statement users to enable them
to understand and/or assess the contingency’s
potential impact.
57
FASB Project on Disclosure of
Certain Loss Contingencies
• Information about possible recoveries from insurance
and other sources only if, and to the extent that it has
been provided to the plaintiff(s) in a litigation
contingency, it is discoverable either by the plaintiff or
by a regulatory agency, or it relates to a recognized
receivable for such recoveries. If the insurance
company has either denied or contested the entity’s
claim for recovery, the entity shall disclose that fact.
58
FASB Project on Disclosure of
Certain Loss Contingencies
• Tabular Reconciliation
– For each period for which a statement of income is
presented, public entities shall disclose reconciliations
by class, in a tabular format, of recognized (accrued)
loss contingencies to include all of the following:
• The carrying amounts of the accruals at the beginning and end of the
period
• Increases (that is, amount accrued during the period) for new loss
contingencies recognized during the period
• Increases for changes in estimates for loss contingencies recognized
in prior periods
• Decreases for changes in estimates for loss contingencies
recognized in prior periods
• Decreases for cash payments or other forms of settlements during
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the period.
FASB Project on Disclosure of
Certain Loss Contingencies
– An entity shall describe the significant activity in the
reconciliation and disclose the line items in the statement of
financial position in which recognized (accrued) loss
contingencies are included. All loss contingencies
recognized in a business combination shall be included in
the reconciliation but shown separately if they have a
different measurement attribute (for example, fair value
versus probable loss amount).
• Scope
• The Board decided that the disclosures shall apply to
all entities except that the tabular reconciliation of
accrued contingencies is not required for nonpublic
60
entities.
FASB Project on Disclosure of Certain Loss
Contingencies
• Reexposure
• The Board decided that the draft standard should be reexposed and that the Exposure Draft should have a 30-day
comment period.
• Effective Date
• The new guidance shall be effective for fiscal years ending after
December 15, 2010, and interim and annual periods in
subsequent fiscal years except that for nonpublic entities the
new guidance shall be effective for the first annual period
beginning after December 15, 2010, and for interim periods
of fiscal years subsequent to the first annual period.
• The Board directed the staff to begin drafting the revised
Exposure Draft.
• 16. The Board expects to issue the Exposure Draft in the 61
second quarter of 2010 that will have a 30-day comment period.
FASB Project on Disclosure of
Certain Loss Contingencies
• Potential Impacts on Rural Electric
Cooperatives:
– Possible disclosure of lawsuit data prior to the time
it would have been recognized under SFAS 5.
– Possible disclosure of environmental regulatory or
litigation actions (pending or threatened).
– Possible disclosure of risks associated with the
regional transmission organization markets.
– Possible disclosure of risks associated with OTC
transactions.
62
– Expect the audit legal letter to take more time.
FASB/IASB Project on Financial
Statement Presentation
• On October 16, 2008, the FASB and IASB
published for public comment a discussion
paper, Preliminary Views on Financial
Statement Presentation. The FASB discussion
paper and the IASB discussion paper are the
same except for differences in style/format. The
comment period ended on April 14, 2009.
63
FASB/IASB Project on Financial
Statement Presentation
• The proposal would require the use of the direct
method cash flow statement.
• This change, if adopted, could have a significant
impact on rural electric cooperatives from the
conversion of existing software to provide the
essential data.
• A benefit may be more timely and accurate
information on cash flows.
• Another impact could be the need to revise
cooperative financial models to accommodate the new
format.
64
FASB/IASB Project on Financial
Statement Presentation
• The single statement of comprehensive income would
still include a subtotal for net income or profit or loss
and a separate section for other comprehensive
income.
• The proposed format would not change existing
requirements that ‘recycle’ items in specified
circumstances from other comprehensive income to
net income or profit or loss.
• This may increase the volatility in rural electric
cooperatives reported earnings, particularly from
transactions subject to SFAS 133 and SFAS 158.
65
FASB/IASB Project on Financial
Statement Presentation
Statement of
Financial Position
Statement of
Comprehensive Income
Statement of
Cash Flows
Business
 Operating assets and
liabilities
 Investing assets and
liabilities
Business
 Operating income and expenses
 Investment income and
expenses
Business
 Operating cash flows
 Investing cash flows
Financing
Financing
Financing income
Financing liability expenses
Financing
 Financing assets
 Financing liabilities
Income taxes
Discontinued operations
Income taxes on continuing
operations business and financing
Discontinued operations net of
tax
Financing asset cash flows
Financing liability cash flows
Income taxes
Discontinued operations
Other comprehensive income
net of tax
66
Equity
Equity
FASB/IASB Project on Financial
Statement Presentation
• At their February 16, 2010 joint meeting, the Boards
continued their deliberations of the proposals in the
Discussion Paper, Preliminary Views on Financial
Statement Presentation.
– Application guidance for analysis of changes in significant
asset and liability line items
The Boards addressed several implementation issues that
relate to the tentative decision made in October 2009 to
require an entity to present an analysis of changes in the
balances of all significant asset and liability line items in the
notes to financial statements (referred to herein as analysis
67
or analyses of changes).
FASB/IASB Project on Financial
Statement Presentation
• At the February meeting, the Boards tentatively decided that the Exposure
Draft will permit an entity to present each analysis of changes with related
information in the topic-specific note disclosure. For example, an analysis of
changes in an entity’s property, plant, and equipment line items should be
presented as part of the entity’s property, plant, and equipment note. In all
cases, each analysis must be accompanied by a narrative explanation of the
changes.
– Will require each analysis of changes reported in the current reporting period to include a
comparative analysis of changes for the prior reporting period(s).
– Will clarify that an entity should always disclose the reconciliations of specific items as
required elsewhere in IFRSs or U.S. GAAP, notwithstanding the factors to be considered in
determining whether the change in an asset or liability should be analyzed in the notes.
– Will clarify that, when preparing a reconciliation of specific items as required elsewhere in
IFRSs or U.S. GAAP, an entity should consider whether the reconciliation reflects the
required components that are part of the analysis of changes.
– Will clarify that an entity should provide disaggregated information for each component of
an analysis of changes. For example, an entity cannot aggregate items that meet the
definition of a remeasurement into one line item.
68
FASB/IASB Project on Financial
Statement Presentation
• At the February joint meeting, the boards directed the
staff to draft an Exposure Draft for vote by written
ballot based on the package of tentative decisions
outlined in that meeting. The plan is to publish that
exposure draft near the end of May 2010.
69
IASB Project on Rate Regulated
Activities
• In December 2008, the IASB added a project
on rate-regulated activities to its agenda. The
project objective is to develop a standard on
rate regulated activities that clarifies whether
regulated entities could or should recognize an
asset or a liability as a result of rate regulation.
• The project is not included in the Memorandum
of Understanding 2006 – 2008 (MoU) on a
Roadmap for Convergence between IFRS and
US GAAP
70
IASB Project on Rate Regulated
Activities
• On July 23, 2009, the IASB issued an Exposure Draft
with a comment deadline of November 20, 2009.
• The Exposure Draft specifically addresses rateregulated activities that meet the following two criteria:
• (a) an authorized body is empowered to establish
rates that bind customers.
• (b) the price established by regulation (the rate) is
designed to recover the specific costs the entity incurs
in providing the regulated goods or services and to
earn a specified return (cost-of-service regulation).
71
IASB Project on Rate Regulated
Activities
• The Exposure Draft provides that when the scope criteria are
met, the entity recognizes regulatory assets and regulatory
liabilities in addition to the assets and liabilities recognized in
accordance with other IFRSs.
• The effect of this requirement is initially to recognize as an
asset (liability) an amount that would otherwise be recognized
in that period in the statement of comprehensive income as an
expense (income).
• On initial recognition and at the end of each subsequent
reporting period regulatory assets and regulatory liabilities are
measured at their expected present value. Regulatory assets
are assessed for impairment when the entity concludes that it is
not reasonable to assume that it will be able to collect sufficient
revenues from its customers to recover its costs.
72
IASB Project on Rate Regulated
Activities
• In particular, this Exposure Draft requires an entity:
– (a) to recognize a regulatory asset or regulatory liability if the
regulator permits the entity to recover specific previously
incurred costs or requires it to refund previously collected
amounts and to earn a specified return on its regulated
activities by adjusting the prices it charges its customers.
– (b) to measure a regulatory asset or regulatory liability at the
expected present value of the cash flows to be recovered or
refunded as a result of regulation, both on initial recognition
and at the end of each subsequent reporting period.
– (c) to provide disclosures that identify and explain the
amounts recognized in the entity’s financial statements
arising from a regulatory asset or regulatory liability and
assist users of those financial statements to understand the
73
nature and financial effects of its rate-regulated activities.
IASB Project on Rate Regulated
Activities
• An entity shall recognize:
– (a) a regulatory asset for its right to recover
specific previously incurred costs and to earn a
specified return, or
– (b) a regulatory liability for its obligation to
refund previously collected amounts and to pay
a specified return when it has the right to
increase or the obligation to decrease rates in
future periods as a result of the actual or
expected actions of the regulator.
74
IASB Project on Rate Regulated
Activities
• On initial recognition and at the end of each
subsequent reporting period, an entity shall
measure a regulatory asset or regulatory liability
at its expected present value.
• An entity shall reflect the following elements in the
measurement of the expected present value of a
regulatory asset or a regulatory liability:
– (a) an estimate of the future cash flows that will arise in
a range of possible outcomes.
– (b) an estimate of the probability of each outcome
occurring.
– (c) the time value of money, represented by the current
market risk-free rate of interest.
– (d) the price for bearing the uncertainty inherent in the
75
regulatory asset or regulatory liability.
IASB Project on Rate Regulated
Activities
• An entity shall determine a range of possible outcomes and estimate the
cash flows that it will recover or refund for each outcome. It shall also
estimate the probability that each outcome will occur, including the
probability that in the entity’s future rates the regulator will allow the entity to
include the actual costs incurred or require the entity to include amounts
collected.
• Interest rates used to discount the estimated cash flows shall reflect
assumptions that are consistent with those inherent in the estimated cash
flows. In other words, the discount rates used shall not reflect risks for which
the estimated cash flows have been adjusted.
• However, the fact that the estimated future cash flows have been adjusted
for the probability of different outcomes occurring does not eliminate the
need to include in the discount rate the price for bearing the uncertainty
inherent in the regulatory asset or regulatory liability. The price for
uncertainty relates to the entity’s estimates of both the amount and the
timing of the cash flows and the probabilities of different outcomes.
76
IASB Project on Rate Regulated
Activities
• In some cases, a regulator requires an entity to capitalize, as
part of the cost of self-constructed property, plant and
equipment or internally generated intangible assets, amounts
that would otherwise be recognized as regulatory assets in
accordance with this [draft] IFRS.
• After the construction or generation is completed, the resulting
capitalized cost is the basis for depreciation or amortization and
unrecovered investment for rate-making purposes. In such
cases, the amounts included in the cost of the asset for ratemaking purposes shall also be included in its cost for financial
reporting purposes, even if IAS 16 Property, Plant and
Equipment, IAS 23 Borrowing Costs or IAS 38 Intangible
Assets would not permit the entity to do so.
• Those amounts shall be included in the cost of the asset only if
their inclusion in the cost for rate-making purposes is highly
probable.
• Otherwise, they shall be accounted for as regulatory assets77in
accordance with this [draft] IFRS.
IASB Project on Rate Regulated
Activities
• At each reporting date, an entity shall consider the net
effect on its rates of its regulatory assets and
regulatory liabilities arising from the actions of each
regulator for the periods in which the regulation is
expected to affect rates.
• The entity shall determine whether it is reasonable to
assume that rates set at levels that will recover the
entity’s costs can be collected from customers.
• In making this determination, the entity shall consider
estimated changes in the level of demand or
competition during the recovery period.
78
IASB Project on Rate Regulated
Activities
• If an entity concludes that it is not reasonable to assume that it
will be able to collect sufficient revenues from its customers to
recover its costs, this is an indication that the cash-generating
unit in which the regulatory assets and regulatory liabilities are
included may be impaired.
• Accordingly, the entity shall test that cash-generating unit for
impairment in accordance with IAS 36 Impairment of Assets.
• An entity shall recognize any impairment loss determined in
accordance with IAS 36 and shall allocate it to the assets of the
cash-generating unit in accordance with that standard. An entity
shall reflect the impairment loss allocated to each regulatory
asset by reducing the entity’s estimate of the future cash flows
that it will receive from the regulatory asset as required by
paragraphs 13(a) and 14 of this [draft] IFRS.
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IASB Project on Rate Regulated
Activities
• An entity shall present in the statement of
financial position current and non-current
regulatory assets and regulatory liabilities,
without offsetting, separately from other assets
and liabilities.
• An entity may present a net regulatory asset or
a net regulatory liability for each category of
asset or liability subject to the same regulator.
80
IASB Project on Rate Regulated
Activities
• Disclosures:
– An entity shall disclose information that:
• (a) enables users of the financial statements to
understand the nature and the financial effects of rate
regulation on its activities; and
• (b) identifies and explains the amounts of regulatory
assets and regulatory liabilities, and related income and
expenses, recognized in its financial statements.
– An entity shall disclose the fact that some or all of
its operating activities are subject to rate regulation,
including a description of their nature and extent.
81
IASB Project on Rate Regulated
Activities
• For each set of operating activities subject to a
different regulator, an entity shall disclose the
following information:
– (a) if the regulator is a related party (as defined in IAS 24
Related Party Disclosures), a statement to that effect,
together with an explanation of why the regulator is related
to the entity.
– (b) an explanation of the approval process for the rate
subject to regulation (including the rate of return), including
information about how that process affects both the
underlying operating activities and the specified rate of
return.
– (c) the indicators that management considered in concluding
that such operating activities are within the scope of the
Exposure Draft, if that conclusion requires significant
82
judgment.
IASB Project on Rate Regulated
Activities
• Significant assumptions used to measure the
expected present value of a recognized
regulatory asset or regulatory liability including:
– (i) the supporting regulatory action, for example, the
issue of a formal approval for costs to be recovered
pending a final ruling at a later date and that date,
when known, or
– (ii) the entity’s assessment of the expected future
regulatory actions.
– (e) the risks and uncertainties affecting the future
recovery of the regulatory asset or final settlement
of the regulatory liability, including the expected
83
timing.
IASB Project on Rate Regulated
Activities
• An entity shall disclose the following information for
each category of regulatory asset or regulatory liability
recognized that is subject to a different regulator:
– (a) a reconciliation from the beginning to the end of the
period, in tabular format unless another format is more
appropriate, of the carrying amount in the statement of
financial position of the regulatory asset or regulatory
liability, including at least the following elements:
• the amount recognized in the statement of comprehensive income
relating to balances from prior periods collected or refunded in the
current period.
• the amount of costs incurred in the current period that were
recognized in the statement of financial position as regulatory assets
or regulatory liabilities to be recovered or refunded in future periods.
84
IASB Project on Rate Regulated
Activities
• other amounts that affected the regulatory asset or regulatory liability,
such as items acquired or assumed in business combinations or the
effects of changes in foreign exchange rates, discount rates or
estimated cash flows. If a single cause has a significant effect on the
regulatory asset or regulatory liability, the entity shall disclose it
separately.
– (b) the remaining period over which the entity expects to
recover the carrying amount of the regulatory asset or to
settle the regulatory liability.
– (c) the amount of financing cost included in the cost of selfconstructed property, plant and equipment and internally
developed intangible assets in the current period in
accordance with paragraph 16 that would not have been
capitalized in accordance with IAS 23.
85
IASB Project on Rate Regulated
Activities
• An entity shall apply this Exposure Draft to
regulatory assets and regulatory liabilities that
exist at the beginning of the earliest
comparative period presented when it applies
this [draft] IFRS.
• The entity shall reflect any adjustments required
as a result of applying this Exposure Draft in the
opening balance of retained earnings of that
comparative period.
86
IASB Project on Rate Regulated
Activities
• At the February 2010 meeting, the Board began
its discussions on the responses received on its
Exposure Draft. At this meeting, the Board
discussed the summary analysis of the
comments received. The Board reviewed the
background of the issue, a summary analysis of
the respondent demographics and a summary
of the primary technical issues.
87
IASB Project on Rate Regulated
Activities
• The Board discussed the logistical
considerations impacting this project and
reviewed the potential paths forward for this
project including a project timetable prepared
by the staff.
• The Board did not make any tentative decisions
on specific aspects of the project, except that
the Board decided tentatively to finalise the
transition relief for first-time adopters.
88
IASB Project on Rate Regulated
Activities
• The transition relief is expected to be included
in the omnibus Improvements to IFRSs due to
be issued in April 2010.
• The Board directed the staff to continue its
research and analysis on this project and to
focus on the key issue of whether regulatory
assets and regulatory liabilities exist in
accordance with the current Framework for the
Preparation and Presentation of Financial
Statements and whether they are consistent 89
with other current IFRSs.
IFRS Small and Medium Size
Entities (SME)
• On July 9, 2009, the International Accounting
Standards Board (IASB) published a new standard
compiling a new International Financial Reporting
Standard (IFRS) for Small and Medium Size Entities
(SME).
• Currently, private companies in the United States can
prepare their financial statements in accordance with
U.S. GAAP as promulgated by the Financial
Accounting Standards ("FASB"); an other
comprehensive basis of accounting ("OCBOA"), such
as cash- or tax-basis; or full IFRS, among others.
Now, with the issuance of IFRS for SMEs, U.S. private
90
companies have an additional option.
IFRS Small and Medium Size
Entities (SME)
• In May, 2008, the AICPA’s Governing Council
recognized the IASB as an accounting body.
• The amendment to Appendix A of AICPA rules
202 and 203 give AICPA members the option to
use IFRS as an alternative to US GAAP.
91
IFRS Small and Medium Size
Entities (SME)
• SME: Small and medium-sized entities are
entities that:
• (a) do not have public accountability, and
• (b) publish general purpose financial
statements for external users.
• Examples of external users include owners who
are not involved in managing the business,
existing and potential creditors, and credit rating
agencies.
92
IFRS Small and Medium Size
Entities (SME)
• An entity has public accountability if:
– (a) its debt or equity instruments are traded in a
public market or it is in the process of issuing such
instruments for trading in a public market (a
domestic or foreign stock exchange or an over-thecounter market, including local and regional
markets), or
– (b) It holds assets in a fiduciary capacity for a broad
group of outsiders as one of its primary businesses.
This is typically the case for banks, credit unions,
insurance companies, securities brokers/dealers,
mutual funds and investment banks.
93
IFRS Small and Medium Size
Entities (SME)
• Some entities may also hold assets in a fiduciary
capacity for a broad group of outsiders because they
hold and manage financial resources entrusted to
them by clients, customers or members not involved in
the management of the entity.
• However, if they do so for reasons incidental to a
primary business (as, for example, may be the case
for travel or real estate agents, schools, charitable
organizations, Cooperative enterprises requiring a
nominal membership deposit, and sellers that
receive payment in advance of delivery of the goods
or services such as utility companies), that does not
94
make them publicly accountable.
IFRS Small and Medium Size
Entities (SME)
• A subsidiary whose parent uses full IFRSs, or
that is part of a consolidated group that uses
full IFRSs, is not prohibited from using this
IFRS in its own financial statements if that
subsidiary by itself does not have public
accountability.
• If its financial statements are described as
conforming to the IFRS for SMEs, it must
comply with all of the provisions of this IFRS.
95
IFRS Small and Medium Size
Entities (SME)
• In May 2008, the AICPA governing Council voted to recognize
the IASB as an accounting body for purposes of establishing
international financial accounting and reporting principles. This
amendment to Appendix A of AICPA Rules 202 and 203 gives
AICPA members the option to use IFRS as an alternative to
U.S. GAAP. As such, a key professional barrier to using IFRS
and therefore IFRS for SMEs has been removed. CPAs may
need to check with their state boards of accountancy to
determine the status of reporting on financial statements
prepared in accordance with IFRS for SMEs within their
individual state. Any remaining barriers may come in the form of
unwillingness by a private company’s financial statement users
to accept financial statements prepared under IFRS for SMEs,
and a private company’s expenditure of money, time and effort
96
to convert to IFRS for SMEs.
IFRS SME
Differences with US GAAP
• IFRS for SMEs is an approximately 230 page, significantly reduced and
simplified version of full IFRS. In creating IFRS for SMEs, the IASB
eliminated many accounting topics that are not generally relevant to private
companies (for example, earnings per share and segment reporting). Being
based on full IFRS and missing many accounting topics, IFRS for SMEs
therefore differs from U.S. GAAP in a variety of areas. Some of the key
differences under IFRS for SMEs are:
• Disclosures are simplified in a number of areas including pensions, leases
and financial instruments.
• LIFO is prohibited.
• Goodwill and indefinite life intangible assets are amortized over a period
not exceeding ten years.
• Depreciation is based on a components approach.
• A simplified temporary difference approach to income tax accounting.
• Reversal of impairment charges, if certain criteria are met, is allowed.
• Accounting for financial assets and liabilities makes greater use of cost.
97
IFRS SME
Measurement of Assets and Liabilities
• At initial recognition, an entity shall measure assets
and liabilities at historical cost unless this IFRS
requires initial measurement on another basis such as
fair value.
• An entity measures basic financial assets and basic
financial liabilities, as defined in Section 11 Basic
Financial Instruments, at amortized cost less
impairment except for investments in non-convertible
and non-puttable preference shares and non-puttable
ordinary shares that are publicly traded or whose fair
value can otherwise be measured reliably, which are
measured at fair value with changes in fair value 98
recognized in profit or loss.
IFRS SME
Measurement of Financial Assets and Liabilities
• An entity generally measures all other financial
assets and financial liabilities at fair value, with
changes in fair value recognized in profit or
loss, unless the IFRS SME standard requires or
permits measurement on another basis such as
cost or amortized cost.
99
IFRS SME
Measurement of Nonfinancial Assets
• Most non-financial assets that an entity initially
recognized at historical cost are subsequently
measured on other measurement bases.
• For example:
– (a) An entity measures property, plant and equipment at the
lower of depreciated cost and recoverable amount.
– (b) An entity measures inventories at the lower of cost and
selling price less costs to complete and sell.
– (c) An entity recognizes an impairment loss relating to nonfinancial assets that are in use or held for sale.
• Measurement of assets at those lower amounts is
intended to ensure that an asset is not measured at an
amount greater than the entity expects to recover from
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the sale or use of that asset.
IFRS SME
Nonfinancial Assets at Fair Value
• For the following types of non-financial assets,
this IFRS permits or requires measurement at
fair value:
• (a) investments in associates and joint
ventures that an entity measures at fair value
• (b) investment property that an entity
measures at fair value
• (c) agricultural assets (biological assets and
agricultural produce at the point of harvest)
that an entity measures at fair value less
101
estimated costs to sell
IFRS SME
Nonfinancial Liabilities
• Most liabilities other than financial liabilities are
measured at the best estimate of the amount
that would be required to settle the obligation at
the reporting date.
102
IFRS SME
Complete Set of Financial Statements
• A complete set of financial statements of an entity shall include
all of the
• following:
– (a) a statement of financial position as at the reporting date.
– (b) either:
• (i) a single statement of comprehensive income for the reporting period
displaying all items of income and expense recognized during the period
including those items recognized in determining profit or loss (which is a
subtotal in the statement of comprehensive income) and items of other
comprehensive income, or
• (ii) a separate income statement and a separate statement of
comprehensive income. If an entity chooses to present both an income
statement and a statement of comprehensive income, the statement of
comprehensive income begins with profit or loss and then displays the items
of other comprehensive income.
– (c) a statement of changes in equity for the reporting period.
– (d) a statement of cash flows for the reporting period.
103
– (e) notes, comprising a summary of significant accounting policies and
other explanatory information.
IFRS SME
Income Statement Options
• If the only changes to equity during the periods for which
financial statements are presented arise from profit or loss,
payment of dividends, corrections of prior period errors, and
changes in accounting policy, the entity may present a single
statement of income and retained earnings in place of the
statement of comprehensive income and statement of changes
in equity.
• If an entity has no items of other comprehensive income in any
of the periods for which financial statements are presented, it
may present only an income statement, or it may present a
statement of comprehensive income in which the ‘bottom line’ is
labeled ‘profit or loss’.
• Because of the requirement to include comparative amounts in
respect of the previous period for all amounts presented in the
financial statements, a complete set of financial statements
means that an entity shall present, as a minimum, two of each
104
of the required financial statements and related notes.
IFRS SME
Cooperative Equity
• Members’ shares in Cooperative entities and
similar instruments are equity if:
– (a) the entity has an unconditional right to refuse
redemption of the members’ shares, or
– (b) redemption is unconditionally prohibited by local
law, regulation or the entity’s governing charter.
• An entity shall reduce equity for the amount of
distributions to its owners (holders of its equity
instruments), net of any related income tax
benefits.
105
IFRS SME
Cooperative Equity
• Sometimes an entity distributes assets other than
cash as dividends to its owners.
• When an entity declares such a distribution and has
an obligation to distribute non-cash assets to its
owners, it shall recognize a liability. It shall measure
the liability at the fair value of the assets to be
distributed.
• At the end of each reporting period and at the date of
settlement, the entity shall review and adjust the
carrying amount of the dividend payable to reflect
changes in the fair value of the assets to be
distributed, with any changes recognized in equity 106
as
adjustments to the amount of the distribution.
IFRS SME
Pension Accounting
• IAS 19 requires that a defined benefit obligation should always
be measured using the projected unit credit actuarial method.
For cost-benefit reasons, the IFRS for SMEs provides for some
measurement simplifications that retain the basic IAS 19
principles but reduce the need for SMEs to engage external
specialists. Therefore, the IASB decided:
– (a) If information based on the projected unit credit calculations of IAS 19
is already available or can be obtained without undue cost or effort,
SMEs must use that method.
– (b) If information based on the projected unit credit method is not
available and cannot be obtained without undue cost or effort, SMEs
must apply an approach that is based on IAS 19 but does not consider
future salary progression, future service or possible mortality during an
employee’s period of service. This approach still takes into account life
expectancy of employees after retirement age. The resulting defined
benefit pension obligation reflects both vested and unvested benefits.
107
IFRS SME
Pension Accounting
• The IFRS for SMEs clarifies that
comprehensive valuations would not normally
be necessary annually. In the interim periods,
the valuations would be rolled forward for
aggregate adjustments for employee
composition and salaries, but without changing
the turnover or mortality assumptions.
108
IFRS SME
Pension Accounting
• One of the principal complexities of IAS 19 is
recognition of actuarial gains and losses. Under
IAS 19, an entity can choose among several
options including deferral and amortization of
actuarial gains and losses. Under the IFRS
SME standard, only the following options are
available:
– (a) recognize actuarial gains and losses in full in
profit or loss when they occur.
– (b) recognize actuarial gains and losses in full
directly in other comprehensive income when they
109
occur.
IFRS SME
Pension Accounting
• Past service cost relating to employee service in prior
periods arises when a new defined benefit plan is
introduced or an existing plan is changed. IAS 19
requires past service cost to be deferred and
amortized as an expense (or, in the case of benefit
reductions, as income) on a straight-line basis over
the average period until the benefits become vested.
To the extent that the benefits vest immediately when
a plan is introduced or changed, the past service cost
is recognized in profit or loss immediately.
• The IFRS for SMEs requires immediate recognition of
all past service cost (including that related to unvested
110
benefits), without any deferral.
IFRS SME
Government Grants
• The IFRS for SMEs requires a single, simplified
method of accounting for all government grants.
All grants are recognized in income when the
performance conditions are met or earlier if
there are no performance conditions.
• All grants are measured at the fair value of the
asset received or receivable. IAS 20 permits a
range of other methods that are not allowed by
the IFRS for SMEs.
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IFRS SME Implementation
Group
• On 18 March 2010, the Trustees of the IFRS Foundation issued
a Press Release inviting nominations of suitable candidates for
membership of the SMEIG. Nominations are due by 30 April
2010.
The SMEIG will have between approximately 12 and 20
members appointed by the IASCF Trustees. Members serve on
a voluntary, non-compensated basis. The Trustees have
appointed Paul Pacter (the IASB's Director of Standards for
SMEs) as the Chairman of the SMEIG. The SMEIG will conduct
its work via email correspondence.
For further details and membership specifications, see
http://go.iasb.org/SMEIG.
112
IFRS SME Implementation
Group
• The SMEIG will have two main responsibilities:
– To consider implementation questions raised by users of the IFRS for
SMEs, decide which ones merit published implementation guidance,
reach a consensus on what that guidance should be, develop proposed
guidance in the form of questions and answers (Q&As) that would be
made publicly available to interested parties on a timely basis, and
request the IASB to review the Q&As before issuance. The Q&As are
intended to be non-mandatory guidance that will help those who use the
IFRS for SMEs to think about specific accounting questions.
– To consider, and make recommendations to the IASB on, the need to
amend the IFRS for SMEs:
• for implementation issues that cannot be addressed by Q&As; and
• for new and amended IFRSs that have been adopted since the IFRS
for SMEs was issued or last amended.
113
AICPA IFRS for SMEs-US GAAP
Comparison Tool
• The American Institute of CPAs (AICPA) staff have developed an IFRS for
SMEs–US GAAP Comparison Tool, which is being added to collaboratively
by those who use the tool. AICPA technical staff monitor and review the
additions. Here is an excerpt of the AICPA's description:
• The purpose of this Wiki is to provide a detailed and comprehensive
comparison of the International Accounting Standards Board's International
Financial Reporting Standard for Small-and Medium-Sized Entities ('IFRS for
SMEs') with corresponding requirements of United States generally
accepted accounting principles ('US GAAP'). But this is more than just a
comparison resource, it is a Wiki. That means it is a collaborative, ongoing
work in progress for anyone to contribute and use.
• You can access the AICPA IFRS for SMEs – US GAAP Comparison Tool at
http://wiki.ifrs.com/
114
AICPA and FAF on Private
Company GAAP
• On Dec. 17, 2009 the American Institute of Certified Public Accountants
(AICPA) and the Financial Accounting Foundation (FAF) today announced
the establishment of a “blue-ribbon panel” to address how U.S. accounting
standards can best meet the needs of users of private company financial
statements.
• The panel will provide recommendations on the future of standard setting for
private companies, including whether separate, stand alone accounting
standards for private companies are needed. Members of the panel will
represent a cross-section of financial reporting constituencies, including
lenders, investors and owners as well as preparers, auditors, and regulators.
Joining the FAF and AICPA as sponsors of the panel is the National
Association of State Boards of Accountancy (NASBA).
115
AICPA and FAF on Private
Company GAAP
• The Panel will comprehensively review the
current system of standard setting for private
companies in the U.S., including the following
matters:
– Who are the actual users of private company
financial statements and how do they use GAAP
financial statements in their decision making?
– What is the key, decision-useful information that the
various users need from GAAP financial
116
statements?
AICPA and FAF on Private
Company GAAP
– Are current GAAP financial statements meeting
those needs? Why or why not?
– Are the benefits of GAAP financial statements
outweighing the costs of preparing those
statements for private companies?
– How does standard setting for private companies in
the U.S. compare to standard setting in other
countries, both those that have adopted IFRS for
Small and Medium-Size Entities and those that
have not?
117
AICPA and FAF on Private
Company GAAP
– To the extent that current GAAP is not meeting user
needs in a cost-beneficial manner, what are some
possible alternatives for private company standards
(e.g., separate, stand-alone standards; base-level
standards for all entities with additional disclosure
requirements for public companies) and what are
the implications for standard-setter structure and/or
processes?
118
RUS Memo on Accounting for
Renewable Energy Credits
• The original RUS proposal would have treated
RECs as intangible assets
• After getting feedback from borrowers and
NRECA, RUS deferred accounting guidance
until more information was available
• In 2008, RUS created a working group to
recommend the appropriate accounting
treatment.
119
RUS Memo on Accounting for
Renewable Energy Credits
• The REC working group consisted of
– RUS technical accounting and auditing staff
– Staff from several G&Ts
– NRECA
– CFC
• The working group began in June 2008
• The result was a letter issued by RUS on
accounting for RECs on April 16, 2009
120
RUS Memo on Accounting for
Renewable Energy Credits
• RUS recommends establishing Account 159,
Renewable Energy Credits, for recording the purchase
and sale of RECs.
• REC inventory should be valued using either weighted
average, FIFO or specific identification.
• Amounts received for the sale of RECs should be
recorded as revenue.
• RECs should be removed from inventory at their
carrying value (if any) and charged against expense at
the time of sale.
121
RUS Memo on Accounting for
Renewable Energy Credits
• RUS recommended establishing Account 459 Revenue from
the Sale of RECs as part of Other Operating Revenues.
• RUS also recommended establishing Account 559 Renewable
Energy Credit Expenses
• RECs used to satisfy state or regional renewable portfolio
standards should be removed from inventory at cost and
expensed if the RECs have a positive value.
• If an REC is accounted for on a unit basis with no associated
cost, the utilization of an REC will reduce the number available
for sale but will not result in a recordable income statement
transaction.
122
Accounting for R&S Plan
Contributions
• With regard to the 2010 base contribution there
are three options:
– Do nothing and record pension expense when the
contribution is paid in 2010.
– Prepay the contribution in 2009. In this case you would
record a prepaid asset in 2009 upon payment and you
would amortize the prepaid asset to pension expense
over 12 months beginning in January 2010.
– Defer revenue from 2009 until 2010 (or later years as
well). Create a deferred credit under SFAS 71 and
recognize the deferred revenue in 2010 or later years to
offset some or all of the pension expense in those years.
123
Accounting for R&S Plan
Contributions
• Note that the only year for revenue deferral is
2009. RUS will not approve a revenue deferral
plan which uses revenue from a subsequent year.
• RUS requires the following in order to approve a
revenue deferral plan:
– A detailed description of the plan and the
specific accounting journal entries. For a onetime economic event, the description must
include the event that gave rise to the deferral,
the amount of the deferral, and the timeframe
over which the deferral will be amortized into
124
income.
Accounting for R&S Plan
Contributions
– The journal entries required include:
• an entry recording the deferred revenue;
• an entry recording the subsequent amortization of the deferred
revenue; and
• an entry segregating the cash equivalent of all revenues deferred in a
special fund.
– A resolution from the cooperative's board of directors stating that
the cooperative is aware of the potential impact on its tax exempt
and "cooperative" statuses and that it will accept the responsibility
for implementation of the plan;
– A resolution from the cooperative’s board of directors stating that
the cash equivalent of all revenues deferred will be segregated in a
special fund until such time as a like amount is subsequently
amortized into revenue; and
– Approval from the state regulatory commission in those states in
which a commission has jurisdiction over the cooperative’s ratemaking activities.
• You may not defer so much revenue that you fail to meet TIER
in 2009.
125
Accounting for R&S Plan
Contributions
• Additional items:
– The amount to be deferred each year is limited to the
35% increase in the base contribution
– You may defer revenue to future years beyond 2010
– You may defer revenue from any source – operating or
nonoperating, but when you reverse the entry in
subsequent years, it must be put back in the same
accounts.
– Instead of segregating the cash on your balance sheet
with an accounting entry, you may deposit the revenue
to be deferred in the cushion of credit account. In this
case as long as the balance in your cushion of credit
account exceeds the amount of revenue deferred from
2009, you will be deemed to have complied with the
126
cash equivalent requirement.
Accounting for R&S Plan
DRC Contribution
• RUS has indicated that they will give NRECA a
letter which will be a blanket approval of a SFAS
71 deferral for the pension expense involving any
DRC contributions that may be required. (NRECA
will know by March 2010)
• You will not have to request RUS approval for the
DRC deferral, but you will need to maintain the
same documentation which is required for the
revenue deferral plans
– Board resolution
– Auditor approval
– PSC approval if required
127
Accounting for R&S Plan
DRC Contribution
• RUS has indicated that the proper amortization
period is the average remaining service life of the
R&S plan as a whole.
– That is, each cooperative will have the same
amortization period.
– The average remaining service life changes but it is
currently about 14 years.
• Note that the deferral of the pension expense
under SFAS 71 does not change the cash funding
requirement.
128
FASB Accounting Standards Update
2010-09 Subsequent Events
• This Update requires all entities to evaluate
subsequent events up to the date the financial
statements are “available to be issued”.
• This extends the necessity to consider subsequent
events beyond the traditional end of audit field work
and may pose complications for those cooperatives
which encounter material subsequent events post
audit.
• Subsequent events must also be considered when an
entity revises its financial statements for either
correction of an error or retrospective application of
129
U.S. GAAP.
FASB Standards Codification
• The Codification is the single source of authoritative
nongovernmental U.S. generally accepted accounting
principles (US GAAP). The Codification is effective for
interim and annual periods ending after September
15, 2009. All previous level (a)-(d) US GAAP
standards issued by a standard setter are superseded.
Level (a)-(d) US GAAP refers to the previous
accounting hierarchy. All other accounting literature
not included in the Codification will be considered
nonauthoritative.
130
FASB Standards Codification
• The Codification is the result of a major 5-year
project involving more than 200 people from
multiple entities. The Codification structure is
significantly different from the structure of
previous standards.
131
FASB Accounting Standards
Codification
• The FASB had three primary goals in
developing the Codification:
– 1. Simplify user access by codifying all authoritative
US GAAP in one spot.
– 2. Ensure that the codified content accurately
represented authoritative US GAAP as of July 1,
2009.
– 3. Create a codification research system that is up
to date for the released results of standard-setting
activity.
132
FASB Accounting Standards
Codification
• NRECA has a professional subscription to the
Codification, so if you need a cite or research
about and accounting matter, please let me
know and I’ll be happy to assist you.
133
The New Form 990
• Final Revised Form 990 – Background
• Final Revised Form 990 – Important
Governance, Compensation, and Related
Organization Provisions
– Compensation of Officers, Highest Compensated
Employees, and Independent Contractors
– Governance, Management, and Disclosure
– Business Relationships and Related Organizations
– Financial Statement Audit Oversight
– Form 990 – Penalties and Public Availability
Senate Finance Committee
Letter
• May 29, 2007
– Senator Max Baucus (Chairman)
– Senator Charles Grassley (Ranking Member)
• Transparency and Openness of Charities
• Form 990 Update Needed
– Top Priority
Dates
• Draft Revised Form 990
– Released June 14, 2007
– Comments Due by September 14, 2007
– NRECA filed a comment letter
• Final Revised Form 990
– Released December 23, 2008
– 2008 Tax Year (Returns Filed in 2009)
Guiding Principles
• Enhancing Transparency to Provide Service
and Public Realistic Picture of Organization and
Operations, with Basis for Comparison to other
Organizations
• Promoting Compliance by Accurately Reflecting
Operations and Use of Assets, so Service may
Efficiently Assess Risk of Noncompliance
Guiding Principles
• Minimizing Burden on Organizations
– Asking Questions in Manner Relatively Easy to
Answer
– Without Imposing Unwarranted Additional
Recordkeeping or Information Gathering Burdens
Corporate Officers, Directors,
Key Employees and Highest
Compensated Employees
• Current
– All Corporate Officers, and Directors, Regardless of
Compensation
– Key Employees Exceeding $150,000
– Five Highest Compensated Employees Exceeding
$100,000
– Reportable Compensation from cooperative and
related organizations (Sch R)
Corporate Officers, Directors,
Key Employees and Highest
Compensated Employees
• Former
– Corporate Officers, Key Employees, and Highest
Compensated Employees with Reportable
Compensation (Form W-2) Exceeding $100,000
– Directors and Trustees with Reportable
Compensation (i.e. Form 1099) Exceeding $10,000
– Compensation from the cooperative and related
organizations (Sch R)
Corporate Officers, Directors,
Key Employees and Highest
Compensated Employees
• Final Instructions for Form 990, Part VII,
Section A, Line 1a, Column (C)
– “… Check the ‘Former’ box with respect to former
highest compensated employees only if all four
conditions below apply. … The individual was
reported (or should have been reported, applying
the instructions in effect for such years) on any of
the organization’s Form 990, … for one or more of
the five prior years as one of the five highest
compensated employees. …”
Corporate Officers, Directors,
Key Employees and Highest
Compensated Employees
– “… Transition rule for non-section 501(c)(3)
organizations. Organizations other than section
501(c)(3) organizations do not report any former
highest compensated employees on Form 990. …”
• 2008 Tax Year Only?
Key Employee
• The Glossary to the draft Form 990 defined a Key
Employee as someone who meets all of the following
tests:
– Receives reportable compensation exceeding $150,000
from the organization and related organizations
– The individual has:
• Responsibilities, power or influence over the organization as a whole
similar to those of officers, directors or trustees
• Manages a discrete segment or activity of the organization that
represents 10% or more of the activities, assets, income or expenses
of the organization compared to the organization as a whole
• Or has or shares authority to control or determine 10% or more of the
organizations capital expenditures, operating budget, or
compensation for employees
Key Employee
• Is one of the 20 employees with the highest reportable compensation
from the organization that satisfy the $150,000 test and responsibility
test
Corporate Officers, Directors,
Key Employees and Highest
Compensated Employees
• The term “Reportable Compensation” is
described in the draft instructions as
– Box 5 of Form W-2
– Box 7 of Form 1099-MISC
• Usually, Reportable Compensation Threshold
Includes Compensation from
– The cooperative and
– related organizations
Corporate Officers, Directors,
Key Employees and Highest
Compensated Employees
• Disclosures required by the core Form 990
– Name and Title
– No personal address (Privacy, Safety, and
Security Concerns)
– Average Hours per Week
– Positions
– Reportable compensation from the
cooperative and related organizations
Corporate Officers, Directors,
Key Employees and Highest
Compensated Employees
• Complete Schedule J if:
– The cooperative pays a former director, corporate
officer, key employee or former highly compensated
employee
– Has any current director, key employee or highly
compensated employee with reportable and other
compensation exceeding $150,000
– Or any former or current director, key employee or
highly compensated employee that receives
compensation from an unrelated organization for
services rendered to the cooperative
Independent Contractors
• Five Highest Compensated Independent
Contractors Receiving more than $100,000
– Name and business address
– Description of services
– Compensation
• Independent contractors typically include:
– Any person that provides services to the
organization but is not treated as an employee
Schedule J Compensation
• Questions
– Did the cooperative pay for first-class or charter travel?
– Did the cooperative pay for travel for companions?
– Did the cooperative make tax indemnification and gross-up
payments?
– Does the person have a discretionary spending account?
– Did the cooperative provide a housing allowance or personal
residence?
– Did the cooperative make a payment for business use of a
personal residence?
– Did the cooperative pay for health or social club dues or
fees?
– Did the cooperative pay for personal services (Maid,
Chauffeur, Chef)?
Schedule J Compensation
• If “Yes,” then
– Follow Written Policy? If “No,” then explain
– For example, did the cooperative require prior
substantiation?
• “may raise … transparency concerns”
Schedule J Compensation
• The draft instructions require the cooperative to
answer if the determination of compensation of
corporate officers (CEO, CFO, etc) includes:
– A review and approval by a governing body or compensation
committee, provided that persons with a conflict of interest
with respect to the compensation arrangement at issue were
not involved.
– Use of data as to comparable compensation for similarly
qualified persons in functionally comparable positions at
similarly situated organizations.
– Contemporaneous documentation and recordkeeping with
respect to the deliberations and decisions regarding the
compensation arrangement.
Schedule J Compensation
• In summary, with regard to corporate officer
compensation, did the cooperative:
– Have a Compensation Committee?
– Retain an Independent Compensation
Consultant?
– Review Form 990 of Other Organizations?
– Have a Written Employment Contract?
– Perform a Compensation Survey or Study?
– Obtain Board or Committee Approval?
Schedule J Compensation
• Did the cooperative provide for any person:
– A severance or change of control payment?
– supplemental nonqualified retirement plan
and/or equity-based compensation
arrangement?
• If “Yes,” then List the Person and Amount
Schedule J Compensation
• Compensation for Schedule J is based on total
compensation which includes:
– Reportable Compensation
• Base
• Bonus and Incentive
• Other
– Deferred Compensation
– Nontaxable Benefits
Rationale for Governance
Questions in the New Form 990
• “the existence of an independent governing
body and well-defined governance and
management policies and practices increases
the likelihood that an organization is operating
in compliance with federal tax law”
Form 990 questions
• Is there a “right answer”?
– Governance and Management Policy Questions
Become “De Facto” Legal Requirements
– Certain Answers Lead to “Presumption of
Wrongdoing”
• In the new Form 990, the cooperative will have
– An opportunity to explain answers
– Continuation schedules provided for Schedules J
(Compensation), N (Liquidation, Termination,
Dissolution, or Significant Disposition of Assets), R
(Related Organizations and Unrelated Partnerships)
Governing Body and
Management
• Voting Members of Governing Body
– Number?
– Number that are “Independent”?
• The Draft Form 990 Glossary defines an Independent Director
as a person:
– That was not compensated as an officer or other employee of the
organization or related organization.;
– Who did not receive total compensation or other payments exceeding
$10,000 as an independent contractor. Note: this threshold does not
include reimbursement of expenses or compensation earned as a
director or trustee; and
– Who was not involved (or a family member was not involved) in a
transaction with the organization or a related organization required to be
reported on Schedule L.
Governing Body and
Management
• Family or business relationships between corporate
officers?
• Did the cooperative
–
–
–
–
Delegate management to management company?
Make significant changes to organizational documents?
Make a material diversion of assets?
Have any business relationship with some of its members?
• The organization is not required to provide information about the
relationships identified for lines 5b through 5e if it is unable to secure the
information after making a reasonable effort to obtain the information. An
example of a reasonable effort would be for the Form 990 preparer, or an
officer eligible to sign the Form 990, to distribute a questionnaire annually to
each person listed in Part II, Section A. The questionnaire should require the
name and title, date and signature of each person reporting this information.
Governing Body and
Management
• Are the cooperative’s Board decisions subject
to member or other approval?
– If “Yes,” then describe
• Does the cooperative “contemporaneously”
document governing body meetings and
actions?
– If “No,” then explain
Governing Body and
Management
• Is a copy of the Form 990 provided to the Board
before it is filed?
• What process does the cooperative use for the
review of the Form 990
• Is there any corporate officer or director that
cannot be reached at the cooperative’s mailing
address?
– If “Yes,” then the cooperative must provide that
persons name and mailing address
Policies
• Does the cooperative maintain a written conflict
of interest policy?
– If “Yes,” then does the cooperative make
annual disclosure of potential conflicts and
regularly and consistently monitor and
enforce policy?
– If “Yes,” then the cooperative should describe
the monitoring and enforcement process
Policies
• Does the cooperative have a written
whistleblower policy?
• Does the cooperative maintain a written
document retention and destruction policy?
• Does the cooperative’s process of determining
officer and key employee compensation include
independent consultants, comparability data,
and contemporaneous substantiation?
– If so, describe
Policies
• Did the cooperative invest in, contributed assets
to, or participated in a joint venture with a
taxable entity?
– If “Yes,” then does the cooperative have a
written policy or procedure to evaluate tax
law compliance and safeguard the
cooperative’s tax exemption?
Policies
• “Reasonable Effort” Information
– Grants or Other Assistance from Cooperative
– Business Relationships and Doing Business with
Cooperative
– Director Independence
– Relationships with Other Officers, Directors, Trustees, or
Key Employees
– Compensation from Related Organizations
• Hours Devoted to Cooperative
– Preparation, Travel, Attendance, Follow Up
– Board Meetings; Education and Training Events; State,
Regional, and National Association Meetings; Etc.
– Communications with Members regarding Cooperative
– Not Sleep or Other Activities Unrelated to Meeting or Event
Policies
• Sample Electric Cooperative Whistleblower
Policy
• Sample Electric Cooperative Records
Management Policy
• Sample Electric Cooperative Conflict of Interest
Policy
• Cooperative.Com
https://www.cooperative.com/general/resour
ces/Form990Resources/Form990Resources.
htm
Disclosure
• The cooperative must disclose states where
Form 990 must be filed.
• The cooperative’s application for exempt status
and Form 990 must be available for public
inspection
– Available through the cooperative’s own
website?
– Available through another website?
– Available upon request?
Disclosure
• The cooperative should describe whether and
how the following are made available to the
public
– Governing documents
– Conflict of interest policy
– Financial statements
• The cooperative must provide the name,
address, and telephone number of the person
in possession of the cooperative’s books and
records.
Entity Doing Business With
• Final Instructions for Form 990, Part IV, Line
28c
– “… The organization should review carefully the
instructions to Schedule L … before answering these
questions and completing Schedule L …”
• Final Instructions for Form 990 Schedule L,
Part IV
– “An interested person for purposes of Schedule L, Part
IV, is …, or any of the following: … An entity (other
than a tax-exempt organization under section 50(c)) of
which a current or former officer, director, trustee, or
key employee listed in Form 990, Part VII, Section A,
was serving at the time of the transaction as …”
Entity Doing Business With
• Electric Generation and Transmission
Cooperative (G&T), Statewide Association of
Electric Cooperatives (Statewide), or other
Entity
– If Exempt under section 501(c), then Not an “Entity”
– If Nonexempt (Taxable), then may be an “Entity”
• Form 990 Schedule L, Part IV
– Reporting Thresholds:
• Payments exceed $10,000 or 1% of total revenue unless total
payments exceeded $100,000 or the payment is to a family
member of an officer, director, trustee or key employee and
exceeded $10,000
Two Directors From the
Organization Serving on the
Board of Another Entity Sch L
• If G&T or Statewide is a “Business,” and if Two or More
Electric Distribution Cooperative (Cooperative) Officers,
Directors, Trustees or Key Employees Serve as Director
for G&T, Statewide, or Other Business
– Individuals may have “Business Relationship”
• Assume G&T or Statewide is a “Business”?
– Minimal Reporting Required
– Increase Transparency
• Explain Relationship between Cooperative and G&T or
Statewide?
– “Business Relationship” Sufficient
– Increase Transparency
– Minimize Questions, Scrutiny, or Criticism of Relationship
Schedule L Transactions with
Interested Persons
• The cooperative must disclose whether any current or
former corporate officer, director, trustee or key
employee has a business relationship with the
cooperative
• For this purpose, “doing business with” excludes
goods and services offered on the same terms to the
general public.
• The cooperative must also disclose if any of these
persons have a family member that has a business
relationship with the cooperative?
– That is, is the family member affiliated with any
entity doing business with the cooperative?
Schedule L Transactions with
Interested Persons
• If “Yes,” then Complete Schedule L
–
–
–
–
Name of Interested Person
Relationship
Amount of Transaction
Description of Transaction
• The Draft Instructions provide “the organization is not required
to provide information about the relationships identified for this
purpose if it is unable to secure the information after making a
reasonable effort to obtain the information. An example of a
reasonable effort would be for the Form 990 preparer, or an
officer eligible to sign the Form 990, to distribute a
questionnaire annually to each person listed in Part II, Section
A. The questionnaire should require the name and title, date
and signature of each person reporting this information.”
Schedule L Questionnaire
• A Sample Electric Cooperative Internal
Revenue Service Form 990 Questionnaire to
be used for determining possible conflicts of
interest and other information necessary to
filing a complete Form 990 is available on
coopertive.com
– Updated Periodically
– Current and Former Officers, Directors, Trustees, Key
Employees, and Highest Compensated Employees
– Form 990 Questions, Instructions, and Definitions
– 2008 and Future Tax Years
Schedule R Related
Organizations
• Does the cooperative
– Own a disregarded entity such as an LLC or
a partnership?
– Is the cooperative “related” to another entity?
– Does the cooperative control any “related
organization”?
• If “Yes,” then the cooperative must complete
Schedule R
“Related Organization”
• The Draft Form 990 Glossary defines a
“Related Organization” as:
– An organization which controls the
cooperative (Parent)
– An organization controlled by the cooperative
(Subsidiary)
– An organization controlled by same persons
as the cooperative (Brother/Sister)
“Control”
• The Draft Form 990 Glossary defines “Control”
– Own More than 50% of Taxable Corporation,
Partnership, Limited Liability Company, or Trust
– Partner or Member of Taxable Partnership or
Limited Liability Company
– Appoint Majority of Directors of Tax-Exempt
Organization
– Share Majority of Tax-Exempt Organization
Directors
Schedule R Related
Organizations
• Types of Related Organizations
– Disregarded entities
– Related tax-exempt organizations
– Related taxable partnerships, corporations,
and trusts
– Unrelated taxable partnerships
Schedule R Related
Organizations
• Did the cooperative have any transactions with
a related organization?
– Interest, annuities, royalties, rent?
– Gifts, grants, contributions, loans?
– Transfers of assets, cash, property?
– Performance of services?
– Sharing of assets or employees?
– Expense reimbursements?
Schedule R Related
Organizations
• If “Yes,” then the cooperative may have to
disclose (based on certain threshold criteria)
– The organization’s name
– The type of transaction
– The amount involved
Core Form 990 Disclosures
about Preparation of Financial
Statements
• Were the cooperative’s financial statements
– Compiled or reviewed by independent
accountant?
– Audited by independent accountant?
• If “Yes,” then did the audit committee of the
Board
– Oversee audit, review, compilation?
– Select independent accountant?
Unreasonable Failure to Include
Information
• If there is an “Unreasonable” failure by the
cooperative to include required information or
otherwise show correct information, then the
cooperative may have to pay a penalty:
– $20 Per Day so long as the failure continues,
not to exceed the smaller of $10,000 or 5% of
gross receipts
– If the cooperative’s gross receipts exceed
$1,000,000, then the penalty becomes $100
per day so long as the failure continues, not
to exceed $50,000
Unreasonable Failure to Include
Information
• Congressional Intent
– Provide Information “Timely and
Completely”
– Provide Information to Enforce Tax Laws
• Incomplete Return
– Service’s Ability to Perform Duties
“Seriously Hindered”
– Public’s Right to Obtain Information
“Impaired”
Unreasonable Failure to Include
Information
• “Use of a Paid Preparer Does Not Relieve the
Organization of its Responsibility to File a
Complete and Accurate Return”
• The IRS will send a letter indicating the time
period by which the cooperative must furnish
the correct information or face a penalty for
failure to comply
Willful Failure to Supply
Information
• “Willful” Failure to Supply Information
– “In Addition to Other Penalties Provided by
Law”
– Guilty of Misdemeanor
• Upon Conviction
– Fined Not More than $100,000,
– Imprisoned Not More than 1 Year, and/or
– Assessed Costs of Prosecution
Public Availability of Form 990
• IRS Form 990
– Available for Public Inspection
– Provide Copy upon Request
• Penalties
– Unreasonable Failure to Comply
– Willfully Furnishing to Public Known Fraudulent or
False Material Information (and Prison)
• Internet
– Guidestar.org
– Foundationcenter.org
2009 Changes to Form 990
Part IV
• Line 11: Includes more detailed trigger
questions to help the filer determine whether it
needs to complete Parts VI, VII, VIII, IX, or X of
Schedule D.
• Line 12a (new): Asks whether the filer was
included in consolidated, independent audited
financial statements for the tax year.
• Line 28: Simplifies trigger questions for
Schedule L, Part IV.
• Line 38 (new): Asks whether the filer
completed Schedule O, as required.
2009 Changes to Form 990
Part V
• Line 1a: Clarifies that the filer must include on
this line the number of its employees reported
on Forms 1099, 1098, 5498, and W-2G by its
reporting agents.
• Line 2a: Clarifies that the filer must include on
this line the number of its employees reported
on a Form W-3 by its reporting agents.
• Lines 1c, 7g, and 7h: Clarifies that the filer
should leave these blank if questions are not
applicable
2009 Changes to Form 990
Part VI
• Line 2: Clarifies that, if two officers, directors, trustees, or key employees of
the filer serve in similar positions with another tax-exempt organization, that
involvement does not create a reportable business relationship between the
two.
• Line 4: Explains that the filer must report significant changes to its
organizational documents on its Form 990, Part VI and in Schedule O, rather
than in a letter to EO Determinations.
• Line 5: Modifies standard for determining if diversion is material and must
be reported on line 5.
• Line 11: Describes the conditions the filer must meet to answer Yes when it
e-mails board members a link to its Form 990.
• Line 15: Defines conflict of interest for compensation arrangements.
• Line 18: Explains when a filer may check the box for Another’s website
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2009 Changes to Form 990
Part VII
Clarifies that the current five highest compensated employees to be reported in the Section A
table do not include officers, directors, trustees, or key employees.
Clarifies that the key employee responsibility test may be met at any time during the tax year.
Clarifies that if a person is a key employee for only part of the tax year, the filer must report that
person’s entire compensation for the calendar year ending with or within the tax year.
Explains how compensation to foreign persons from the filing organization or a related
organization should be reported in the Section A table.
Explains when and how compensation from unrelated organizations to the filing organization’s
officers, directors, trustees, key employees, and highest compensated employees must be
reported in Part VII.
Explains when and how compensation to leased employees must be reported in Section A.
Explains how compensation paid by common paymasters and other reporting and payroll
agents should be reported in Section A.
Clarifies that the filer must report all compensation paid by a related organization during the
calendar year to listed persons, even if the other organization was related for only a portion of
the tax year.
Clarifies (in compensation table) that employee deferrals to 401(k) and 403(b) plans must be
reported in Part VII, columns (D) and (E), and in Schedule J, column B(I).
2009 Changes to Form 990
Glossary
• Includes new definitions of audit, fair market
value, and principal officer.
• Includes revised definitions of-– Control: Clarifies means by which the filer can
control or be controlled by another organization, for
purposes of determining the filer’s related
organizations.
– Related organization: Clarifies that related
organizations may include governmental units and
other government entities.
2009 Changes to Form 990
Schedule D
• Part X: Asks the filer to complete Part X if its
financial statements for the tax year included a
footnote addressing its liability for uncertain tax
positions.
• Parts XI-XIII: Clarifies that if the filer was
included in consolidated financial statements
(not in separate financial statements),
completing Parts XI-XIII is optional.
2009 Changes to Form 990
Schedule L
• Part IV
– Explains how to report joint ventures with interested
persons as business transactions.
• Clarifies that governmental units and
instrumentalities are not interested persons.
2009 Changes to Form 990
Schedule R
• Explains how the filer can control or be
controlled by another organization for purposes
of determining related organizations; includes
several new examples of control.
• Part V, line 2, column (c): Asks the filer to
describe in Schedule O the method used to
determine the value of services, cash, and
other assets reported in column (c).
Tower Attachments
• The IRS initially ruled in PLR 9816027 that
antenna tower pole attachments were excluded
from unrelated business taxable income under
Code section 512(b)(3).
• In order to reach this conclusion, the IRS
considered the tower to be real property and
that it was permanently attached to the land
and could not be severed.
Tower Attachments
• On November 9, 1998, the IRS notified the
coop that it was reconsidering its initial ruling.
• Subsequently, the IRS modified PLR 9816027
by concluding that the tower, because it is
considered to be “other tangible property” under
regulations section 1.48-1(d) is not real
property.
• Consequently, the exclusion of lease income
from real property from the unrelated business
income tax does not apply.
Tower Attachments
• In other words, rental income from a tower is
considered to be from tangible personal
property and is subject to the unrelated
business income tax under Code section 511.
• Note that a cooperative can deduct allocable
costs in arriving at unrelated business taxable
income.
• These costs include tax depreciation which can
be based on an accelerated method.
Tower Attachments
• All other operating costs can be allocated to the
tower in the ratio of the towers cost to the cost
of all other plant and equipment.
• Allocation of costs typically creates a net
operating loss.
• In order to claim the loss, the cooperative must
file a Form 990-T, otherwise the loss is not
available for carryforward purposes.
• In general, net operating losses can be carried
back two years and carried forward twenty
years.
How Much is a Trillion Dollars?
One Million Dollars = 100 Packets
of $10,000 Bills
$100 Million Dollars Fits on a
Standard Pallet
One Billion Dollars fits on 10
Standard Pallets
A Trillion Dollars aka One Thousand
Billion aka One Million Million
5000 Pallets = $500 Billion
US National Debt of $11 Trillion (March
2009)
5000 Pallets Stacked 22 Rows High
US National Debt of $12.9 Trillion (March 2010)
How Much is a Trillion?
• Picture a stack of $100 bills.
• It might surprise you to know that it only takes a stack four
inches high to be worth $100,000. So $1,000,000 would be a
stack of $100 bills 40 inches tall.
• How about a Billion? Well, you would have to stack $100 bills
up to the top of the Empire State Building...twice...in order to
reach a Billion.
• So to picture $1.25 Trillion (the Fed’s MBS purchases)
represented by a stack of $100 bills - that stack would be 850
miles high. If you could turn that stack on its side and were
able to drive alongside it, it would take you longer than 14
hours to reach the end. If you laid those $100 bills down side
by side, they would travel around the world 50 times. We're
talking about a lot of money here.
If This Were A Normal Recovery
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Employment would already be at a new high, not 8.4 million shy of the old
peak.
The level of real GDP would already be at a new cycle high, not almost 2%
below the old peak.
Consumer confidence would be closer to 100 than 50.
Bank credit would be expanding at a 14% annual rate, not contracting by that
pace.
The Fed would certainly not have a $2.3 trillion balance sheet
And, the government deficit would not be running in excess of 10% of GDP or
twice the ratio that FDR ever dared to run in the 1930s.
If this were a normal cycle, then there would be a ‘clean’ 5-6 months’ supply of
homes on the market, not the 21 months overhanging as is the case now when
all the shadow inventory is included from the foreclosure pipeline.
If this were a normal cycle, then the funds rate would not be near zero and one
in six Americans would not be either unemployed or underemployed.
If this were a normal cycle, then mortgage applications for new home
purchases would not be down 13.9% year-over-year (just reported for the week
of March 12) on top of the already depressing 29.4% detonating trend of a year
ago.
The government would not control 80% of the housing market, two out of three
domestic automakers, and have bailed out all the remaining large banks and
investment banks.
Summary
• As far as Walls Street is concerned, the Recession is
Dead… Long Live the Recession?
• Consumer weakness will likely continue for some time
and consumers account for 70% of the economy
• Businesses are a wild card
• Housing bounce won’t last
• Banks not out of the woods yet
• Commercial real estate trouble to continue
• Significant chance of a double dip recession
• Higher interest rates coming down the pike
• Unknown cost of significant government programs
• Sovereign systemic risk increasing
Contact Information
Russ Wasson
Director of Tax, Finance and Accounting Policy
National Rural Electric Cooperative Association
4301 Wilson Blvd.
Mail Code EP11-253
Arlington, VA 22203-1860
Voice work: (703) 907-5802
Mobile: (225) 939-1298
Mobile: (703) 402-2510
Fax: (703) 907-5517
email: [email protected]
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