Supplemental Information for the Accounting, Tax and...

Supplemental Information for the Accounting, Tax and RUS

Update Web Conference (January 26, 2010)

Supplemental Information for the Accounting, Tax and RUS Update Web Conference

Purpose The purpose of this document is to supplement the presentation discussed in the January 26, 2010 Accounting, Tax and RUS Update web conference. This document details many of the FASB, IASB, and RUS accounting standards updates that have occurred since the July 2009 Accounting, Finance, and Tax conference. It also reviews some important tax requirements that impact electric cooperatives. Sources The sources for this information contained in this document are listed below. Financial Accounting Standards Board (FASB) website and standards http://www.fasb.org International Accounting Standards Board (IASB) website and standards http://www.iasb.org Rural Utilities Services (RUS) http://www.usda.gov/rus/ Internal Revenue Service (IRS) website and standards http://www.irs.gov/ Contact: Russ Wasson Executive 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 [email protected]

http://www.fasb.org/�

http://www.iasb.org/�

http://www.usda.gov/rus/�

http://www.irs.gov/�


Table of Contents FIN 48 Accounting for Uncertainty in Income Taxes:

An Interpretation of SFAS 109 ..................................................... 4

FASB/IASB Project on Postretirement Benefit Obligations

Including Pensions (Phase 2) ....................................................... 6

FASB/IASB Project on Leases ...................................................... 7

FASB/IASB Project on Financial Instruments with

Characteristics of Equity ............................................................. 8

FASB/IASB Project on Emission Trading Schemes .......................... 10

FASB Project on Disclosure of Certain Loss Contingencies ............... 11

FASB/IASB Project on Financial Statement Presentation .................. 13

IASB Project on Rate Regulated Activities ..................................... 15

IASB Project on Small and Medium Size Entities (SMEs) ................. 20

Accounting for R&S Plan Contributions ......................................... 25

RUS Memo on Renewable Energy Credits ...................................... 27

The IRS Form 990 .................................................................... 28

Form 1120-POL ........................................................................ 36


FIN 48 Accounting for Uncertainty in Income Taxes: An Interpretation of SFAS 109 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 tax-exempt entities and disclosure modifications for nonpublic enterprises. 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:

o The nature of the uncertainty o The nature of the event that could occur in the next 12 months that would

cause the change o 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. 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 taxes. 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.


What happens if a tax-exempt rural electric cooperative determines that it has an uncertain tax position in a key element of its 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?


FASB/IASB Project on Postretirement Benefit Obligations Including Pensions (Phase 2) This new project on measurement, known as “Phase 2” is expected to last for several years. While the ED on Postretirement Benefits and Pensions does not affect the NRECA multi-employer plan, it is quite possible that developments with respect to measurement in the Phase 2 project may have an impact. The FASB will take the lead in addressing the following issues: How the reporting of an employer’s obligations associated with participation

in a multiemployer plan might be improved. The Board expressed tentative support for the staff’s recommendation that phase 2 initially focus on improving disclosures in the notes to financial statements, pending the staff’s additional analysis of reasons for that recommendation (that is, the staff’s rationale for initially focusing on disclosure rather than recognition and measurement of plan obligations).

If we end up with footnote disclosure only, that would be ideal since that is basically what we have now. However, the observation that all changes would move directly through earnings could be problematic if the FASB intends that the fair value of changes in plan assets and liabilities be divided up among the plan participants in some manner. The FASB is waiting to see the outcome of the IASB on this project before proceeding. IAS 19 requires an entity to account for its proportionate share of the defined benefit obligation, plan assets, and costs associated with the plan in the same way as for a single-employer defined benefit plan. However, IAS 19 provides an exemption from defined benefit accounting when sufficient information is not available. In that case, the entity applies defined contribution accounting and discloses that fact. This means that the entity may not recognize its share of some plan liabilities in its financial statements.


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. 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 lease accounting. 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-of-use asset at cost. Cost equals the present value of the lease payments discounted using the lessee’s incremental borrowing rate. 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 first half of 2010 with a final standard in 2011.


FASB/IASB Project on Financial Instruments with Characteristics of Equity This project started in August 1990 was 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. 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 as liabilities.

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:

o 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).


o 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 transacted by the holder.)

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. 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 first half of 2010 with a final standard in 2011.


FASB/IASB Project on 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. Currently, the FASB anticipates issuing an exposure draft in the first half 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?


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. 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. The FASB decided on the following disclosure objective: An entity shall disclose qualitative and quantitative information about the loss contingency to enable a financial statement user to understand the nature of the contingency and its potential timing and magnitude. The Board decided on the following broad principles for disclosures about loss contingencies: Disclosures about litigation contingencies should focus on the contentions of the

parties, rather than predictions about the future outcome. Disclosures about a contingency should be more robust as the likelihood and

magnitude of loss increase and as the contingency progresses toward resolution. Disclosures should provide a summary of information that is publicly available

about a case and indicate where users can obtain more information. The Board decided that entities should not consider the possibility of recoveries from insurance or indemnification arrangements when assessing whether a contingency should be disclosed. Regarding quantitative disclosure requirements, the Board directed the staff to develop an approach that would focus on disclosure of nonprivileged quantitative information that would be relevant to making an estimate of the potential loss, for consideration by the Board at a future meeting. The Board decided not to require entities to disclose information about settlement negotiations.


The Board decided to require disclosure about possible recoveries from insurance and other sources if and to the extent that the information has been provided to the plaintiff in discovery. The Board discussed the effective date of any final guidance on this project and decided not to rule out the possibility that it could be effective for fiscal years ending after December 15, 2009. The potential impacts on rural electric cooperatives are: 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. 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. 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. 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.


How Financial Statements May Look in the Future

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 assets • Financing

liabilities

Financing Financing income

• Financing liability expenses

Financing • Financing asset

cash flows • Financing

liability cash flows

Income taxes

Income taxes on continuing operations business and financing

Income taxes

Discontinued operations

Discontinued operations net of tax

Discontinued operations

Other comprehensive income net of tax

Equity Equity


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. On July 23, 2009, the IASB issued an Exposure Draft with a comment deadline of November 20, 2009. The Exposure Draft specifically addresses rate-regulated 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).

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. 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 nature and financial effects of its 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.

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 regulatory asset or

regulatory liability. 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. 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 rate-making 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 assets in accordance with this [draft] IFRS. 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. 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. 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. 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.


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 judgment.

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 timing. 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:

o the amount recognized in the statement of comprehensive income relating to balances from prior periods collected or refunded in the current period.

o 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.

o 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 self-constructed 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.

The IASB received 145 comment letters, many from electric utilities in the US supporting the proposed accounting (for the most part) of the Exposure Draft.


The most frequent criticism was the valuation of regulatory assets and liabilities. The major accounting firms and non-US entities did not agree that a separate standard was necessary, arguing that the concept of a regulatory asset or liability was already permissible under the IASB Conceptual Framework. 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.


IASB Project on Small and Medium Size Entities (SMEs) On July 9, 2009, the International Accounting Standards IASB(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 companies have an additional option. 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. 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. 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-the-counter 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.

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 make them publicly accountable. 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 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.

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 non-financial 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 the sale or use of that asset. 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.


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:

o (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

o (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. (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 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. 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 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.


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.


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 35% increase in the pension expense in those years.

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 one-time 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 income.

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 rate-making activities. You may not defer so much revenue that you fail to meet TIER in 2009. 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 cash equivalent requirement. 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

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.


RUS Memo on 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. 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 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. 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.


The IRS Form 990 This section discusses the important governance and compensation provisions of the new IRS Form 990. Compensation of Officers, Highest Compensated Employees, and Independent Contractors 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 (Schedule

R) Former: Corporate Officers, Key Employees, and Highest Compensated Employees with

Reportable Compensation (From 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)

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. …” “… 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? What is a Key Employee? The Glossary to the 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:

o Responsibilities, power or influence over the organization as a whole similar to those of officers, directors or trustees

o 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


o Or has or shares authority to control or determine 10% or more of the organizations capital expenditures, operating budget, or compensation for employees

Is one of the 20 employees with the highest reportable compensation from the organization that satisfy the $150,000 test and responsibility test

What is “reportable compensation”? The term “Reportable Compensation” is described in the 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

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

Schedule J: 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

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


The 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.

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?

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. Compensation for Schedule J is based on total compensation which includes: Reportable Compensation

o Base o Bonus and Incentive o Other

Deferred Compensation Nontaxable Benefits

Governance, Management, and Disclosure 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)


Voting Members of Governing Body Number? Number that are “Independent”?

The 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.

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. 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.

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? o If “Yes,” then the cooperative must provide that person’s name and

mailing address


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 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?

o If so, describe 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? “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

The following sample policies are on the cooperative.com below: Sample Electric Cooperative Whistleblower Policy Sample Electric Cooperative Records Management Policy Sample Electric Cooperative Conflict of Interest Policy

https://www.cooperative.com/InterestAreas/governance/Pages/Form990.aspx You can also go to cooperative.com, select Interest Areas , then Governance and finally select Form 990.

https://www.cooperative.com/InterestAreas/governance/Pages/Form990.aspx�


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 o Available through the cooperative’s own website? o Available through another website? o Available upon request?

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. Schedule 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

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?


If “Yes,” then Complete Schedule L Name of Interested Person Relationship Amount of Transaction Description of Transaction

The 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.” 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

Financial Statement Audit Oversight The following are the 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?

Form 990 – Penalties and Public Availability 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


The Congressional intent of these penalties are to: Provide Information “Timely and Completely” Provide Information to Enforce Tax Laws

Incomplete Returns: Service’s Ability to Perform Duties “Seriously Hindered” Public’s Right to Obtain Information “Impaired”

“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: “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

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 sources Guidestar.org Foundationcenter.org


Form 1120-POL Under federal election law, a corporation, including an electric cooperative, may not contribute to federal candidates or to a federal political action committee. In some states, however, an electric cooperative may contribute to state or local candidates and political action committees. If an exempt electric cooperative contributes its own funds (as opposed to transferring contributions from members, directors, or employees) to a state or local candidate, then it seems the cooperative is subject to the tax described in Internal Revenue Code section 527(f)1) and Treasury Regulation 1.527-6 and must file Form 1120-POL. Likewise, if the cooperative contributes its own funds to a state or local political action committee, and if the committee uses the funds for campaign purposes, then it seems the cooperative is subject to the tax. In both situations, and regardless of whether a political action committee files IRS Form 1120-POL, it seems the cooperative must file Form 1120-POL. Taxable income is essentially net investment income reduced by deductions for salaries, rents, and similar costs applicable to the political functions. The tax is computed on the greater of the amount of the political contribution or net investment income.

Supplemental Information for the Accounting, Tax and...

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