The Impact of FASBIASBAICPARUS Standards, Form 990 and

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The Impact of FASBIASBAICPARUS Standards, Form 990 and Powered By Docstoc
					   The Impact of FASB/IASB/AICPA/RUS
Standards, Form 990 and Visualizing a Trillion
                  Dollars



      REMA Financial Managers
            Conference
          April 16, 2010
         Bloomington, MN
                    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                                                        2
• 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 tax-
  exempt entities and disclosure modifications for
  nonpublic enterprises.                               3
                         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
                                                      4
                       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.




                                                           5
                        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
                                                            6
  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.
                                               7
                     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?


                                                8
                   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.

                                              9
                     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 an10

  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;

                                                      11
                       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.

                                                      12
                        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.
                                                        13
   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.


                                                       14
   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.


                                                      15
   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.

                                                    16
            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?

                                                       17
          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.
                                             18
      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.
                                                  19
      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.
                                                 20
       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
                                                 21
  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.

                                             22
        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
                                                                        23
     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.
                                                             24
  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
  lease accounting.                             25
    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-of-
  use asset at cost. Cost equals the present
  value of the lease payments discounted using   26
  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.


                                                 27
     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.

                                                      28
     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.


                                                    29
       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.
                                                                         30
    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
  before OCI.                                   31
          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.32
          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
                                                               33
    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
          transacted by the holder.)                                                           34
         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.
                                                      35
              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.
                                                                             36
         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:          37
       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.
                                                    38
         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.




                                                     39
        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.
                                                 40
       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.

                                                              41
     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?

                                                     42
      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.                                      43
      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.

  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          44
  magnitude.
     FASB Project on Disclosure of
      Certain Loss Contingencies
• 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.
                                                            45
     FASB Project on Disclosure of
      Certain Loss Contingencies
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.

A final standard is expected in the second quarter of 2010.
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
                                                                              46
years ending after December 15, 2009.
     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.
                                                       47
  – 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.



                                              48
     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.                                           49
     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.
                                                       50
           FASB/IASB Project on Financial
              Statement Presentation
           Statement of             Statement of                           Statement of
         Financial Position      Comprehensive Income                      Cash Flows
Business                      Business                            Business
 Operating assets and         Operating income and expenses      Operating cash flows
  liabilities                  Investment income and              Investing cash flows
 Investing assets and        expenses
  liabilities

Financing                     Financing                           Financing
                              Financing income
 Financing assets            Financing liability expenses       Financing asset cash flows
 Financing liabilities                                           Financing liability cash flows
                              Income taxes on continuing
Income taxes                  operations business and financing   Income taxes

Discontinued operations       Discontinued operations net of      Discontinued operations
                              tax

                              Other comprehensive income
                              net of tax
                                                                                              51
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
    or analyses of changes).                                      52
       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.                                         53
    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.




                                                     54
     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                                           55
     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 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).
                                                        56
     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.
                                                                57
    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
                                                                  58
     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.
                                                59
    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
    regulatory asset or regulatory liability.               60
      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.


                                                                                61
     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 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 assets62  in
  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.
                                                      63
     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.
                                                               64
   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.

                                                65
   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.
                                                             66
    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
     judgment.                                                    67
    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
                                                        68
    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.
                                                                            69
 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 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.                    70
   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.
                                                71
  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.


                                              72
  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.
                                             73
  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 74
  with other current IFRSs.
  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
                                                 75
  with other current IFRSs.
       IFRS Small and Medium Size
             Entities (SME)
• 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
                                                     76
  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.




                                          77
      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.
                                                 78
      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-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.                  79
       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
                                                        80
  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.
                                             81
        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
  to convert to IFRS for SMEs.                                  82
                     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.

                                                                          83
            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 84
  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.



                                                  85
            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.                     86
              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
                                                87
  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.




                                                   88
             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.
                                                                         89
   – (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 90
  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.                                       91
                  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 as  92
  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.  93
                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.


                                             94
                 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    95
    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
                                                        96
  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.
                                              97
       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    98
  http://go.iasb.org/SMEIG.
         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.
                                                                      99
            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/




                                                                       100
            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).



                                                                        101
        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          102
    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?
                                                103
      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?



                                                  104
    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.
                                           105
     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
                                                  106
     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.
                                                   107
      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.

                                                             108
         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.
                                                        109
         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 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
                                                   110
     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 rate-
     making activities.
• You may not defer so much revenue that you fail to meet TIER
  in 2009.                                                 111
         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
    cash equivalent requirement.                         112
       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
                                                113
  – PSC approval if required
       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.

                                                           114
     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
                                                       115
  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.
                                                    116
    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.




                                               117
     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.
                                                     118
     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.




                                               119
           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
             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).
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
•   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: russell.wasson@nreca.coop
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