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

The Impact of FASB/IASB/AICPA/RUS Standards, Form 990 and Visualizing a Trillion Dollars Florida Statewide Accounting Group Meeting Ocala FL May 21, 2010

There is a lot going on! • FIN 48 Accounting for Uncertainty in Income Taxes – An Interpretation of SFAS 109 • FASB Project Disclosures About Employer’s Participation in a Multiemployer Plan • SFAS 141 Business Combinations • SFAS 157 Fair Value Measurements • FASB/IASB Project on Leases • FASB/IASB Project on Other Comprehensive Income • FASB/IASB Project on Financial Instruments with Characteristics of Equity • FASB/IASB Project on Emission Trading Schemes • FASB Project on Disclosure of Certain Loss Contingencies • FASB/IASB Project on Financial Statement Presentation • IASB Project on Rate Regulated Activities • IASB Project on SMEs • AICPA and FAF on Private Company GAAP • RUS memo on Renewable Energy Credits • Accounting for R&S plan contributions • Subsequent Events • FASB Accounting Standards Codification • Form 990 Update • 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.

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

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.

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 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.

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?

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.

FIN 48 • The schedule will require a concise description of each uncertain tax position in sufficient detail so that the Service can determine the nature of the issue. • The sufficiency of a description will depend on the taxpayer’s particular facts and the nature of the underlying transaction. • As currently contemplated, this concise description will include the rationale for the position and a concise general statement of the reasons for determining that the position is an 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;

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.

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.

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.

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.

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.

FASB Project on Disclosures of Employers’ Participation in a Multiemployer Plan • At the April 14, 2010 meeting, the Board deliberated on the disclosure requirements of an employer’s participation in a multiemployer plan. The Board decided on the following: • The Board agreed on the staff’s recommendation for an employer to disclose both quantitative and qualitative information about its participation in a multiemployer plan. This will inform the financial statement users about the employer’s commitment to the plan and the effect of future cash flows. The proposed disclosures are derived largely from the agreement between the employer and the plan. Additionally, some of the disclosure requirements are based on information that can be obtained by the employer from the plan under the requirements of the Pension Protection Act of 2006.

FASB Project on Disclosures of Employers’ Participation in a Multiemployer Plan • Such disclosures might include information such as: • The plan’s minimum funding level • The participant’s withdrawal liability • The cash flow and earnings assumptions embodied in the plan

FASB Project on Disclosures of Employers’ Participation in a Multiemployer Plan • The Board agreed to make the disclosure requirements effective prospectively. The Board agreed to propose in the Exposure Draft that the new guidance should be effective for fiscal years ending after December 15, 2010, except that for nonpublic entities the new guidance should be effective for the first annual period beginning after December 15, 2010. • The Board directed the staff to draft an Exposure Draft of a proposed Accounting Standards Update for vote by written ballot. • The Board decided that the Exposure Draft should be exposed for a 60-day comment period and directed the staff to solicit comments from the constituents that may be affected by the final standard.

FASB Project on Disclosures of Employers’ Participation in a Multiemployer Plan • The Board has directed the staff to begin drafting a proposed Accounting Standards Update. The staff expects to issue the proposed Update in the second quarter of 2010 and a final Update early in the fourth quarter of 2010.

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?

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.

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.

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.

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 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.

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 activeThe 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 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.

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.

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 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.

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.

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.

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.

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.

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.

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 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.)

Financial Instruments with Characteristics of Equity • Claim StatusAll 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.

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.

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:

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.

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.

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.

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.

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?

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.

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.

FASB Project on Disclosure of Certain Loss Contingencies • Disclosure Objective • An entity shall disclose qualitative and quantitative information about loss contingencies to enable financial statement users to understand their nature, potential timing, and potential magnitude. • Disclosure Principles • To achieve the above objective, an entity shall consider the following principles in determining disclosures that are appropriate for its individual facts and circumstances:

FASB Project on Disclosure of Certain Loss Contingencies • During early stages of a contingency’s life cycle, an entity shall disclose information (even though its availability may be limited) to help users understand the nature and potential magnitude of a loss contingency. In subsequent reporting periods, disclosure shall be more extensive as additional information becomes available. • An entity may aggregate disclosures about similar contingencies (for example, by class or type) so that the disclosures are understandable and not too detailed. If an entity provides disclosures on an aggregated basis, it shall disclose the basis for aggregation.

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