Accounting, Tax & RUS Update Web Conference January 26, 2010 We’re Here to Help! For technical support: Send an email to nreca_assist@commpartners.com OR If you are listening to the program over the phone, please press *0. How to Submit Questions Step 1: Type in your question here. Step 2: Click on the Send button.
Links Box To Save Today’s Handouts: 1. Click in Links Box to open handouts. 2. Click here to print or save handouts. Moderator and Presenters � Vince L. Rodriguez Senior Program Planning Advisor, NRECA � Russ Wasson Executive Director Tax, Finance and Accounting Policy, NRECA � Diana C. Alger, Chief Technical Accounting & Auditing Staff, Rural Utilities Service (RUS) 6
General Topic Areas � Accounting updates � RUS updates � Tax issues 7 Polling Question What is your main job role at your cooperative? –CEO –CFO –Accountant –Other 8 Recent FASB/IASB/AICPA/RUS Projects � FIN 48 Uncertain Tax Positions � FASB/IASB Project on Postretirement Benefit Obligations Including Pensions (Phase 2) � FASB/IASB Project on Leases � 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 � Accounting for R&S plan contributions 9
FIN 48 Uncertain Tax Positions � Every rural electric cooperative will have implemented FIN 48 (if they had not already done so) for the 2009 financial statement audit. � For tax-exempt rural electrics, the challenge is looking at their 85-15 test and determining if they have any uncertain tax positions. � An example might be CIAC received from nonmembers but historically counted as member income. 10 FIN 48 Uncertain Tax Positions � If reversing this position causes a change in the outcome of the 85-15 test for 2009, that is, then cooperative is deemed to be taxable for financial reporting purposes (but not for income tax purposes), then the financial statements have to be recast and the cooperative would have to implement SFAS 109 Accounting for Income Taxes. 11 Polling Question Have you implemented FIN 48? –Yes –No 12
Postretirement Benefit Obligations Including Pensions � This new project on measurement, known as “Phase 2” is expected to last for several years. � While the ED on Postretirement Benefits and Pensions does not affect the NRECA multi- employer plan, it is quite possible that developments with respect to measurement in the Phase 2 project may have an impact. 13 Postretirement Benefit Obligations Including Pensions � The FASB will take the lead in addressing the following issues: – How the reporting of an employer’s obligations associated with participation in a multiemployer plan might be improved . The Board expressed tentative support for the staff’s recommendation that phase 2 initially focus on improving disclosures in the notes to financial statements, pending the staff’s additional analysis of reasons for that recommendation (that is, the staff’s rationale for initially focusing on disclosure rather than recognition and measurement of plan obligations). 14 Postretirement Benefit Obligations Including Pensions � If we end up with footnote disclosure only, that would be ideal since that is basically what we have now. � However, the observation that all changes would move directly through earnings could be problematic if the FASB intends that the fair value of changes in plan assets and liabilities be divided up among the plan participants in some manner. 15
Postretirement Benefit Obligations Including Pensions � IASB Discussion Paper on Employee Benefits and amending IAS 19 � The FASB is waiting to see the outcome of the IASB on this project before proceeding. � IAS 19 requires an entity to account for its proportionate share of the defined benefit obligation, plan assets, and costs associated with the plan in the same way as for a single- employer defined benefit plan. 16 Postretirement Benefit Obligations Including Pensions � However, IAS 19 provides an exemption from defined benefit accounting when sufficient information is not available. � In that case, the entity applies defined contribution accounting and discloses that fact. This means that the entity may not recognize its share of some plan liabilities in its financial statements. 17 Polling Question Do you have operating leases? –Yes –No 18
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. 19 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. 20 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. 21
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 first half of 2010 with a final standard in 2011. 22 Financial Statements 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. 23 Financial Statements 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. 24
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