National Council of Farmers Cooperatives. Legal, Tax & Accounting Committee. Revenue Recognition Working Group. Tax Considerations Listing

Transcription

1 Cooperative Bylaws: an area of focus to highlight any effects of adoption on the determination of patronage sourced earnings and deduction for patronage dividends. Consider impacts specific to Marketing Cooperatives and Supply Cooperatives. Consider bylaw provisions for both book and tax basis cooperatives for the effect of revenue recognition changes on determining allocable patronage sourced earnings. Coops should identify on their teams both accounting and tax personnel to assess what the adoption means to the Coop, how will it impact the determination of book net earnings? Provide direction on what tax accounting method changes might be considered, if any. Potential impact on book basis cooperatives: effect on timing of recognition of book revenues; how will changes affect the fiscal year of recognition of patronage sourced income and therefore the timing of the fiscal year in which patronage distributions are paid. Consideration of effect of the standard on recording revenue gross versus net for book purposes and will there be a different treatment for tax, whether gross versus net recognition. Will the ERP systems be able to provide separate revenue recognition determinations for book and tax purposes, in event they will be different. If ERP systems will be change to account for revenue recognition under the new standard, but remain under prior method for tax, will the ERP system be able to account for revenue recognition under both methods. How will books account for the retrospective effect of adoption of the revenue recognition standard? Generally, the retrospective effects are booked to opening retained earnings. For book basis cooperatives, will such Coops desire to retain such earnings effects or allocate as patronage to patrons? If allocate, will Bylaws need to be amended to provide for allocation of such retrospective effects by modifying the determination of patronage sourced earnings? Consideration for Coops that are members of federated cooperatives. How will the effects of the new standard effect the federated cooperative s revenue recognition and its associated effects on patronage dividends to be received from the federated cooperative? Assuming the local cooperative has a fiscal year ended 8/31 with interest in a federated cooperative with calendar year-end, how will the new standard effect the accrual of anticipated patronage dividend income from the federated cooperative? Variable Consideration the new standard has provisions requiring the identification of any component of consideration that would be considered variable. Estimating variable consideration requires a probability weighted determination of the most likely amount to be realized. This methodology would almost certainly not be a permissible tax method of accounting under IRC section

2 In certain cases under the revenue recognition standard, certain reductions in gross revenue recognized might include anticipated bad debt collection experience. In such case, tax would not generally permit bad debt collection experience to be a factor in the determination of gross revenue accrued for tax. For tax purposes, bad debt deductions are only permitted when an item of accounts receivable is determined to be partially or wholly worthless. Given uncertainty of the tax treatment of these new provisions under the revenue recognition standard, Coops will need to consider the provisions of FIN 48 for any identified uncertain tax positions associated with revenue recognition. Variable Consideration: will patronage dividends expected to be received considered variable consideration? With regard to member sale of product to Coop, are there any potential items of variable consideration? What about situations of pooling where there is not set price on delivery; member shares in net proceeds of the pool through periodic advance payments from the pool, followed by final payment of patronage dividend. Are the periodic advances from net pool proceeds considered variable consideration? How does the determination of whether legal title transfer occurs at the time of product delivery for purposes of whether Coop would book gross revenue as principal or net revenue as agent? Type of sales arrangements, such as where Coop owns the product while in possession of the retailer (on consignment) for sale. Timing of revenue recognition for the sale under the new standard? What are some other type of examples of similar sales arrangements? Special situations for cooperatives marketing grain under contracts with multiple parties involving the producer, local cooperative, LLCs that might own the elevators to which grain is delivered by the producer, federated cooperative pooling grain of multiple local cooperatives, and certain direct shipments from local cooperative to end processor. These complex arrangements need to be analyzed to understand book treatment under the new standard and whether tax will change to any degree. To what extent will legal counsel need to be brought in to interpret contractual terms and title transfer, agent versus principal? Consider issues related transfer of sales contracts. Buy / Sell versus Agency? Drop shipments where first seller delivers direct to their customer s end-customer. In such situations is the first customer required to book the sale net (i.e. their net margin on the drop-shipment). In such case, only the first seller who handle the inventory would book the gross sale? This might apply 2

3 to situations where a local cooperative delivers farmer s grain directly to a third party s ethanol plant. Does the local cooperative get to book the gross sale, or only net as the ethanol plant s agent? If the local cooperative can only book the net margin, how does this affect the ability of the local cooperative to count the gross member payment as a PURPIM for section 199 purposes? What revenue gross or net will be used by the local cooperative for state apportionment purposes? Will the local cooperative be permitted to retain the gross revenue recognition method for tax purposes? Supply type Coops purchasing products for resale to members. Treatment of volume discounts Coop will qualify and receive from its vendors. Are such volume discounts and rebates from vendors be considered variable consideration? Under the new standard, will these volume discounts need to be estimated and accrued? This may be a challenge in practice determining the most likely amount to be received. How might the accrual of these discounts and rebates differ for tax purposes? This divergence in method likely to create more book / tax differences. For example, if books accelerate the recognition of rebates in year 1 as variable consideration, whereas tax will likely under the current method defer recognition until the right to the rebates become fixed and reasonably estimable. This acceleration of rebate income without modification for patronage distribution purposes, could have a material impact on the timing of a significant amount of patronage distributions. Cumulative effect of the change for adoption of the revenue recognition standard as of the end of Retrospective effect booked to retained earnings. Similar retrospective issues as going from LIFO to FIFO. Book retrospective adjustment does not affect GAAP book earnings. Distributable book patronage earning would generally not include the retrospective adjustment without a bylaw amendment modifying the GAAP starting point of distributable patronage earnings to include retrospective adjustments. Whether or not this modification would be desirable would include consideration for how significant in amount the retrospective adjustment will be. As it relates to tax basis distributable patronage earnings, the issue will be whether there will be any changes in tax accounting methods resulting in section 481(a) adjustments. How these will be included in tax basis patronage earnings will likely take into account whether the adjustment is positive or negative, the applicable spread period and how significant in size the amount. IRS has been monitoring the development of the new revenue recognition standard and has asked for public comments on any potential new guidance that may be helpful to taxpayers. Are there any specific issues or matters we may wish to provide the IRS comments for their consideration to issue guidance? IRS Notice , dated March 29, 2015, invites comments regarding the effect on taxpayers' methods of accounting of new financial accounting revenue recognition standards, titled 3

4 "Revenue from Contracts with Customers," announced by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). IRS is also reviewing the book accounting rules to determine if there would be instances where tax might be able to follow the new book accounting method. Any new guidance IRS may issue would need to be in conformity with IRC section 451 and regulations thereunder. IRS is also looking at whether it is advisable to issue any new guidance on procedures for requesting a change in tax accounting method. Also, whether it would make sense for the IRS to identify additional method changes that would qualify for automatic changes. From a practical perspective, there may be limited options for tax conformity with the book changes, resulting new book / tax differences going forward. An area for consideration for sale of goods is what is the timing for the sales recognition of revenue? Is it upon shipment, delivery or acceptance by the customer? Will the new revenue recognition standard change the timing of the book recognition of the sale of goods based on timing of title transfer and delivery terms? Will any service fee components be required to be separated out and recognized differently for transportation, installation, insurance, etc? Tax will need to analyze these potential book changes in these areas to determine what changes tax law would accept. Supply cooperatives sale of fertilizer where cooperative directly spreads on farmer s field. Will the cooperative be required to segregate the value of the service of spreading the fertilizer as a separate revenue stream where recognition of revenue will occur over multiple periods as fertilizer is spread? Will this segregation of the service revenue require collecting sales tax on the value of a separately stated service? Need to consider various jurisdictions for taxability of services and availability of agricultural related exemptions. Need to consider how these changes would lead to sales tax systems such as Vertex needing to be programmed differently to consider this service revenue for sales tax purposes. Impact on gross receipts, sales taxes, VAT, etc. Will these changes affect the tax base for these types of indirect non-income taxes? Need to evaluate basis of accounting currently used and what changes might be required. For example, if services are broken out as a separate charge from that of the goods, will the service fees be subject to sales tax? If books identifies separate components of variable consideration, how might these indirect taxes be applied to variable consideration? How might the development of sales apportionment factors for income and franchise tax filings be impacted by the new revenue recognition standard? As next steps, the Accounting Sub-group will need to come up with the situations where the book method of revenue recognition will change under the new standard. Then we can take each of those 4

5 situations and analyze the treatment for tax purposes for purposes of whether tax can conform to the new book method or whether tax will be required to retain the existing method. 5