Non-Qualified Patronage Allocations Received: Record or Not? – Dennis Gardiner, Managing Partner, CPA
The following is a reprint of an article from our summer 2015 newsletter.
We are seeing more use of non-qualified patronage from the regional cooperatives. Treatment of these allocations varies from client to client, firm to firm, etc. Even our decision may change as we see the regionals indicate or demonstrate they intend to revolve the non-qualified patronage. For example, CoBank specifically indicates they have no intention of revolving the non-qualified they have issued. Therefor we do not have our cooperative clients record the income and asset associated with the allocation. There are no tax implications, so it becomes a notation in the audited financials at best.
As some of the other regional cooperatives turn to non-qualified patronage as a tool for equity, tax and cash management, we have to make decisions on how to account for those allocations. This affects your financial statements and also allocations to your members. Again, it depends on whether you are bearish or bullish on the regional cooperative to revolve the non-qualified allocations they make to you, absent any positive indication of their intent. Remember, the financial statements are the responsibility of management (not us); meaning, we may have some clients choose to record the income and asset, and others that will not.
Unfortunately, that is not the end of the dilemma. If you receive a nonqualified patronage allocation from a regional, do you in turn allocate it to your patrons in the same year? Or do you just allow that income to become part of retained earnings (undivided savings, reserves, etc.)? If you keep it internally, then it will just become part of permanent capital, which many of you have built up pretty significantly in the past 7–8 years. You could allocate it to the patrons in the year it is revolved (paid to you in cash and becomes taxable). It is then likely to end up going to a different group of members, due to timing.
Thought that was the end of it? Wrong. If you do allocate the nonqualified allocation you receive to your patrons, you will someday face a revolvement issue. When do you revolve it?
When you receive it, when your member passes or in a normal revolvement cycle? The answer is any of the above—each coop will probably do it differently.
It seems wrong to revolve it if you have not received it from the regional cooperative, but will you be able to segregate it, identify it from other non-qualified you may have, or do you even care to? Most of the regional cooperative members don’t die (coops like yours), but your members do, requiring an estate payout decision.
We will want to engage you in timely discussions. As you see more use of non-qualified patronage allocations from the regional cooperatives, you will want to have a game plan that fits your balance sheet, equity management, cash and tax planning objectives. Just a heads-up as we move into our next cycle of coop audits.
Where are we today?
Generally accepted accounting principles (GAAP) provides for recognizing income and increase to investments in the year a written notification of allocation is received. Specifically, FASB Codification for the Agriculture Industry 905-325-30 Investments-Other Paragraph 30-1 states “Investments in other agricultural cooperatives shall be accounted for at cost, including allocated equities and retains. For this purpose, cost means the amount of any cash investment and the face amount of all written notices of allocation in the form of per-unit retains, capital equity credits, revolving fund certificates, and certificates of equity”.
Gardiner + Co. have been huge advocates of non-qualified patronage as a tool for our local cooperatives for many years, which was ramped up in the mid-2000s with the utilization of Section 199. We understand their use, purpose and value; stressing to our clients to make sure even in merger situations, the members be made whole for that portion of their deferred patronage too (or at least to fight for it).
It is time to be having further discussions on the appropriate treatment of these notices.