Accounting Requirements for RUS Telecommunications Borrowers

DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1770

RIN 0572-AB10

Accounting Requirements for RUS Telecommunications Borrowers

AGENCY: Rural Utilities Service, USDA.

ACTION: Final rule.

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SUMMARY: The Rural Utilities Service (RUS) is amending its regulations

on accounting policies and procedures for RUS telecommunications

borrowers as set forth in RUS's regulations concerning Accounting

System Requirements for RUS Telecommunications Borrowers. This rule

establishes an accounting interpretation for postretirement benefits

that addresses both the requirements of the Financial Accounting

Standards Board (FASB) and the Federal Communications Commission (FCC).

It also sets forth accounting interpretations that establish uniform

accounting procedures for Rural Telephone Bank (RTB) stock, cushion of

credit investments, Rural Economic Development loans and grants, and

satellite or cable television service investments.

EFFECTIVE DATE: This rule is effective August 30, 1996.

FOR FURTHER INFORMATION CONTACT: Ms. Roberta D. Purcell, Director,

Program Accounting Services Division, Rural Utilities Service, STOP

1523, room 2221, South Building, U.S. Department of Agriculture,

Washington, DC 20250-1523, telephone number (202) 720-9450.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This final rule has been determined to be not significant for the

purposes of Executive Order 12866 and therefore has not been reviewed

by the Office of Management and Budget (OMB).

Regulatory Flexibility Act Certification

The Administrator of RUS has determined that the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.) does not apply to this final

rule.

Information Collection and Recordkeeping Requirements

The information collection and recordkeeping requirements contained

in this rule have been approved by OMB under control number 0572-0003

pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35,

as amended.) Comments regarding these requirements may be sent to

Roberta D. Purcell, Director, Program Accounting Services Division,

Rural Utilities Service, STOP 1523, Washington, DC 20250-1523.

National Environmental Policy Act Certification

The Administrator, RUS, has determined that this final rule will

not significantly affect the quality of the human environment as

defined by the National Environmental Policy Act of 1969 (42 U.S.C.

4321 et seq.). Therefore, this action does not require an environmental

impact statement or assessment.

Catalog of Federal Domestic Assistance

The program described by this final rule is listed in the Catalog

of Federal Domestic Assistance Program under numbers 10.851--Rural

Telephone Loans and Loan Guarantees and 10.852--Rural Telephone Bank

loans. This catalog is available on a subscription basis from the

Superintendent of Documents, the United States Government Printing

Office, Washington, DC 20402.

Executive Order 12372

This final rule is excluded from the scope of Executive Order

12372, Intergovernmental Consultation. A Notice of Final Rule entitled

Department Programs and Activities Excluded from Executive Order 12372

(50 FR 47034) exempts RUS and RTB loans and loan guarantees, and RTB

loans, to governmental and nongovernmental entities from coverage under

this order.

Executive Order 12778

This final rule has been reviewed under Executive Order 12778,

Civil Justice Reform. This final rule: (1) Will not preempt any state

or local laws, regulations, or policies, unless they present an

irreconcilable conflict with

[[Page 39845]]

this rule; (2) Will not have any retroactive effect; and (3) Will not

require administrative proceeding before parties may file suit

challenging the provisions of this proposed rule.

National Performance Review

This regulatory action is being taken as part of the National

Performance Review program to eliminate unnecessary regulations and

improve those that remain in force.

Background

In order to facilitate the effective and economical operation of a

business, adequate and reliable financial records must be maintained.

Accounting records must provide a clear, accurate picture of current

economic conditions from which management can make informed decisions

in charting the company's future. The rate regulated environment in

which a telecommunications carrier operates causes an even greater need

for financial information that is accurate, complete, and comparable

with that generated by other carriers. For this reason, the FCC

prescribes a Uniform System of Accounts (USoA) for the

telecommunications industry.

RUS, as a Federal lender and mortgagee, and in furthering the

objectives of the Rural Electrification Act (RE Act) (7 U.S.C. 901 et

seq.) has a legitimate programmatic interest and a substantial

financial interest in requiring adequate records to be maintained. In

order to provide RUS with financial information that can be analyzed

and compared with the operations of other borrowers in the RUS program,

all RUS borrowers must maintain financial records that utilize uniform

accounts and uniform accounting policies and procedures. The standard

RUS security instrument, therefore, requires borrowers to maintain

their books, records, and accounts in accordance with methods and

principles of accounting prescribed by RUS in the RUS USoA for its

telecommunications borrowers.

To ensure that borrowers consistently account for and apply the

provisions of recent pronouncements of the FASB and the FCC, the RUS

USoA must be revised and updated as changes in generally accepted

accounting principles and the FCC USoA occur. RUS is, therefore,

establishing a new accounting interpretation that addresses the

accounting requirements set forth in Statement of Financial Accounting

Standards No. 106, Employers' Accounting for Postretirement Benefits

Other Than Pensions (Statement No. 106). Statement No. 106 requires

reporting entities to accrue the expected cost of postretirement

benefits during the years the employee provides service to the entity.

Copies of Statements of Financial Accounting Standards may be obtained

from the Order Department of the Financial Accounting Standards Board,

401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116.

RUS is also establishing an accounting interpretation for RTB bank

stock that sets forth the journal entries necessary to record the

required purchase of Class B RTB stock, patronage refunds in the form

of additional shares of Class B RTB stock, purchases of Class C stock,

and dividends received on Class C stock. The interpretation also

addresses the proper accounting for the conversion of Class B stock to

Class C stock after all RTB loans have been repaid.

RUS is also setting forth an accounting interpretation that

establishes the accounting policies and procedures for the Rural

Economic Development loan and grant programs recently established by

the Rural Business and Cooperative Development Service and for

investments in satellite and cable television services.

Comments

A proposed rule entitled Accounting Requirements for REA

Telecommunications Borrowers, published September 14, 1994, at 59 FR

47097, invited interested parties to submit comments on or before

November 14, 1994. Comments were received from telecommunications

borrowers, certified public accountants (CPAs), state wide

associations, and national trade associations. The following paragraphs

address the various topics that were discussed by the commenters.

Interpretation No. 101, Postretirement Benefits

Comment. Some commenters questioned the need for actuarial studies

if the only benefit provided is an item such as local phone service.

Response. As with all statements issued by FASB, the provisions of

Statement No. 106 need not be applied to immaterial amounts. If the

borrower and the independent CPA engaged to perform the annual audit of

the borrower's financial statements are satisfied as to the

immateriality of a benefit provided, Statement No. 106 need not be

adopted and accordingly, an actuarial study is not required. It should

be noted, however, that an initial actuarial study may be necessary in

order to determine the materiality of the benefit provided. For this

reason, no revision was made to the final rule.

Comment. Several commenters presented arguments for retaining the

option to immediately recognize the transition obligation created by

the implementation of Statement No. 106.

Response. On December 26, 1991, the FCC issued 6 FCC Rcd 7560,

which requires telecommunications carriers to recognize the transition

obligation on a delayed basis thereby eliminating the option of

immediate recognition. In order to ensure the consistent and uniform

application of generally accepted accounting principles among all

telecommunications borrowers, RUS requires its borrowers to comply with

the FCC USoA. Therefore, all RUS borrowers are required to adopt the

delayed recognition required by the FCC. If a state regulatory body

requires immediate recognition of the postretirement benefit transition

obligation, the transition obligation should be recognized on a delayed

basis with the jurisdictional difference accounts used to effect

compliance with the state requirements.

Interpretation No. 102, Rural Telephone Bank Stock

Comment. Several commenters suggested that the purchase of Class B

RTB stock should be accounted for as an increase in interest expense or

as an amortizable loan cost rather than as the acquisition of an asset.

Response. While the investment in Class B RTB stock is a

requirement for a borrower to secure financing from the RTB, the owner

of Class B RTB stock is entitled to patronage refunds in the form of

additional shares of Class B stock. When a borrower has repaid all of

its RTB loans, the borrower may request that the Class B stock be

converted into Class C stock. Class C stock earns cash dividends and

may be redeemed at some future time in accordance with the bylaws of

the RTB. The aforementioned characteristics are indicative of an

investment, not an item of expense, and as such, no revision was made

to the final rule.

Comment. One commenter stated that income should be recognized at

the time the patronage refund is allocated to the owners of Class B RTB

stock in order to insure that members of a telecommunications

cooperative receive their fair share of the patronage refund.

Response. In 1975, this issue was considered by the Staff

Subcommittee on Accounts of the National Association of Regulatory

Utility Commissioners. Because Class B RTB stock has no known market

value, pays no return or interest, and cannot be alienated except in

connection with the transfer of the outstanding RTB loan, the committee

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recommended that the patronage refunds be recorded as a memorandum

entry on the books of account until such time as the value of the stock

is realized, in cash, through its redemption.

Comment. Several commenters raised issues regarding RTB

privatization.

Response. When privatization of the RTB actually begins, any

necessary revisions to this regulation will be proposed and exposed for

comment at that time.

Comment. One commenter questioned the determinability of the fair

value of Class C stock based on Accounting Principle Board Opinion No.

29, Accounting for Nonmonetary Transactions (Opinion No. 29).

Response. The conversion of Class B RTB stock to Class C RTB stock

meets the definition of a nonmonetary exchange as set forth in Opinion

No. 29. In Opinion No. 29, the Accounting Principles Board concluded

that the accounting for nonmonetary transactions should be based upon

the fair value of the assets involved. Paragraphs 25 & 26 of the

opinion, however, raise questions concerning the determination of fair

value within reasonable limits. While the face value of Class C stock

is considered to be its surrender value, the indefinite nature of its

realizability requires the consideration of the time value of money.

Calculating the present value of the Class C stock is not feasible

because it is not known when the Class C stock will become redeemable.

Therefore, the fair value of this transaction cannot be determined

within reasonable limits and as such, must be accounted for at the

recorded value of the Class B RTB stock. The final rule has been

revised accordingly.

Comment. Several commenters expressed concern regarding the tax

issues that would be raised if income is recognized at the time Class B

stock is converted into Class C stock.

Response. While income tax issues are of great concern to RUS

borrowers and we are sympathetic to these concerns, accounting

interpretations issued by RUS must be based upon the appropriate,

consistent application of generally accepted accounting principles

(GAAP). As such, RUS cannot prescribe accounting requirements that do

not comply with GAAP in an effort to circumvent either Federal or state

income tax laws. It should be noted, however, that by recording the

conversion of Class B stock at its recorded value, no income is

recognized until the Class C stock is actually redeemed.

Interpretation No. 103, Cushion of Credit Investments

Comment. One commenter suggested that interest earned on the RUS

Cushion of Credit account should be recorded as a credit to interest

expense rather than interest income under the ``right of offset'' as

discussed in FASB Technical Bulletin No. 88-2, Definition of a Right of

Setoff (FTB No. 88-2).

Response. FTB No. 88-2 was superseded, in its entirety, by FASB

Interpretation No. 39, Offsetting of Amounts Related to Certain

Contracts (Interpretation No. 39). Interpretation No. 39 states that

the offsetting of assets and liabilities in the balance sheet is

improper except where a right of offset exists. A right of offset

exists only when each of two parties owes the other determinable

amounts. In accordance with paragraph 5, footnote 2, of Interpretation

No. 39, cash on deposit at a financial institution must be considered

cash by the depositor rather than an amount owed to the depositor.

Therefore, deposits in the RUS Cushion of Credit account do not meet

the criteria required for offsetting against the principle owed on an

outstanding RUS loan. As such, no offset of interest income and expense

is appropriate under Interpretation No. 39 and no revision was made to

the final rule.

Interpretation No. 104, Rural Economic Development Loan and Grant

Program

Comment. Two commenters objected to recording the funds received

from a Rural Economic Development grant as income.

Response. The establishment of a revolving loan program with

Federal grant funds creates special concerns from an accounting

perspective. The customary Federal grant is made for a specific project

or purpose. The income to the grantee is offset by the costs incurred

in the project, thereby eliminating any net income effect. When a

revolving loan program is established, however, the grantee incurs no

immediate expense with which to offset the grant proceeds. The grant

proceeds are loaned to a third party thereby creating an asset

(receivable) from that third party. As the loan is repaid, the asset is

reduced and additional funds are available for relending. While there

may be the incidental costs of administering the loan program, no

additional costs are incurred until a loan actually goes into default.

In fact, under the Rural Business and Cooperative Development Service's

grant program, after the initial grant funds have been loaned and

repaid, the borrower may charge a reasonable rate of interest on its

revolving loans. The grant program may, therefore, actually become

income producing.

Additionally, because 7 CFR Part 1703, Subpart B, Rural Economic

Development Loan and Grant Program, is somewhat ambiguous as to the

final disposition of the grant funds upon termination of the revolving

loan program, further accounting concerns are raised.

The accounting for a rural economic development grant is therefore,

dependent upon the grant agreement itself. If the grant agreement

requires repayment of the funds upon termination of the revolving loan

program, the funds must be recorded as a liability. If the grant

agreement stipulates that there is no obligation for repayment, the

funds should be recorded as a permanent infusion of capital. If,

however, the agreement is silent as to the final disposition of the

grant funds, the funds must be recorded as income. The final rule has

been revised accordingly.

Interpretation No. 105, Satellite and Cable Television Services

Comment. One commenter suggested that this interpretation should

apply to any type of service offered through a subsidiary, joint

venture, or as a segment of an entity's operations.

Response. While the underlying accounting principles used to

establish this accounting interpretation are applicable to any type of

service offered through a subsidiary, joint venture, or a segment of an

entity's operations, the purpose of this interpretation was to

specifically address borrowers' investments in satellite and cable

television services. For this reason, no revision was made to the final

rule.

List of Subjects in 7 CFR Part 1770

Accounting, Loan programs--communications, Reporting and

recordkeeping requirements, Rural areas, Telecommunications, Uniform

System of Accounts.

For the reasons set forth in the preamble, RUS hereby amends 7 CFR

chapter XVII as follows:

PART 1770--ACCOUNTING REQUIREMENTS FOR RUS TELECOMMUNICATIONS

BORROWERS

1. The authority citation for part 1770 continues to read as

follows:

Authority: 7 U.S.C. 901 et seq.; 7 U.S.C.1921 et seq.; Pub. L.

103-354, 108 Stat. 3178 (7 U.S.C. 6941 et seq.).

2. Subpart C is added to read as follows:

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Subpart C--Accounting Interpretations

Sec.

1770.26 General.

1770.27 Definitions.

1770.28-1770.45 [Reserved]

Appendix to Subpart C--Accounting Methods and Procedures Required of

All Borrowers

Subpart C--Accounting Interpretations

Sec. 1770.26 General.

(a) The standard provisions of the security instruments utilized by

the Rural Utilities Service (RUS) and the Rural Telephone Bank (RTB)

for all telecommunications borrowers require borrowers to at all times

keep and safely preserve, proper books, records, and accounts in which

full and true entries will be made of all of the dealings, business,

and affairs of the borrower in accordance with the methods and

principles of accounting prescribed by the state regulatory body having

jurisdiction over the borrower and by the Federal Communications

Commission (FCC) in its Uniform System of Accounts for

telecommunications companies (47 CFR part 32), as those methods and

principles of accounting are supplemented from time to time by RUS.

(b) This subpart implements those standard provisions of the RUS

and RTB security instruments by prescribing accounting principles,

methodologies, and procedures applicable to all telecommunications

borrowers for particular situations.

Sec. 1770.27 Definitions.

As used in this part:

Borrower is an RUS telecommunications borrower.

Cushion of Credit Account is a 5 percent interest bearing account

established by RUS in which all voluntary payments or overpayments on

Rural Electric and Telephone Revolving Funds after October 1, 1987, are

deposited.

FCC is the Federal Communications Commission.

Part 32 is 47 CFR Part 32, Uniform System of Accounts, issued by

the Federal Communications Commission.

RAO is the Responsible Accounting Officer of the Federal

Communications Commission.

RE Act is the Rural Electrification Act of 1936, as amended (7

U.S.C. 901 et seq.).

RETRF is the Rural Electric and Telephone Revolving Fund.

RTB is the Rural Telephone Bank.

RUS is the Rural Utilities Service, an agency of the United States

Department of Agriculture, or its predecessor or successor.

Sec. 1770.28--1770.45 [Reserved]

Appendix to Subpart C--Accounting Methods and Procedures Required of

All Borrowers

All borrowers shall maintain and keep their books of accounts

and all other books and records which support the entries in such

books of accounts in accordance with the accounting principles

prescribed in this appendix.

Numerical Index

Number and Title

101 Postretirement Benefits

102 Rural Telephone Bank Stock

103 Cushion of Credit Investments

104 Rural Economic Development Loan and Grant Program

105 Satellite and Cable Television Services

106 Consolidated Financial Statements

Subject Matter Index Number

C

Cable Television Services.................................. 105

Consolidated Financial Statements.......................... 106

Cushion of Credit Investments.............................. 103

E

Economic Development Loan and Grant Program................ 104

F

Financial Statements--Consolidated......................... 106

I

Investments--Cushion of Credit............................. 103

P

Postretirement Benefits.................................... 101

R

Rural Economic Development Loan and Grant Program.......... 104

Rural Telephone Bank Stock................................. 102

S

Satellite Television Services.............................. 105

Stock--Rural Telephone Bank................................ 102

101 Postretirement Benefits

A. Statement of Financial Accounting Standards No. 106,

Employers' Accounting for Postretirement Benefits Other than

Pensions (Statement No. 106), requires reporting entities to accrue

the expected cost of postretirement benefits during the years the

employee provides service to the entity. For purposes of applying

the provisions of Statement No. 106, members of the board of

directors are considered to be employees of the cooperative. Prior

to the issuance of Statement No. 106, most reporting entities

accounted for postretirement benefit costs on a ``pay-as-you-go''

basis; that is, costs were recognized when paid, not when the

employee provided service to the entity in exchange for the

benefits. (Statement 106 is available from the Financial Accounting

Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT. 06856-

5116.)

B. As defined in Statement No. 106, a postretirement benefit

plan is a deferred compensation arrangement in which an employer

promises to exchange future benefits for an employee's current

services. Postretirement benefit plans may be funded or unfunded.

Postretirement benefits include, but are not limited to, health

care, life insurance, tuition assistance, day care, legal services,

and housing subsidies provided outside of a pension plan.

C. Statement No. 106 applies to both written plans and to plans

whose existence is implied from a practice of paying postretirement

benefits. An employer's practice of providing postretirement

benefits to selected employees under individual contracts with

specific terms determined on a employee-by-employee basis does not,

however, constitute a postretirement benefit plan under the

provisions of this statement.

D. Postretirement benefit plans generally fall into three

categories: single-employer defined benefit plans, multiemployer

plans, and multiple-employer plans.

E. A single-employer plan is a postretirement benefit plan that

is maintained by one employer. The term may also be applied to a

plan that is maintained by related parties such as a parent and its

subsidiaries. A multiemployer plan is a postretirement benefit plan

in which two or more unrelated employers contribute, usually

pursuant to one or more collective-bargaining agreements. One

characteristic of a multiemployer plan is that the assets

contributed by one participating employer may be used to provide

benefits to employees of other participating employers since assets

contributed by an employer are not segregated in a separate account

or restricted to provide benefits only to employees of that

employer.

F. A multiple-employer plan is a postretirement benefit plan

that is maintained by more than one employer but is not a

multiemployer plan. A multiple-employer plan is generally not

collectively bargained and is intended to allow participating

employers to pool their plan assets for investment purposes and

reduce the cost of plan administration. A multiple-employer plan

maintains separate accounts for each employer so that contributions

provide benefits only for employees of the contributing employer.

G. The accounting requirements set forth in this interpretation

focus on single- and multiple-employer plans. The accounting

requirements set forth in Statement No. 106 for multiemployer plans

or defined contribution plans shall be adopted for borrowers

electing those types of plans.

H. Under the provisions of Statement No. 106, there are two

components of the postretirement benefit cost: the current period

cost and the transition obligation. The transition obligation is a

one-time accrual of the costs resulting from services already

provided. Statement No. 106 allows the transition obligation to be

deferred and amortized on a straight-line basis over the average

remaining service period of the active employees. If the average

remaining service period of the active employees is less than 20

years, a 20-year amortization period may be used.

I. Accounting Requirements

A. All borrowers shall adopt the accrual accounting provisions

and reporting

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requirements as set forth in Statement No. 106. The transition

obligation and accrual of the current period cost must be based upon

an actuarial study. This study must be updated to allow the borrower

to comply with the measurement date requirements of Statement No.

106; however, the study must, at a minimum, be updated every five

years. Borrowers may not account for postretirement benefits on a

``pay-as-you-go'' basis.

B. Under the provisions of Statement No. 106, an entity may

recognize the transition obligation, in its entirety, when Statement

No. 106 is first adopted or the entity may elect to delay the

recognition of the transition obligation. On December 26, 1991,

however, the FCC issued 6 FCC Rcd 7560, which requires

telecommunications carriers to recognize the transition obligation

on a delayed basis. RUS reviewed this issuance and has determined

that borrowers must comply with this ruling and recognize the

transition obligation on a delayed basis.

C. The deferral and amortization of the transition obligation on

a delayed basis is considered to be an off balance sheet item. As a

result, an accounting entry is not required at the time of adoption

of Statement No. 106. Instead, the transition obligation is

recognized as a component of postretirement benefit cost as it is

amortized. The amount of the unamortized transition obligation must

be disclosed in the notes to the financial statements.

D. In accordance with the provisions of Responsible Accounting

Officer (RAO) Letter 20, released by the FCC on April 24, 1992,

Account 4310, Other Long-Term Liabilities, shall be used to record

the liability accrued for postretirement benefits. (RAO Letter 20 is

available from the Federal Communications Commission, 1919 M Street,

NW., Washington, DC 20554.) Borrowers shall credit this account for

the net periodic cost of postretirement benefits for the current

year and shall debit this account for any fund payments made during

the current year.

E. Net periodic postretirement benefit cost includes current

period service cost, interest cost, return on plan assets,

amortization of prior service cost, gains and losses, and

amortization of the transition obligation. If fund payments create a

debit balance in the postretirement benefits portion of Account

4310, the debit balance applicable to postretirement benefits shall

be reported in Account 1410, Other Noncurrent Assets. Account 1410

shall also be used to record any prepaid postretirement benefit

cost.

F. The benefits portion of the expense matrix for the

appropriate Part 32 expense accounts shall be used to record the

current period service cost component of the current year's net

periodic postretirement benefit cost. The interest cost component,

return on plan assets, amortization of prior service cost, gains and

losses, and amortization of the transition obligation shall be

charged to the benefits portion of the expense matrix of Account

6728, Other General and Administrative.

II. Effective Date and Implementation

A. For plans outside the United States and for defined benefit

plans of employers that (a) are nonpublic enterprises and (b)

sponsor defined benefit postretirement plans with no more than 500

plan participants in the aggregate, Statement No. 106 is effective

for fiscal years beginning after December 15, 1994. For all other

plans, Statement No. 106 is effective for fiscal years beginning

after December 15, 1992.

102 Rural Telephone Bank Stock

A. Capital stock issued by the Rural Telephone Bank consists of

Class A, Class B, and Class C stock. Class A stock is issued only to

the Administrator of RUS on behalf of the United States in exchange

for capital furnished to RTB.

B. Class B stock is issued only to recipients of loans under

Section 408 of the Rural Electrification Act (RE Act). Borrowers

receiving loan funds pursuant to Section 408(a) (1) or (2) of the RE

Act are required to invest 5 percent of the amount of loan funds

approved in Class B stock. No dividends are payable on Class B

stock. All holders of Class B stock are entitled to patronage

refunds in the form of Class B stock under the terms and conditions

specified in the bylaws of the RTB.

C. Class C stock is available for purchase by borrowers,

corporations, and public bodies eligible to borrow under Section 408

of the RE Act, or by organizations controlled by such borrowers,

corporations and public bodies. The payment of dividends is in

accordance with the bylaws of the RTB.

Accounting Requirements

A. The purchase of RTB stock required by the RE Act shall be

debited to Account 1402.1, Investments in Nonaffiliated Companies--

Class B RTB Stock. Patronage refunds in the form of additional

shares of RTB Class B Stock shall be debited to Account 1402.1 and

credited to Account 1402.11, Investments in Nonaffiliated

Companies--Class B RTB Stock--Cr.

B. Purchases of Class C RTB stock shall be debited to Account

1402.2, Investments in Nonaffiliated Companies--Class C RTB Stock.

Cash dividends received on Class C RTB stock shall be credited to

Account 7310, Dividend Income.

C. Once a borrower has repaid all of its RTB loans, it may

request that its Class B stock be converted to Class C stock. When

the conversion is made, Account 1402.2 shall be debited and Account

1402.1 shall be credited for the face value of the stock converted.

Account 1402.21, Investments in Nonaffiliated Companies--Class C RTB

Stock--Cr., shall be credited and Account 1402.11 shall be debited

for the face value of the Class B stock that has been received as

patronage refunds.

103 Cushion of Credit Investments

A. The RUS Cushion of Credit account is an investment account

bearing an interest rate of 5 percent. All voluntary payments or

overpayments on Rural Electric and Telephone Revolving Fund (RETRF)

loans made after October 1, 1987, are deposited into this account in

the appropriate borrower's name.

Accounting Requirements

A. The following journal entries shall be used by RUS borrowers

to record the transactions associated with cushion of credit

payment:

1. Dr. 4210.18, RUS Notes--Advance Payments, Dr. Cr. 1130.1/1120.11,

Cash--General Fund. To record the cushion of credit payment.

2. Dr. 4210.18, RUS Notes--Advance Payments, Dr. Cr. 7320/7300.2,

Interest Income. To record interest earned on cushion of credit

deposits.

3. Dr. 4210.12, RUS Notes, Cr. 4210.18, RUS Notes--Advance Payments,

Dr. To apply cushion of credit payments (and interest) to the RUS

note.

104 Rural Economic Development Loan and Grant Program

A. On December 21, 1987, Section 313, Cushion of Credit Payments

Program (7 U.S.C. 901 et seq.), was added to the RE Act. Section 313

establishes a Rural Economic Development Subaccount and authorizes

the Administrator of the RUS to provide zero interest loans or

grants to RE Act borrowers for the purpose of promoting rural

economic development and job creation projects. Effective December

5, 1994, this authority was assigned to the Administrator, Rural

Business and Cooperative Development Service.

B. 7 CFR part 1703, Subpart B, Rural Economic Development Loan

and Grant Program, sets forth the policies and procedures relating

to the zero interest loan program and for approving and

administering grants.

Accounting Requirements

A. The accounting journal entries required to record the

transactions associated with a Rural Economic Development grant are

as follows:

1. Dr. 1130.4/1120.14, Cash--General Fund--Economic Development

Grant Funds. Cr. 4210.25, RUS Notes--Economic Development Grant; Cr.

4540.41, Other Capital--Miscellaneous; or Cr. 7360/7300.6, Other

Nonoperating Income. To record grant funds disbursed by RUS. If the

grant agreement requires repayment of the funds upon termination of

the revolving loan program, Account 4210.25 shall be credited. If

the grant agreement states that there is absolutely no obligation

for repayment upon termination of the revolving loan program, the

funds shall be accounted for as a permanent infusion of capital by

crediting Account 4540.41. If, however, the grant agreement is

silent as to the final disposition of the grant funds, Account 7360/

7300.6 shall be credited.

2. Dr. 1401.1, Other Investments in Affiliated Companies--Federal

Economic Development Grant Loans or Dr. 1402.4, Other Investments in

Nonaffiliated Companies--Federal Economic Development Grant Loans

Cr. 1130.4/1120.14, Cash--General Fund--Economic Development Grant

Funds. To record a Federal revolving loan to an economic development

project.

[[Page 39849]]

3. Dr. 1130.1/1120.11, Cash--General Fund. Cr. 7360/7300.6, Other

Nonoperating Income. To record payment of loan servicing fees

charged to the economic development project.

4. Dr. 1130.5/1120.15, Cash--General Fund--Economic Development Non-

Federal Revolving Funds. Cr. 1401.1, Other Investments in Affiliated

Companies --Federal Economic Development Grant Loans or Cr. 1402.4,

Other Investments in Nonaffiliated Companies--Federal Economic

Development Grant Loans. To record the repayment, by the project, of

the Federal revolving loan.

5. Dr. 1401.2, Other Investments in Affiliated Companies--Non-

Federal Economic Development Grant Loans or Dr. 1402.5, Other

Investments in Nonaffiliated Companies--Non-Federal Economic

Development Grant Loans. Cr. 1130.5/1120.15, Cash--General Fund--

Economic Development Non-Federal Revolving Funds. To record a Non-

Federal revolving loan to an economic development project.

6. Dr. 1210, Interest and Dividends Receivable Cr. 7320/7300.2,

Interest Income. To record the interest earned on a Non-Federal

revolving loan to an economic development project.

7. Dr. 1130.5/1120.15, Cash--General Fund--Economic Development Non-

Federal Revolving Funds. CR. 1401.2, Other Investments in Affiliated

Companies--Non-Federal Economic Development Grant Loans or Cr.

1402.5, Other Investments in Nonaffiliated Companies--Non-Federal

Economic Development Grant Loans. To record the repayment, by the

project, of the Non-Federal revolving loan.

B. The accounting journal entries required to record the

transactions associated with a Rural Economic Development loan are

as follows:

1. Dr. 4210.26, Economic Development Notes--Unadvanced, Fr. Cr.

4210.25, Economic Development Notes. To record the contractual

obligation to RUS for the Economic Development Notes.

2. Dr. 1130.6/1120.16, Cash--General Fund--Economic Development Loan

Funds Cr. 4210.26, Economic Development Notes--Unadvanced, Dr. To

record the receipt of the economic development loan funds.

3. Dr. 1401.3, Other Investments in Affiliated Companies--Federal

Econmic Development Loans or Dr. 1402.6, Other Investments in

Nonaffilitated Companies--Federal Economic Development Loans. Cr.

1130.6/1120.16, Cash--General Fund--Ecoomice Development Loan Funds.

To record the discursement of economci development loand funds to

the project.

4. Dr. 1130.1/1120.11, Cash--General Fund. Cr. 7360/7300.6, Other

Nonoperating Income. To record payment of loan servicing fees

charged to the economic development project.

5. Dr. 1210, Interest and Dividends Receivable Cr. 7320/7300.2,

Interest Income. To record the interest earned on the investment of

rural economic development loan funds.

6. Dr. 7370, Special Charges. Cr. 1130.1, Cash--General Funds. To

record the payment of interest earned in excess of $500 on the

investment of rural economic development loan funds. Note: Interest

earned in excess of $500 must be used for the rural economic

development project for which the loan funds were received or

returned to RUS.

7. Dr. 1130.6/1120.16, Cash--General Fund--Economic Development Loan

Funds. Cr. 1401.3, Other Investments in Affiliated Companies--

Federal Economic Development Loans or Cr. 1402.6, Other Investments

in Nonaffiliated Companies--Federal Economic Development Loans. To

record repayment, by the project, of the economic development loan.

8. Dr. 4210.25, Economic Development Notes. Cr. 1130.6/1120.16,

Cash--General Fund--Economic Development Loan Funds. To record the

repayment, to RUS, of the economic development loan funds.

105 Satellite and Cable Television Services

A. Many RUS borrowers have become involved in providing either

satellite or cable television services to their members and others

through subsidiaries, joint ventures, or as segments of their

current operations.

Accounting Requirements

A. This section outlines the accounting to be followed when

recording transactions involving satellite or cable television

services.

1. Separate Subsidiary. If a borrower provides satellite or

cable television services through a separate subsidiary, the

investment in the subsidiary shall be debited to Account 1401,

Investments in Affiliated Companies. The net income or loss of the

subsidiary shall be debited or credited to Account 1401, as

appropriate, with an offsetting entry to Account 7360, Other

Nonoperating Income.

2. Joint Venture. i. If a borrower provides satellite or cable

television services through a joint venture, the borrower's

ownership interest dictates the accounting methodology. If the

borrower has less than a 20 percent ownership interest in the joint

venture, the investment is accounted for under the cost method of

accounting in Account 1402, Investments in Nonaffiliated Companies.

Under the cost method, the joint venture's net income or loss is not

recorded in the borrower's records. Income is recognized only to the

extent of any dividends declared by the joint venture. When a

dividend is declared, the borrower shall debit Account 1210,

Interest and Dividends Receivable, and credit Account 7310, Dividend

Income. When the dividend is received in cash, the borrower shall

debit Account 1130.1, Cash--General Fund, and credit Account 1210.

ii. If a borrower has a 20-percent or more ownership interest in

the joint venture, the investment is accounted for under the equity

method in Account 1401, Investments in Affiliated Companies. The

borrower's proportionate share of the joint venture's net income or

loss shall be debited or credited to Account 1401, as appropriate,

with an offsetting entry to Account 7360, Other Nonoperating Income.

3. Segment of Current Operations. i. If a borrower provides

satellite or cable television service as a segment of its current

operations and there are no shared assets between this activity and

the regulated telecommunications activities of the borrower, the

investment shall be debited to Account 1406.1, Nonregulated

Investments--Permanent Investment. The net income or loss from

providing such service shall be debited or credited, as appropriate,

to Account 1406.3, Nonregulated Investments--Current Net Income,

with an offsetting entry to Account 7990, Nonregulated Net Income.

ii. If a borrower provides satellite or cable television service

as a segment of current operations and shares assets between this

activity and the regulated telecommunications activities of the

borrower, the franchise and application fees shall be debited to a

subaccount of Account 2690, Intangibles. The cost of the satellite

or cable television equipment shall be debited to a subaccount of

Account 2231, Radio Systems. Revenues earned from providing

satellite or cable service shall be credited to Account 5280,

Nonregulated Operating Revenue, while the associated expenses shall

be recorded in a subaccount of the applicable regulated expense

accounts.

4. Sale and Installation of Satellite or Cable Television

Equipment. i. If a borrower sells or installs satellite or cable

television equipment as a segment of its current operations and

there are no shared assets between this activity and the regulated

telecommunications activities of the borrower, the purchase of the

equipment shall be debited to Account 1406.1, Nonregulated

Investments--Permanent Investment. The net income or loss from

providing such services shall be debited or credited, as

appropriate, to Account 1406.3, Nonregulated Investments--Current

Net Income, with an offsetting entry to Account 7990, Nonregulated

Net Income.

ii. If a borrower sells or installs satellite or cable

television equipment as a segment of its current operations and

shares assets between this activity and the regulated

telecommunications activities of the borrower, the purchase of the

equipment shall be debited to Account 1220.2, Property Held for Sale

or Lease. Revenues received for the sale or installation of the

equipment shall be credited to Account 5280, Nonregulated Operating

Revenue, while the associated expenses shall be debited to a

subaccount of the applicable regulated expense accounts.

106 Consolidated Financial Statements

A. In October 1987, FASB issued Statement of Financial

Accounting Standards No. 94, Consolidation of All Majority-Owned

Subsidiaries (Statement No. 94). (Statement 94 is available from the

Financial Accounting Standards Board, 401 Merritt 7, P.O. Box 5116,

Norwalk, CT 06856-5116.) For purposes of reporting to RUS, Statement

No. 94 shall be applied as follows:

[[Page 39850]]

1. A borrower that is a subsidiary of another entity shall

prepare and submit to RUS separate financial statements even though

this financial information is presented in the parent's consolidated

statements.

2. In those cases in which a borrower has a majority-ownership

in a subsidiary, the borrower shall prepare consolidated financial

statements in accordance with the requirements of Statement No. 94.

These consolidated statements must also include supplementary

schedules presenting a Balance Sheet and Income Statement for each

majority-owned subsidiary included in the consolidated statements.

B. Although Statement No. 94 requires the consolidation of

majority-owned subsidiaries, the RUS Form 479, Financial and

Statistical Report for Telecommunications Borrowers, shall be

prepared on an unconsolidated basis by all borrowers.

Dated: July 17, 1996.

Jill Long Thompson,

Under Secretary, Rural Development.

[FR Doc. 96-18806 Filed 7-30-96; 8:45 am]

BILLING CODE 3410-15-P