Nonqualified Distributions from Regional Cooperatives

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

Recently, several regional cooperatives have issued nonqualified retained patronage.  That has raised awareness about nonqualified distributions and also created new questions and misconceptions. Most auditors are not presenting the regional nonqualified stock as a listed asset on the balance sheet but, are instead, describing it in the footnotes.  Retained patronage from a regional cooperative, either qualified or nonqualified, is an asset.  The balance sheet presentation depends on whether a future cash flow (redemption) can be realistically anticipated. To date, the regional cooperatives issuing nonqualified stock have indicated that they intend to use it as permanent capital.  The balance sheet presentation is a result of that issue.  If nonqualified stock is expected to be redeemed it would be shown as an asset, usually termed, “investment in cooperatives”.

That raises the second misconception.  At least from the local cooperative level, nonqualified equity can, and should be, redeemed just like qualified equity.  A local cooperative transitioning or adding nonqualified distributions could use the same equity management system or a new system.  Regional cooperatives face somewhat different issues in equity management relative to local cooperatives.  In a local cooperative, failure to redeem equity results in equity ownership being very disproportional to use.  Inactive members, and in extreme cases, estates, are providing the equity for a different set of active users.  In a regional cooperative, the local cooperative has a (potentially) infinite life and their business volume does not decline as they age.  A regional cooperative using base capital plan (with either qualified or nonqualified stock) keeps their equity proportional to use and would not redeem equity to a growing local cooperative.  The base capital system in a regional cooperative is not that far divorced from the concept of a component of permanent capital.  In any case, equity management decisions are independent on whether the equity is qualified or nonqualified.

The last issue raised by regional nonqualified distributions is whether it should influence the local cooperative’s distribution.  If the regional nonqualified is not expected to be redeemed it obviously has no impact on the local cooperative’s decisions.  If it is expected to be redeemed there could be a conceptual fairness advantage for a nonqualified distribution by the local cooperative.  As discussed, in the article on segregating regional patronage, mirroring the regional patronage tends to add complexity rather fairness to equity management.  A better practice is for the local cooperative to make the profit distribution and equity management decisions that protect the cooperative and maximize their members’ return.

Local cooperatives are increasingly examining nonqualified distributions.  If you missed our national webinar on nonqualified distributions you can still view at http://www.extension.org/cooperatives under archived webinars.  I have also just completed a white paper on “Understanding Nonqualified Distributions” which is available if you contact me.