ACCOUNTING STANDARDS UPDATE 2023-02— INVESTMENTS—EQUITY METHOD AND JOINT VENTURES (TOPIC 323): ACCOUNTING FOR INVESTMENTS IN TAX CREDIT STRUCTURES USING THE PROPORTIONAL AMORTIZATION METHOD (A CONSENSUS OF THE EMERGING ISSUES TASK FORCE)

Overview

On March 29, 2023, The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that improves the accounting and disclosures for investments in tax credit structures. The ASU is a consensus of the FASB’s Emerging Issues Task Force (EITF).

The amendments in this Update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met.

Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). To qualify for the proportional amortization method, if elected in accordance with paragraph 323-740-25-4, all of the following conditions must be met:

1. It is probable that the income tax credits allocable to the tax equity investor will be available.
2. The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project.
3. Substantially all of the projected benefits are from income tax credits and other income tax benefits. Projected benefits include income tax credits, other income tax benefits, and other non-income-tax-related benefits. The projected benefits are determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project.
4. The tax equity investor’s projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive
5. The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor’s liability is limited to its capital investment.

A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. A reporting entity that applies the proportional amortization method to qualifying tax equity investments must account for the receipt of the investment tax credits using the flow-through method under Topic 740, Income Taxes, even if the entity applies the deferral method for other investment tax credits received.

The amendments in this Update require that all tax equity investments accounted for using the proportional amortization method use the delayed equity contribution guidance in paragraph 323-740-25-3 (which requires that a liability be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event when that contingent event becomes probable). LIHTC investments not accounted for using the proportional amortization method will no longer be permitted to use the delayed equity contribution guidance in paragraph 323-740-25-3. In addition, the amendments in this Update remove the equity method impairment example for LIHTC investments in Example 1 in Subtopic 323-740. As a result of this change, LIHTC investments accounted for using the equity method must apply the impairment guidance in Subtopic 323-10, Investments—Equity Method and Joint Ventures—Overall. Furthermore, the amendments in this Update require that LIHTC investments that are not accounted for using the proportional amortization method or the equity method apply the guidance in Topic 321 on the accounting for equity investments. As a result of these changes, the guidance in Subtopic 323-740 is applicable only to tax equity investments accounted for using the proportional amortization method.

Transition and Effective Dates

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. If an entity adopts the amendments in an interim period, it shall adopt them as of the beginning of the fiscal year that includes that interim period.

The amendments in this Update must be applied on either a modified retrospective or a retrospective basis (except as discussed below for LIHTC investments not accounted for using the proportional amortization method). Under a modified retrospective transition, a reporting entity evaluates all investments for which it still expects to receive income tax credits or other income tax benefits as of the beginning of the period of adoption. The assessment of whether the investment qualifies for the proportional amortization method is performed as of the date the investment was entered into. A cumulative-effect adjustment reflecting the difference between the previous method used to account for the tax equity investment and the application of the proportional amortization method since the investment was entered into is recognized in the opening balance of retained earnings as of the beginning of the period of adoption.

Under a retrospective transition, a reporting entity evaluates all investments for which it still expects to receive income tax credits or other income tax benefits as of the beginning of the earliest period presented. The assessment of whether the investment qualifies for the proportional amortization method is performed as of the date the investment was entered into. A cumulative-effect adjustment reflecting the difference between the previous method used to account for the tax equity investment and the application of the proportional amortization method since the investment was entered into is recognized in the opening balance of retained earnings as of the beginning of the earliest period presented.

A reporting entity that has LIHTC investments that are no longer permitted to use (1) the cost method guidance in paragraph 323-740-25-2A, (2) the equity method example in paragraphs 323-740-55-8 through 55-9, or (3) the delayed equity contribution guidance in paragraph 323-740-25-3 must either use its general transition method (that is, modified retrospective or retrospective) or apply a prospective approach. This election may be made separately for each of the three transition adjustment types described above. However, a reporting entity shall apply a consistent transition method for each transition adjustment type. Under the prospective transition approach, an adjustment for affected LIHTC investments currently recorded on the date of adoption, is recognized in current-period earnings, or the balance sheet, or both, on the date of adoption.

Additional Information

• Download the Accounting Standards Update
• Read the Press Release introducing the ASU

Post-Issuance Activities

None.

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