The FASB has issued ASU 2023-02 related to Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, which allows reporting entities to account for investments made primarily for the purpose of receiving income tax credit and other income tax benefits consistently. While ASU 2014-01 provided guidance to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits, ASU 2014-01 only addressed low income housing tax credit structures.

Stakeholders noted that other economically similar investments should be able to make the same election to apply the proportional amortization method. Under the proportional amortization method, the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received with the investment gains and losses and tax credits is presented in the income statement as a component of income tax expense or benefit. This better represents the returns from such investments than the equity or cost method.

To qualify for the proportional amortization method, all of the following conditions must be met:

• Probable that the income tax credits allocable to the investor will be available
• Investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project
• 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 should be 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.
• Investor’s projected yield based solely on the cash flows from the income tax credits and other tax benefits is positive
• Investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment

The election is made at the tax credit program level rather than the reporting entity level. The proportional amortization method accounts for the receipt of the investment tax credits using the flow-through method under ASC 740, Income Taxes. Disclosures should provide an understanding of the tax equity investments on the proportional amortization method and the impact on the financial position and results of operations of the reporting entity.

For public business entities, the ASU is effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted at any period including interim periods but must be applied effective the beginning of that fiscal year. The assessment of whether the investment qualifies for proportional amortization is performed at the date the investment is entered into.

The ASU can be applied on either a modified retrospective with a cumulative-effect adjustment reflecting the proportional amortization method recognized in opening retained earnings in the year of adoption or a retrospective basis with a cumulative-effect adjustment reflecting the proportional amortization method recognized in opening retained earnings in the earliest period presented.

The full text of ASU 2023-02 is available here.