The FASB has issued an Exposure Draft related to Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, which would allow for 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, this ASU 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 statements 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 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.

The effective date would be determined once the Exposure Draft is approved and application of the election would be done on the modified prospective or retrospective basis. For the modified prospective application, the reporting entity would analyze its investments that receive income tax credit or other income tax benefits at the date of adoption based on the date the investment was entered into and record a cumulative adjustment to retained earnings. For the retrospective application, the adoption would be applied as an adjustment to retained earnings at the earliest period presented.

Comments related to the questions outlined in this Exposure Draft are due to the FASB by October 6, 2022. The full text of the Exposure Draft is available here.

 

^{Readers should not act upon information presented without individual professional consultation.}