FASB Issues New Accounting Rules for Investments in Tax Credit Structures

Apr. 13, 2023

Reporting entities can now elect to account for qualifying tax equity investments using the proportional amortization method.

The Financial Accounting Standards Board (FASB) issued a new standard on March 29 that will allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits.

Reporting entities were previously permitted to apply the proportional amortization method only to qualifying tax equity investments in low-income housing tax credit (LIHTC) structures.

But in recent years, stakeholders had asked the FASB to extend the application of the proportional amortization method to qualifying tax equity investments that generate tax credits through other programs, which resulted in the FASB’s Emerging Issues Task Force addressing this issue.

Accounting Standards Update (ASU) No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits.

For public companies, the amendments are effective for fiscal years beginning after Dec. 15, 2023, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period.

[CPA Practice Advisor]