FASB issues proposal to improve accounting for investments in tax credit structures

August 22, 2022

FASB today issued a proposed Accounting Standards Update (ASU) intended to improve the accounting and disclosures for investments in tax credit structures.

The amendments in the proposed ASU would allow reporting entities to elect to account for their tax equity investments using the proportional amortization method if certain conditions are met, regardless of the program from which the income tax credits are received. The election would be on a program-by-program basis.

The proposed amendments would also require disclosures to help financial statement users understand the entity's investments that generate income tax credits and other income tax benefits.

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).

Investments in other tax credit structures are typically accounted for using the equity or cost method, which results in investment gains and losses and tax credits being presented gross on the income statement in their respective line items.

In 2014, FASB issued a standard that introduced a limited option allowing reporting entities to elect to apply the proportional amortization method to account for investments made in low-income housing tax credit structures for the purpose of generating income tax benefits.

In recent years, stakeholders have asked FASB to expand the option. They wanted reporting entities to be able to elect to apply the proportional amortization method to tax equity investments that generate tax credits through other programs, such as the new markets tax credit program, the historic rehabilitation tax credit program, and renewable energy tax credit programs.

These stakeholders noted that the proportional amortization method helps financial statement users understand returns from these investments better than the equity or cost methods.

Stakeholders are encouraged to review and provide comments on the proposed ASU by Oct. 6. The proposed update is a consensus-for-exposure of FASB's Emerging Issues Task Force.

[Journal of Accountancy]