Appendix C — ASC 323-740 Before the Adoption of ASU 2023-02

C.2 Introduction

C.2.1 QAHP Investments

A QAHP investment is a form of tax equity investment in which an investor invests in a QAHP through a limited liability entity for the purpose of obtaining low-income housing tax credits (LIHTCs) and other tax benefits generated by the QAHP. The LIHTCs generated are applied to the investor’s tax return each year over a 10-year period. These investments, which in practice are sometimes also referred to as LIHTC investments, are typically structured as “flow-through” entities for tax purposes. Therefore, the investor is entitled to directly receive tax benefits generated by the QAHP, typically in the form of tax credits and tax deductions from operating losses.

Investments in real estate, such as housing projects, should be accounted for in accordance with ASC 970-323. This guidance generally requires the use of the equity method of accounting for limited partnership real estate investments unless the limited partnership interest is so minor that it has essentially no influence over the investee. In such a case, the investment would typically be accounted for at fair value in accordance with ASC 3212 (unless the measurement alternative is elected). However, ASC 970-323-05-4 refers to ASC 323-740 for QAHP investments that satisfy the conditions in ASC 323-740.

ASC 323-740 permits an investor in a QAHP that meets certain scope criteria (see Section C.3) to make an accounting policy election to account for its QAHP investment by using either the effective yield method (for investments entered into before the adoption of ASU 2014-01 3) or the proportional amortization method (for investments entered into after the adoption of ASU 2014-01). If this policy election is made, it should be applied consistently to all QAHP investments that meet the scope criteria. Further, ASC 323-740 also provides incremental guidance for QAHP investments that do not qualify for, or do not elect to use, the proportional amortization method (see Section C.7). See Sections C.2.2, C.2.3, and C.2.4 for additional information on the impact of ASU 2014-01 and ASU 2023-02 on the guidance in ASC 323-740.

ASC 323-740

05-3 The following discussion refers to and describes a provision within the Revenue Reconciliation Act of 1993; however, it shall not be considered a definitive interpretation of any provision of the Act for any purpose. The Revenue Reconciliation Act of 1993, enacted in August 1993, retroactively extended and made permanent the affordable housing credit. Investors in entities that manage or invest in qualified affordable housing projects receive tax benefits in the form of tax deductions from operating losses and tax credits. The tax credits are allowable on the tax return each year over a 10-year period as a result of renting a sufficient number of units to qualifying tenants and are subject to restrictions on gross rentals paid by those tenants. These credits are subject to recapture over a 15-year period starting with the first year tax credits are earned. Corporate investors generally purchase an interest in a limited liability entity that manages or invests in the qualified affordable housing projects.

C.2.2 Before the Adoption of ASU 2014-01

Before the adoption of ASU 2014-01, an investor could have elected, if certain criteria were met, to account for its investment in a QAHP by using the effective yield method. Under this method, tax credits are applied to (recognized in) the investor’s tax return over a 10-year period and the investor’s initial cost of investment is amortized in a manner that provides a constant effective yield over the same 10-year period. An investor that used the effective yield method to account for QAHP investments it entered into before adopting ASU 2014-01 is permitted to continue applying this method to such investments until it transitions to the updated guidance in ASU 2023-02 (see Appendix D).

C.2.3 After the Adoption of ASU 2014-01

ASU 2014-01 replaced the effective yield method with the proportional amortization method. Under this ASU, an investor can elect to account for its investment in a QAHP by using the proportional amortization method, which requires that the investor’s initial cost of the investment be amortized in proportion to the tax credits and other tax benefits received. ASC 323-740-35-4 notes that “[a]s a practical expedient, an investor is permitted to amortize the initial cost of the investment in proportion to only the tax credits allocated to the investor if the investor reasonably expects that doing so would produce a measurement that is substantially similar to” the one that would have resulted if it had applied the full proportional amortization method.

Although the provisions of ASU 2014-01 were required to be applied retrospectively, an investor that used the effective yield method to account for its QAHP investments before adopting ASU 2014-01 may continue to apply that method for those prior investments.

C.2.4 Issuance of ASU 2023-02

In March 2023, the FASB issued ASU 2023-02, which further updates the guidance in ASC 323-740 and expands its applicability to investments other than QAHPs. See Appendix D for a discussion of ASC 323-740 after the adoption of ASU 2023-02.

The remainder of this appendix is applicable to investors who have not adopted ASU 2023-02.

Footnotes

See footnote 1.

For public entities, ASU 2014-01 became effective for fiscal years beginning after December 15, 2014, and interim periods therein. For nonpublic entities, the ASU became effective for fiscal years beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early adoption was permitted.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.