C.5 Initial Measurement

Investments that are accounted for in accordance with ASC 323-740, including QAHP investments that are not accounted for in accordance with the proportional amortization method, are initially recognized at cost. The cost of the investment should include (1) the initial investment amount, (2) the amount of any unconditional and legally binding future contributions to be made, and (3) the cost of any future contributions that are contingent on a future event that is determined to be probable. Notwithstanding the reference to the leverage lease accounting guidance in ASC 323-740-25-3, we believe that these delayed equity contributions are not required to be recognized on a discounted basis. However, if an investor elected to record delayed equity contributions on a discounted basis and recognize the subsequent accretion expense, we would not object.

See Section C.6.2 for further interpretive guidance on how to adjust the proportional amortization calculation for commitments to fund that are made, or are contingent and become probable, after the initial measurement of the investment.

Further, while ASC 323-740 does not explicitly state that an entity is not required to recognize deferred taxes for the temporary difference related to its QAHP investment, ASU 2014-01 amended the example in ASC 323-740-55-2 through 55-5 so that it no longer addresses the recognition of deferred taxes for the temporary difference.

In the Background Information and Basis for Conclusions of ASU 2014-01, the EITF expressed the view that the proportional amortization method better reflects a QAHP investment’s economics than the equity or cost methods of accounting and thus should help users better understand such investments. As shown in Column K of the table in Example C-2, if an entity does not record deferred taxes when using the proportional amortization method, there will be a return in all periods that is positive and in proportion to the investment amortization in each respective period. Column O of the table in Example C-2, on the other hand, shows that when deferred taxes are recorded on the investment, a net decrease in income tax expense (or increase in benefit) occurs in the early years and a net increase in income tax expense (or reduction of benefit) occurs in later years. We believe that result is less indicative of the overall economics, is more difficult for financial statement users to understand, and is therefore generally inconsistent with the EITF’s overall objectives in ASU 2014-01. Nonetheless, we are aware that others believe that since the asset is an investment, an entity would not be precluded from accruing deferred taxes on the related temporary difference. Entities that take this view are encouraged to consult with their income tax accounting advisers.

We believe that when an entity uses the practical expedient described in ASC 323-740-35-4, as discussed in further detail in Section C.6.3, it should recognize deferred taxes on the investment. Under the practical expedient, the entire cost of the QAHP investment is amortized over only the period during which the QAHP credits are received (generally 10 years). The period over which “other tax benefits” such as depreciation will be received may be longer (e.g., depreciation deductions would normally be taken over a period of 15 years or longer). When deferred taxes are recognized for the temporary difference, the current tax benefit for the “other tax benefits” received after the amortization of the investment’s cost is offset by deferred tax expense resulting from the reversal of the DTA recognized for the remaining tax basis. We believe that when using the practical expedient, an entity should record deferred taxes since this approach results in a better reflection of the investment’s performance and thus should provide users with a better understanding of an entity’s QAHP investment, as demonstrated in Column O of the table in Example C-4.

If the practical expedient is used and deferred taxes are not recorded, a reporting entity will recognize “other tax benefits” in the years after the cost of the investment has been amortized, and those other tax benefits will not be reduced by the cost of obtaining them in the period in which they are recognized. The investment may result in an Incremental expense in the early years and an incremental benefit in the later years. We believe that these results are less reflective of the overall economics of the investment and, again, inconsistent with the overall objectives of ASU 2014-01.