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

C.7 Other Accounting Methods When the Proportional Amortization Method Cannot Be Used or Is Not Elected

ASC 323-740

25-2 For an investment in a qualified affordable housing project through a limited liability entity not accounted for using the proportional amortization method, the investment shall be accounted for in accordance with Subtopic 970-323. In accounting for such an investment under that Subtopic, the requirements in paragraphs 323-740-25-3 through 25-5 and paragraphs 323-740-50-1 through 50-2 of this Subsection that are not related to the proportional amortization method, shall be applied.

25-2A Accounting for an investment in a qualified affordable housing project using the cost method may be appropriate. In accounting for such an investment using the cost method, the requirements in paragraphs 323-740-25-3 through 25-5 and paragraphs 323-740-50-1 through 50-2 of this Subsection that are not related to the proportional amortization method shall be applied.

25-4 The decision to apply the proportional amortization method of accounting is an accounting policy decision to be applied consistently to all investments in qualified affordable housing projects that meet the conditions in paragraph 323-740-25-1 rather than a decision to be applied to individual investments that qualify for use of the proportional amortization method.

ASC 970-323

25-8 If the substance of the partnership arrangement is such that the general partners are not in control of the major operating and financial policies of the partnership, a limited partner may be in control. An example could be a limited partner holding over 50 percent of the limited partnership’s kick-out rights through voting interests in accordance with paragraph 810-10-15-8A. A controlling limited partner shall be guided in accounting for its investment by the principles for investments in subsidiaries in Topic 810 on consolidation. Noncontrolling limited partners shall account for their investments by the equity method and shall be guided by the provisions of Topic 323, as discussed in the guidance beginning in paragraph 970-323-25-5, or by the guidance in Topic 321.

Under ASC 323-740-25-2, if a limited liability investment in a QAHP is not accounted for under the proportional amortization method, either because it does not qualify or because the proportional amortization method is not elected, an entity is required to account for such investment in accordance with ASC 970-323.

ASC 970-323-25-6 generally requires use of the equity method of accounting for limited partnership real estate investments unless the limited partner’s interest is “so minor [(generally considered to be no more than 3 to 5 percent)] that the limited partner may have virtually no influence over partnership operating and financial policies.”

For situations in which the equity method of accounting is not required under ASC 970-323-25-6, ASC 970-323-25-8 indicates that noncontrolling limited partners should account for their investments by using the equity method and should “be guided by the provisions of Topic 323, as discussed in the guidance beginning in paragraph 970-323-25-5, or by the guidance in Topic 321.” Alternatively, ASC 323-740-25-2A (added by ASU 2016-01) notes that it may be appropriate to account for a QAHP by using the cost method. ASU 2016-01 also removed the reference to the cost method6 in ASC 970-323 and superseded ASC 325-20.

Because of this conflicting guidance, we believe that investors are able to make a policy election regarding the accounting for QAHP investments that are not accounted for by using the proportional amortization method and that do not qualify for the equity method. Such investments may be accounted for under either (1) ASC 321 or (2) the modified cost method of accounting described in ASC 323-740-25-2A and ASC 323-740-55-7. Once a policy election is made, it should be applied consistently to all QAHP investments.

Example C-8

On January 1, 20X1, Company A makes a $100,000 QAHP investment in exchange for a 5 percent limited partnership interest. Further assume that:

Company A accounts for its investment by using the cost method.
The partnership is financed entirely with equity.
Company A recognizes annual tax credits equal to 9 percent of the original cost of the property ($200,000) in each year for 10 years starting in 20X1.
Book and tax depreciation are determined by using a straight-line method over 25 years.
Company A’s statutory tax rate is 25 percent.
The project will operate with break-even pretax cash flows.
The estimated residual value of A’s investment is zero.

Each year, the cost of the investment is amortized in proportion to the tax credits generated. The key difference between the application of the cost method and the application of the proportional amortization method is that under the cost method, the amortization of the investment is not recorded within the income tax line item.

Footnotes

Note that the cost method referenced in ASC 323-740 is a modified form of the cost method previously codified in ASC 325-20. See Example C-8 for the application of the modified cost method discussed in ASC 323-740 to a QAHP investment.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.