Appendix D — ASC 323-740 After the Adoption of ASU 2023-02

D.2 Introduction

D.2.1 Tax Equity Investments

ASC 323-740

05-1 This Subtopic contains standalone guidance on the use of the proportional amortization method to investments made primarily for the purpose of receiving income tax credits and other income tax benefits. Income tax accounting guidance on other types of equity method investments and joint ventures is contained in Subtopics 740-10 and 740-30.

Tax equity investments, including investments in QAHPs, are a subset of investments that are made through limited liability entities for the purpose of obtaining income tax credits and other income tax benefits generated by the investee. Because these types of investments are typically structured as “flow-through” entities for tax purposes, the investors are entitled to directly receive income tax benefits generated by the investee, typically in the form of income tax credits and income tax deductions from operating losses.

ASC 323-740 permits investments that meet certain scope criteria (see Section D.3) to be accounted for by using the proportional amortization method at the election of the investor. The sections below provide additional information on the impact of ASU 2014-01 and ASU 2023-02 on the guidance in ASC 323-740.

In March 2023, the FASB issued ASU 2023-02. Before adoption of ASU 2023-02, tax equity investments are typically accounted for in accordance with ASC 323, or industry specific guidance such as ASC 970-323. In that regard, ASC 970-323-05-4 specifies that QAHP investments should be accounted for in accordance with ASC 323-740. That is, only QAHP investments that meet certain criteria are eligible to be accounted for by using the proportional amortization method. However, if those criteria are not met, or if the tax equity investor did not elect to apply the proportional amortization method, other guidance in ASC 323-740 would apply to those QAHP investments. After the adoption of ASU 2023-02, any tax equity investments that meet certain criteria can be accounted for by using the proportional amortization method in accordance with ASC 323-740. As a result, the scope of the investments to be accounted for under ASC 323-740 changes after the adoption of ASU 2023-02.

D.2.2 Before the Adoption of ASU 2014-01

Before the adoption of ASU 2014-01, a tax equity investor could have elected, if certain criteria were met, to account for its QAHP investments 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 way 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.

D.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, a tax equity investor can elect to account for its investment in a QAHP by using the proportional amortization method, which required 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 could continue to apply that method for those prior investments.

D.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. Specifically, this ASU expands the use of the proportional amortization method, which was previously limited to tax equity investments in QAHPs, to all tax equity investments regardless of the program from which the income tax credits are received, if certain conditions are met.

Under ASU 2023-02, an investor must make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis. For all tax equity investments accounted for under the proportional amortization method, an entity must use the flow-through method to account for ITCs received through the tax equity investments, even if the entity uses the deferral method for other ITCs it received. Further, ASU 2023-02 removes the guidance in ASC 323-740 that was specific to QAHP investments that were accounted for by using the equity method or cost method (rather than proportional amortization).

The remainder of this appendix is applicable to investors who have adopted ASU 2023-02. For additional guidance on the application of ASC 323-740 for investors who have not yet adopted the ASU, see Appendix C.

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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.