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

D.8 Transition

D.8.1 Transition Guidance

ASC 323-740

65-2 The following represents the transition and effective date information related to Accounting Standards Update No. 2023-02, Investments — Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method:

A public business entity shall apply the pending content that links to this paragraph for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.
All other entities shall apply the pending content that links to this paragraph for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years.
For all entities, early adoption, including adoption in an interim period, is permitted. If an entity adopts in an interim period, it shall adopt as of the beginning of the fiscal year that includes that interim period.
Except for the transition adjustment types described in (e), an entity shall apply the pending content that links to this paragraph using either a modified retrospective approach or a retrospective approach. Under both a modified retrospective approach and a retrospective approach, an entity that elects to apply the proportional amortization method shall determine as of the date that an investment was entered into, and considering the effect of any modifications, including those that may require reassessment as discussed in paragraph 323-740-25-1C, whether the investment qualifies for the proportional amortization method on the basis of the following:
1. Under a modified retrospective approach, that evaluation shall be performed for all investments that are still expected to generate either income tax credits or other income tax benefits from a tax credit program as of the date of adoption. To make that determination, the entity shall use actual income tax credits and other income tax benefits received and remaining benefits expected as of the date of adoption. A cumulative-effect adjustment shall be recognized to the opening balance of retained earnings at the beginning of the fiscal year of adoption for the difference between the previous accounting and the new method of accounting since the investment was entered into.
2. Under a retrospective approach, that evaluation shall be performed for all investments that are still expected to generate either income tax credits or other income tax benefits from a tax credit program as of the beginning of the earliest period presented. To make that determination, the entity shall use actual income tax credits and other income tax benefits received and remaining benefits expected as of the beginning of the earliest period presented. A cumulative-effect adjustment shall be recognized to the opening balance of retained earnings at the beginning of the earliest period presented for the difference between the previous accounting and the new method of accounting since the investment was entered into.
3. Under both a modified retrospective approach and a retrospective approach, an entity shall use actual equity contributions made and remaining equity contributions expected to be made as of the date at which an entity first applies the pending content that links to this paragraph in applying the guidance in paragraph 323-740-25-3.
An entity that holds investments in limited liability entities that manage or invest in qualified affordable housing projects and are flow-through entities for tax purposes that no longer are permitted to apply the cost method guidance, the impairment guidance in the equity method Example, or the delayed equity contribution guidance shall apply the pending content that links to this paragraph using the transition method elected in (d) or a prospective approach. Under a prospective approach, an adjustment as a result of applying the pending content that links to this paragraph to investments in qualified affordable housing projects held at the date of adoption shall be recognized in current-period earnings, the balance sheet, or both on the date of adoption. An entity may elect to apply its transition method in (d) or a prospective approach separately for each of the three transition adjustment types in this subparagraph. An entity shall apply a consistent transition method for each transition adjustment type.
Investments for which the proportional amortization method is used shall follow the flow-through method described in paragraph 740-10-25-46. An entity may have previously elected to apply the deferral method. That election is not applicable to investments that are accounted for using the proportional amortization method.
An entity shall provide the following transition disclosures consistent with Topic 250 on accounting changes and error corrections:
1. The nature of and reason for the change in accounting principle
2. The transition method and a description of prior-period information that has been retrospectively adjusted, if any
3. The effect of the change on income from continuing operations, net income, and any affected per-share amounts for the prior periods retrospectively adjusted
4. The cumulative effect of the change on retained earnings
5. A qualitative description of the financial statement line items affected by the change.
An entity that issues interim financial statements shall provide the disclosures in (g) in the financial statements of both the interim period of the change and the fiscal year of the change.

D.8.1.1 Effective Date

The amendments in ASU 2023-02 are required to be implemented by PBEs for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. All other entities are required to implement the amendments in ASU 2023-02 for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. For all investors, early adoption is permitted, including adoption in an interim period. If an entity adopts in an interim period, it should adopt as of the beginning of the fiscal year that includes that interim period. For example, if a calendar-year-end non-PBE tax equity investor elects to adopt the amendments in ASU 2023-02 in the quarter ending on June 30, 2024, it would adopt the amendments as of January 1, 2024.

D.8.1.2 Transition Approach

Entities have the option to implement the amendments in ASU 2023-02 by using either the retrospective approach or the modified retrospective approach (the general transition approach). If the retrospective approach is elected, an entity would record a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the earliest reporting period presented. If electing the modified retrospective approach, an entity would record a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the first reporting period in which the guidance is effective.

D.8.1.2.1 Investments Previously Accounted for Under the Proportional Amortization Method in ASC 323-740

After ASU 2023-02 is adopted, investments previously accounted for under the proportional amortization method in ASC 323-740 should continue to be accounted for under that method. We generally believe that any investments that were previously accounted for under the proportional amortization method would continue to qualify for that accounting after adoption of ASU 2023-02.

If the investor decides to change its election so that it no longer elects to apply the proportional amortization method, this would be considered a change in accounting principle, and the investor would need to apply the guidance in ASC 250-10.

D.8.1.2.2 Investments, Other Than QAHPs, Not Previously Accounted for Under the Proportional Amortization Method in ASC 323-740

Regardless of the general transition approach selected, if an entity has an investment other than a QAHP that was not previously accounted for under the proportional amortization method in accordance with ASC 323-740, it should determine whether the investment is still expected to generate either income tax credits or other income tax benefits from a tax credit program. Such a determination must be made as of either (1) the beginning of the earliest period presented if the retrospective transition approach is being applied or (2) the period of adoption if the modified retrospective transition approach is being applied.

If an entity determines that its investment other than a QAHP that was not previously accounted for under the proportional amortization method is still expected to generate income tax credits or other income tax benefits from a tax credit program, it should consider the effect of any subsequent modifications and determine, as of the date that the investment was entered into, whether the investment qualifies for the proportional amortization method (see Section D.3). This determination should incorporate actual income tax credits and other tax benefits earned to date as well as an estimate of the remaining income tax credits and other income tax benefits to be earned from the investment.

If such an investment qualifies for use of the proportional amortization method and the tax equity investor has elected to apply such method to investments that earn income tax credits through that program, the tax equity investor should account for the investment by using the proportional amortization method in accordance with the guidance in ASC 323-740, as amended by ASU 2023-02.

D.8.1.2.3 Select QAHP Not Previously Accounted for Under the Proportional Amortization Method in ASC 323-740

Before adoption of ASU 2023-02, the guidance in ASC 323-740 is applicable to all equity investments in a QAHP regardless of whether they were accounted for under the proportional amortization method. After adoption of ASU 2023-02, the guidance in ASC 323-740 is applicable only to those tax equity investments that are accounted for under the proportional amortization method (except for disclosure requirements as described in Section D.7.2). As a result, there are certain provisions in ASC 323-740 that no longer apply to QAHP investments that are not accounted for under the proportional amortization method. Therefore, the EITF determined that special transition guidance should be provided for these investments.

As described in Section D.8.1.2, the amendments in ASU 2023-02 can generally be implemented by using the retrospective or modified retrospective approach. However, ASU 2023-02 provides three exceptions from the general transition approach in which the amendments can be implemented by using the prospective approach. For investments in QAHPs that did not previously qualify for the proportional amortization method, or for which the proportional amortization method was not previously elected, the prospective transition method can be used to account for the following:

Transitioning from the cost method to another acceptable method of accounting for QAHP investments that are not accounted for under the proportional amortization method and that do not qualify for use of the equity method of accounting (see Section D.8.1.2.3.1).
Transitioning from the impairment guidance for equity method investments as illustrated in the example in ASC 323-740-55-8 and 55-9 to the impairment guidance in ASC 323-107 (see Section D.8.1.2.3.2).
Transitioning from the delayed equity contribution guidance in ASC 323-740-25-3, since this guidance is no longer applicable for QAHP investments that are not accounted for under the proportional amortization method (see Section D.8.1.2.3.3).

The prospective transition approach can be elected for each of these three exceptions independently (i.e., the same transition approach does not have to be selected for each of the three provisions mentioned above). However, if the prospective approach is not elected, the investor should use the “general transition” approach described above to implement the amendments in ASU 2023-02.

D.8.1.2.3.1 Transition From Cost Method

Before the adoption of ASU 2023-02, ASC 323-740 allows entities to use the modified cost method8 for investments in QAHPs that do not qualify for or are not accounted for under the proportional amortization method and do not qualify to be accounted for as equity method investments. After the adoption of ASU 2023-02, investments may no longer be accounted for under the modified cost method and, as a result, would transition to being accounted for either (1) at fair value in accordance with ASC 321 or (2) under the measurement alternative provided by ASC 321.9 In this scenario, the entity would record, to the opening balance of retained earnings, a cumulative-effect adjustment equal to the difference between the historical carrying amount of the investment and the carrying amount of the investment after applying ASC 321 as follows, depending on the transition approach selected:

Retrospective transition approach — A cumulative-effect adjustment would be recorded as of the beginning of the earliest period presented for the difference between (1) the historical investment balance on that date and (2) what the investment balance would have been had the investment historically been accounted for in accordance with ASC 321.
Modified retrospective transition approach — A cumulative-effect adjustment would be recorded as of the beginning of the period of adoption for the difference between (1) the historical investment balance on that date and (2) what the investment balance would have been had the investment historically been accounted for in accordance with ASC 321.
Prospective transition approach — No cumulative-effect adjustment would be recorded. Instead, the investment balance would be adjusted for the difference between (1) the balance as accounted for under the cost method as of the date of adoption and (2) what the investment balance would have been had the investment historically been accounted for in accordance with ASC 321, with an offsetting adjustment recognized in current-period earnings.

ASC 321 typically requires entities to measure equity investments at fair value but permits a measurement alternative for equity investments without a readily determinable fair value. If the investor elects the measurement alternative provided in ASC 321 (in which the investment is accounted for at initial cost, less impairment) while also considering observable price changes, the investor would need to assess whether there were any impairments that would have been identified under ASC 321. This is because the investment was initially acquired and recognized by using the cost method. In addition, the investor would need to assess whether there were any observable price changes in orderly transactions for the identical or a similar investment and measure the investment at fair value as of the date on which the observable transaction occurred. In effect, the investor should determine what the investment balance would have been if it had been measured in accordance with ASC 321 since the date the cost method was applied (usually inception) and then record a cumulative-effect adjustment as described above.

Note that ASC 321 was codified as a result of the issuance of ASU 2016-01. The guidance in ASU 2016-01 was effective for PBEs for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, the guidance in ASU 2016-01 was effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Therefore, some entities may have existing QAHP investments that were entered into before the adoption of ASU 2016-01. For such entities, we believe the tax equity investments should have been accounted for as though the modified cost method in ASC 323-740 was applied before the tax equity investor’s adoption of ASU 2016-01; therefore, the cumulative-effect adjustment recorded would incorporate some periods in which the investment was accounted for under the modified cost method and some in which ASC 321 was applied.

The timeline below illustrates various impairment considerations related to the accounting for investments during the following three periods: (A) before the adoption of ASU 2016-01, (B) after the adoption of ASU 2016-01 but before the adoption of ASU 2023-02, and (C) after the adoption of ASU 2023-02.

During period A, an entity should assess investments in QAHPs that did not qualify for (or did not elect to use) the proportional amortization method or equity method of accounting for impairment by using the modified cost method in ASC 323-740.
During period B, an entity should assess these QAHP investments by using ASC 321 (fair value or the measurement alternative).
During period C, if the measurement alternative was selected and an impairment was identified in historical periods by using the guidance outlined for periods A and B above, an entity should record the difference between that impairment and any actual historical impairment recognized as part of the cumulative-effect adjustment. The entity should assess tax equity investments accounted for by using ASC 321 for impairment on the basis of the guidance in ASC 321.

D.8.1.2.3.2 Transition From Equity Method Impairment Guidance

Before the adoption of ASU 2023-02, ASC 323-740 includes an example illustrating how a QAHP investment accounted for under the equity method should be assessed for impairment. After the adoption of ASU 2023-02, ASC 323-740 no longer includes this equity method impairment example, and it is now only applicable to investments accounted for by using the proportional amortization method. (However, note that the example that was included in ASC 323-740-55-8 and 55-9 diverged from how impairment of typical equity method investments is calculated.) After the adoption of ASU 2023-02, investors applying the equity method to account for an investment in a QAHP should apply the guidance in ASC 323-10 to determine whether the equity method investment is impaired. That is, after the adoption of ASU 2023-02, there should be no difference between how a QAHP investment accounted for under the equity method should be assessed for impairment and how other equity method investments accounted for in accordance with ASC 323-10 are assessed.

Regardless of the transition approach elected, we believe that the tax equity investor should assess, on the basis of the guidance in ASC 323-10, whether there were any impairments since the initial recognition of the QAHP investment. If an impairment is identified on the basis of the guidance in ASC 323-10 or an impairment was previously recognized on the basis of the superseded guidance in ASC 323-740, an entity should do the following, depending on the transition approach elected:

Retrospective transition approach — A cumulative-effect adjustment should be recorded as of the beginning of the earliest period presented to (1) give effect to the impairment being recognized in accordance with ASC 323-10 and (2) reverse the impact of any impairment that was recognized in accordance with the example in ASC 323-740.
Modified retrospective transition approach — A cumulative-effect adjustment should be recorded as of the beginning of the period of adoption to (1) give effect to the impairment being recognized in accordance with ASC 323-10 and (2) reverse the impact of any impairment that was recognized in accordance with the example in ASC 323-740.
Prospective transition approach — No cumulative-effect adjustment should be recorded. Instead, the impact of recognizing the impairment in accordance with ASC 323-10 and reversing the impairment (if any) that was previously recognized by using the example in ASC 323-740 should be recorded in the period of adoption as an adjustment to the investment balance, with an offsetting impairment charge recognized in current-period earnings.

D.8.1.2.3.3 Transition From Delayed Equity Contribution Guidance

Before the adoption of ASU 2023-02, ASC 323-740 includes guidance that requires investors in QAHPs to gross-up their investment balance for the amount of any unconditional and legally binding future contributions to be made, as well as future contributions that are contingent on a future event that is determined to be probable. An offsetting liability would then be recorded for the amount of the future contributions included in the investment balance. While that guidance continues to exist in ASC 323-740-25-3 after the adoption of ASU 2023-02, because the scope of investments subject to ASC 323-740 has changed, it should no longer be applied to investments for which the proportional amortization method is not applied. If an investor has QAHP investments accounted for in accordance with the cost method, ASC 321, or the equity method that have been grossed up for delayed equity contributions, this transition guidance would apply upon adoption of ASU 2023-02 as follows, depending on the transition approach elected:

Retrospective transition approach — The investment balance and offsetting liability for the delayed equity contribution would be netted down as of the beginning of the earliest period presented. Said differently, the balance sheet would no longer reflect the increased investment balance or corresponding liability for the portion of the tax equity investment not yet funded.
Modified retrospective and prospective transition approaches — The investment balance and offsetting liability for the delayed equity contribution should be netted down as of the beginning of the period of adoption. Because there should be no difference between the amount of the investment balance and the liability being netted down, there is no cumulative-effect adjustment or income statement impact, and these two transition approaches are effectively the same.

We believe that if an entity elects the retrospective or modified retrospective transition approach, a tax equity investment that was previously impaired but for which a delayed equity contribution has been recorded should be reassessed for impairment under the applicable accounting framework. If the reduction of the investment balance that results from applying this transition guidance would cause an impairment to no longer be identified, the reversal or adjustment of that impairment should be recognized as part of the cumulative-effect adjustment.

D.8.1.3 Transition Illustrative Example — ASC 323 to Proportional Amortization

Example D-7

On June 30, 2022, Investor A made an initial investment in Facility W, which generates income tax credits through onshore wind production, and has historically accounted for this investment as an equity method investment. Because A is a PBE, it is required to adopt ASU 2023-02 for its fiscal year beginning January 1, 2024.

On January 1, 2024, A adopts ASU 2023-02 by using the modified retrospective transition approach and elects to apply the proportional amortization method for qualifying tax equity investments that generate income tax credits through onshore wind production. Investor A determines that (1) as of the date of adoption, the investment is still expected to generate either income tax credits or other income tax benefits from a tax credit program and (2) as of the investment date (June 30, 2022), the investment still qualifies for use of the proportional amortization method and is eligible for such accounting under ASC 323-740-25-1.

On the basis of the assessment of these two factors, A determines that its investment in W meets the new requirements to be accounted for under the proportional amortization method and calculates the cumulative-effect adjustment to the opening balance of retained earnings as follows:

The subsequent accounting for A’s investment in W will be no different from the subsequent accounting for an investment accounted for by using the proportional amortization method since inception. The amortization of the investment in W recognized each period will be based on the proportional amortization calculation used to determine the initial cumulative-effect adjustment.10

D.8.2 Summary of Differences in ASC 323-740 Before and After the Implementation of ASU 2023-02

ASC 323-740 (Before Implementing ASU 2023-02)	ASC 323-740 (After Implementing ASU 2023-02)
Scope
The guidance applies to qualified11 investments in limited liability entities that manage or invest in QAHPs and are flow-through entities for tax purposes. See Section C.1.	The guidance applies to qualified12 investments in limited liability entities that are made primarily for receiving income tax credits and other income tax benefits and are flow-through entities for tax purposes. It is no longer limited to investments in QAHPs. See Section D.1.
If the proportional amortization method is elected, it must be applied to all investments that qualify for the proportional amortization method. See Section C.1.	The proportional amortization method is elected on a tax-credit-program-by-tax-credit-program basis. It is not required to be applied to all investments that qualify for the proportional amortization method. See Section D.1.
The scope criterion in ASC 323-740-25-1(aaa), which requires substantially all projected benefits from the investment to be from income tax credits or other tax benefits, does not specify how refundable income tax credits should be considered in this assessment. See Section C.3.1.	The scope criterion in ASC 323-740-25-1(aaa), which requires substantially all projected benefits from the investment to be from income tax credits or other income tax benefits, clarifies that in the evaluation of this condition, income tax credits accounted for outside of the scope of ASC 740 (e.g., refundable income tax credits) should be included in total projected benefits but not in income tax credits and other income tax benefits. See Section D.3.
The scope criterion in ASC 323-740-25-1(aaa), which requires substantially all projected benefits from the investment to be from income tax credits or other income tax benefits, does not specify whether this should be assessed on a discounted basis. There is significant diversity in practice in how this assessment is performed.	The scope criterion in ASC 323-740-25-1(aaa), which requires substantially all projected benefits from the investment to be from income tax credits or other income tax benefits, clarifies that this condition should be determined on a discounted basis by using a discount rate that is consistent with the cash flow assumptions used by the investor when determining whether it would invest in the underlying project. See Section D.3.
If Proportional Amortization Is Not Elected or Does Not Apply
Investments that do not qualify to be accounted for in accordance with the proportional amortization method (ASC 323-740) or the equity method (ASC 323) can be accounted for in accordance with either the modified cost method as illustrated in ASC 323-740-55 or in accordance with ASC 321. See Section C.7.	Investments that do not qualify to be accounted for in accordance with the proportional amortization method (ASC 323-740) or the equity method (ASC 323) should be accounted for in accordance with ASC 321. The cost method that was illustrated in an example in ASC 323-740 is no longer an acceptable option. See Section D.1.
Specific illustrative guidance is available addressing how investments in QAHPs that are accounted for in accordance with the equity method can be assessed for impairment. See Section C.6.5.2.	There is no unique guidance on how to assess tax equity investments accounted for by using the equity method for impairment. Instead, investors should refer to the guidance in ASC 323-10 or ASC 323-30, depending on the scope of the guidance applicable to that investment. See Section D.6.5.
Specific guidance for QAHPs not accounted for by using the proportional amortization method allows investors to gross up their initial investment balance for the amount of any unconditional and legally binding future contributions to be made, as well as future contributions that are contingent on a future event that is determined to be probable. An offsetting liability is then recorded for the amount of the future contributions included in the investment balance. See Section C.5.1.	While similar guidance continues to exist in ASC 323-740-25-3 that allows investors to gross up their initial investment balance, such guidance should no longer be applied to investments that do not apply the proportional amortization method. See Section D.8.1.2.3.3.

Footnotes

See the guidance in AC 323-10-35-31 through 35-32A.

Note that the cost method previously referenced in ASC 323-740 was a modified form of the cost method previously codified in ASC 325-20. See Section C.6 for more information.

The measurement alternative provided in ASC 321 allows an equity security without a readily determinable fair value to be subsequently measured at cost, less impairment, factoring in observable price changes (see ASC 321-10-35-2).

To determine this amount, the investor needs to create a proportional amortization calculation as if the investment were accounted for by using the proportional amortization method since June 30, 2022, the date of the initial investment. This amount would equal the investment balance as of January 1, 2024.

To qualify for the proportional amortization method, investments would need to meet the criteria outlined in ASC 323-740-25-1, as discussed in more detail in Sections D.3 and D.4.

See footnote 11.

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