Summary of the June Meeting of the Emerging Issues Task Force
This EITF Snapshot summarizes the June 16, 2022, meeting of the Emerging Issues Task Force (“EITF” or “Task Force”). Initial Task Force consensuses (consensuses-for-exposure) are exposed for public comment upon ratification by the Financial Accounting Standards Board (FASB). After the comment period, the Task Force considers comments received and redeliberates the issues at a scheduled meeting to reach a final consensus. Those final consensuses are then provided to the FASB for final ratification and, ultimately, issuance as an Accounting Standards Update (ASU).
The official EITF minutes will be posted to the Deloitte Accounting Research Tool (DART) and to the FASB’s Web site (note that the official EITF minutes may contain details that differ from those in this publication). EITF meeting materials (released before the meeting and used to frame the discussion) are also available on those sites.
Issue 21-A, “Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”
Status: Initial deliberations.
Affects: Entities that invest in tax credit programs other than low-income housing tax credit (LIHTC) investments.
Background: Through the LIHTC program established by the federal government, tax credits are awarded to developers of low-income housing. These developers often monetize the value of tax credits with investors. For the investor to receive these tax credits, a limited liability entity is typically established in which the developer acts as the general partner and the investor acts as the limited partner.
In January 2014, the FASB issued ASU 2014-011 (codified in ASC 323-7402), which allows investors to use the proportional amortization method to account for LIHTC investments if the criteria in ASC 323-740-25-1 are met. ASC 323-740-35-2 states, in part, that “[u]nder the proportional amortization method, the investor amortizes the initial cost of the investment in proportion to the tax credits” received through the LIHTC investment. Further, the investor recognizes the amortization and the tax credits on a net basis in its income statement as a component of income tax expense from continuing operations. If the criteria in ASC 323-740-25-1 are not met, the investor typically uses the equity method to account for its investment.
Since the issuance of ASU 2014-01, stakeholders have continued to support expanding the proportional amortization method to investments in tax credit programs other than LIHTC investments. At its September 22, 2021, meeting, the FASB decided to add a project on this topic to the EITF’s technical agenda. In this project, the EITF has considered whether such an expansion is appropriate and has evaluated whether narrow clarifications should be made to the current criteria in ASC 323-740-25-1 to permit entities to use the proportional amortization method to account for investments in tax credit programs other than LIHTC investments.
Summary: The EITF held decision-making meetings on March 24, 2022, and June 16, 2022, and made the following decisions during those meetings:
The scope of the proportional amortization method would be expanded to include all investments in tax credit programs that meet the criteria in ASC 323-740-25-1.
The FASB will retain criteria (a),3 (b),4 and (c)5 from ASC 323-740-25-1 without making any additional clarifications to them. Criterion (aa)6 will also be retained, but the Board will clarify that the assessment is based on whether the investor can exercise significant influence over the operating and financial policies of the underlying project.
When applying criterion (aaa)7 in ASC 323-740-25-1, an investor would not automatically be precluded from applying the proportional amortization method when refundable tax credits exist. Accordingly, the Board would revise criterion (aaa) so that “projected benefits” clearly refer to total return, including tax credits, other tax benefits, and non-tax-related cash flows. Further, the Board would clarify that (1) the refundable tax credits should be included in the denominator but not the numerator of the calculation when criterion (aaa) is applied, (2) discounted amounts should be used in applying the criterion, and (3) the discount rate to be used will not be specified but will be based on a principle that the discount rate used should be consistent with the cash flow assumptions used by the investor.
An entity is permitted to elect the proportional amortization method on a tax-credit-program-by-tax-credit-program basis for tax credit investments that meet the criteria in ASC 323-740-25-1.8
A reassessment of whether a tax credit investment meets the criteria for the proportional amortization method would be required only upon a change in (1) the nature of the investment or (2) the relationship with the project sponsor.
Entities would be required to apply the flow-through method to account for the tax credit itself when tax equity investments qualify for, and are accounted for by using, the proportional amortization method.
The disclosure requirements would apply to all investments in tax credit programs for which an entity elects the proportional amortization method. In addition, while the preexisting disclosure objective in ASC 323-740-50-1 would be retained, conforming amendments would be made. Further, the level of disclosure required by ASC 323-740-50-2 would be enhanced (e.g., the specific line items presented and discussion of any significant modifications to the investment).
Effective Date and Transition: The Task Force tentatively decided that an entity would be required to (1) apply either the modified prospective transition method or the retrospective transition method and (2) comply with the disclosure requirements in ASC 250-10-50-1 and 50-2; however, the Board would clarify that an entity would not be required to justify the change on the basis of preferability. The Task Force will discuss the effective date at a future meeting after considering stakeholder feedback on the proposed amendments.
Next Steps: The FASB staff will draft a proposed ASU that it intends to present for Board ratification in mid-July 2022.
The next EITF decision-making meeting is tentatively scheduled for September 15, 2022.
FASB Accounting Standards Update No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects — a consensus of the FASB Emerging Issues Task Force.
For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”
Criterion (a) states, “It is probable that the tax credits allocable to the investor will be available.”
Criterion (b) states, “The investor’s projected yield based solely on the cash flows from the tax credits and other tax benefits is positive.”
Criterion (c) states, “The investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment.”
Criterion (aa) states, “The investor does not have the ability to exercise significant influence over the operating and financial policies of the limited liability entity.”
Criterion (aaa) states, “Substantially all of the projected benefits are from tax credits and other tax benefits (for example, tax benefits generated from the operating losses of the investment).”
At its March 24, 2022, meeting, the EITF preliminarily decided that the proportional amortization method would have to be applied as a policy to all tax credit investments that qualified. However, at its June 16, 2022, meeting, the EITF redeliberated the accounting policy election related to the proportional amortization method and reversed the preliminary decision made at its March 24, 2022, meeting.