Using the proportional amortisation method in equity investments in tax credit structures
Jeffrey A. Ford
by Jeffrey A. Ford
In March 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 20231-02 to achieve consistency in the accounting and reporting of equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits.
The main provisions
Reporting entities may elect to account for their tax equity investments using the proportional amortisation method, if certain conditions are met, regardless of the tax credit program from which the income tax credits are received.
Under the proportional amortisation method, an entity amortises the initial cost of the investment in proportion to income tax credits and other income tax benefits received, and recognises the net amortisation, income tax credits, and other income tax benefits in the income statement as a component of income tax expense (benefit).
To qualify, all the following conditions must be met:
It is probable that the income tax credits allocable to the tax equity investor will be available.
The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project.
Substantially, all projected benefits are from income tax credits and other income tax benefits. Projected benefits include income tax credits, other income tax benefits, and other non-income-tax-related benefits. The projected benefits are determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project.
The tax equity investor's projected yield is positive, based solely on the cash flows from income tax credits and other income tax benefits.
The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor's liability is limited to its capital investment.
An electing entity must also:
Apply the proportional amortisation method on a tax-credit-program-by-tax-credit-program basis, rather than electing to apply the proportional amortisation method at the reporting entity level or to individual investments.
Account for the receipt of investment tax credits using the flow-through method under Topic 740, Income Taxes, even if the entity applies the deferral method for other investment tax credits received.
Use the delayed equity contribution guidance, which requires that a liability be recognised for delayed equity contributions that are unconditional and legally binding, or recognised for equity contributions that are contingent upon a future event when that contingent event becomes probable.
Of course, specified disclosures are also required.
Effective dates
These amendments are effective for fiscal years beginning after 15 December 2023 for public companies and 15 December 2024 for other entities. Early adoption is permitted.
Jeffrey A. Ford is a Founding Partner at Grossman Yanak & Ford LLP. He has over 30 years of experience, focused in audit and assurance, M&A transactions, and technology consulting. Jeff has served on a variety of ownership groups including public and private companies, private equity groups and international investors. Contact Jeff.
Grossman Yanak & Ford LLP is a full-service CPA firm, headquartered in Pittsburgh, Pennsylvania. Their accounting and consulting service offerings include audit and assurance, tax advisory and compliance, business valuation and litigation support, business advisory/ management consulting, and ERP solutions.
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