ASU 2023-02 Expands Applicability of Guidance on Investments in Tax Credit Structures
On March 29, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-02. Under ASU 2023-02, the optional proportional amortization method that was previously limited to tax equity investments in low-income-housing tax credit investments (LIHTC) will now be permitted for tax equity investments “regardless of the tax credit program or programs from which the investment generates income tax credits.” For example, an entity making a tax equity investment for the purpose of receiving tax credits from Renewable Energy Tax Credit, New Markets Tax Credit, or Historic Rehabilitation Tax Credit programs may now elect to use the proportional amortization method.
However, five conditions, including “that substantially all of the projected benefits [from the investment] are from income tax credit and other income tax benefits,” must be met to qualify for this accounting treatment. Additionally, ASU 2023-02 includes amendments that remove the specialized guidance for low-income-housing tax credit investments (LIHTC) “that are not accounted for using the proportional amortization method and instead require that those LIHTC investments be accounted for using the guidance in other generally accepted accounting principles.”
Entities electing the proportional amortization method net the amortization of the investment and the income tax benefits received within income tax expense or benefit presented on the statement of operations. Entities not applying the proportional amortization method would apply other US GAAP to the investment such as the equity method of accounting or ASC Topic 321, Investments-Equity Securities as applicable. The election of the proportional amortization method is made on a tax-credit-program-by-tax-credit-program basis for qualifying investments.
The standard also provides specific disclosure requirements including the nature of the tax equity investments and the effect on the financial position and result of operations. The new guidance is effective for public business entities for fiscal years, including interim periods within, beginning after Dec. 15, 2023 and for all other entities for fiscal years, including interim periods within, beginning after Dec. 15, 2024. Ealy adoption is permitted, and the amendments are applied either on a modified retrospective or retrospective basis. The FASB press release located on the organization’s website contains further details about the ASU. As always, contact our team of experts at MHM for further information on how this may affect your business. Published on April 11, 2023