FASB issues proposal to improve accounting for investments in tax credit structures

By Kevin Brewer

The FASB today issued a proposal Update of accounting standards (ASU) aimed at improving the accounting and disclosure of investments in tax credit structures.

Proposed ASU changes would allow reporting entities to elect to account for their tax fairness investments under the proportionate depreciation method if certain conditions are met, regardless of the program from which the tax credits on income are received. The election would be program by program.

The proposed amendments would also require disclosures to help users of financial statements understand the entity’s investments that generate tax credits and other tax benefits.

Under the proportional depreciation method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax advantages received and recognizes the net depreciation and the tax credits and other tax advantages in the account as a component of income tax expense (benefit).

Investments in other tax credit structures are generally accounted for using the equity or cost method, which results in investment gains and losses and tax credits being presented gross in the account. results in their respective positions.

In 2014, the FASB published a Standard which introduced a limited option for reporting entities to elect to apply the proportionate depreciation method to account for investments made in low-income housing tax credit structures for the purpose of generating tax benefits .

In recent years, stakeholders have asked the FASB to expand the option. They wanted reporting entities to be able to choose to apply the proportional depreciation method to tax equity investments that generate tax credits through other programs, such as the New Markets Tax Credit Program, the Historic Rehabilitation Tax Credit Program and the Renewable Energy Tax Credit Programs.

These stakeholders noted that the proportional amortization method helps users of financial statements better understand the returns on these investments than the equity or cost methods.

Stakeholders are encouraged to review and provide feedback on the proposed ASU by October 6. The proposed update is a consensus for the FASB’s Emerging Issues Working Group exposure.

— To comment on this article or suggest an idea for another article, contact Kevin Brewer at [email protected].

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