The Financial Accounting Standards Board released a
The exposure draft, which comes from FASB's Emerging Issues Task Force, originated from questions that arose about a 2014 accounting standard that allowed companies to elect to apply the proportional amortization method to account for investments mostly made for the purpose of receiving income tax credits and other income tax benefits. The guidance issued by FASB at the time limited the proportional amortization method to investments in Low-Income Housing Tax Credit structures.
Under the proportional amortization method, a company amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of the income tax expense or benefit. Investments in other types of tax credit structures are usually accounted for using the equity or cost method, which results in investment gains and losses and tax credits being presented gross on the income statement in their respective line items.
While the original guidance limited the option to Low-Income Housing Tax Credits, in recent years, stakeholders have asked FASB to let reporting entities elect to apply the proportional amortization method to tax equity investments that generate tax credits through other programs, such as the New Markets Tax Credit, the Historic Rehabilitation Tax Credit and the Renewable Energy Tax Credit. They pointed out that the proportional amortization method gives users of financial statements a better understanding of the returns from investments that are made mainly for the purpose of receiving income tax credits and other income tax benefits than the equity or cost methods.
The amendments in the proposed accounting standards update would enable reporting entities to elect to account for their tax equity investments using the proportional amortization method if specific conditions are met, regardless of the program from which the income tax credits are received. The election would be made on a program-by-program basis. The proposed amendments would also require companies to make certain disclosures so financial statement users can better understand the nature and impact of the entity's investments that generate income tax credits and other income tax benefits.
FASB is asking for comments on the proposed ASU by Oct. 6, 2022.
