Simplified investor accounting for tax equity investments

Investors in certain equity investments (e.g. certain investments in renewable energy projects that generate tax credits) may elect the proportional amortization method by tax credit program.

Applicability

• Equity investors in income tax credit structures through limited liability entities (e.g. partnerships, LLCs) that are flow-through entities for tax purposes (i.e. tax equity investments) 

Relevant dates

• March 29, 2023 – FASB issues ASU 2023-02

Key impacts

The scope, recognition and measurement provisions of the ASU:

• Expand the population of qualifying investments to which the PAM may be applied.
• Clarify the criteria that must be met for a tax equity investment to qualify for the use of the PAM.
• Provide for election of the PAM on a tax-credit-program-by-tax-credit-program basis.
• Require use of the flow-through method to account for the related tax credit when the PAM is applied even if the investor has generally elected the deferral method of accounting for its investment tax credits.
• Remove the guidance that indicates it may be appropriate to apply the cost method to a low-income housing tax credit (or LIHTC) investment.
• Remove the equity method impairment example involving an LIHTC investment.
• Make the delayed equity contributions guidance applicable only when the PAM is applied to a tax equity investment.
• Require disclosures on an interim and annual basis for tax equity investments within tax credit programs for which the PAM is elected, regardless of whether the PAM is applied.
• Requires adoption of the expansion of the PAM and PAM-related clarifications on either a modified retrospective or retrospective basis.
• Requires adoption of each type of the non-PAM-related changes using either the prospective method or the transition method elected for adoption of the PAM-related changes.

Report contents

• Source and applicability
• Fast facts, impacts, actions
• Overview of PAM
• Overview of ASU
• Clarifications to the qualifying investment criteria
• Other amendments to ASC 323-740
• Disclosures
• Effective dates and transition

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