Low-income housing tax credit (LIHTC) industry observers are hopeful that the recently announced accounting change will attract new investors to the market.
What is the change?
The Emerging Issues Task Force has unanimously voted to recommend an Accounting Standards Update for LIHTC investments to the full board of the FASB. It is anticipated that the Board will accept the recommendation at its next meeting in December, making the new guidance effective for the fiscal years ending after 12/15/14 with early adoption permitted.
The Task Force voted on the following:
- To reverse course on its preliminary conclusion that LIHTC investments be presented as deferred tax assets in the balance sheet, which would have been a negative outcome.
- To adopt proportional amortization as the new method of accounting with the amortization period tied to tax credits rather than all tax benefits. Equity accounting will continue to be the law for LIHTC investments that do not meet the four basic criteria and it will be a permissible method for investments that qualify if the investor choses it as an accounting policy method. Investments accounted made prior to adoption which satisfied the EITF 94-1 criteria can continue to be accounted for using the effective yield method.
- The ASU will provide that the proportional amortization period will be based solely on the expected tax credits. However, in cases where the pattern of benefits shows that there will be significant remaining benefits at the conclusion of the tax credit period, investors will be permitted to utilize a proportional amortization period which more nearly reflects the actual tax benefit period.
- To recommend expansion of the scope to “other tax credits” that meet the four requirements for the new accounting. However it became apparent that the full Board was likely to require re-exposure of the draft update if so expanded. As a result, the Task Force voted to recommend the new accounting solely for LIHTC and to recommend re-issuance of the draft ASU with respect to other credit investments that meet the criteria adopted for LIHTC investments. Task Force members and FASB board members are concerned about the potential conflict between tax credit investments that must be structured to demonstrate a profit motive and the new requirement that substantially all of the expected investment benefits must come from tax credits and tax losses.
It is too early to know whether this change will allow the tax credit industry to attract investment from companies that have previously not participated. However, most industry observers agree that the change can only help.