The Financial Accounting Standards Board has issued Accounting Standards Update (ASU) 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force). The amendments in this ASU permit reporting entities to elect to account for their tax equity investments regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method (PAM) if certain conditions are met. Under prior GAAP, reporting entities could only elect to apply the PAM to investments in low-income-housing tax credit (LIHTC) structures.
Electing the PAM for eligible investments allows the reporting entity to amortize the cost of the investment in proportion to the income tax credits and other income tax benefits received, and present both the amortization of the investment and the income tax credits together, as a component of income tax expense (benefit). An entity that does not elect the PAM for eligible investments will continue to apply the equity method of accounting in Accounting Standards Codification (ASC) Topic 323 or the guidance inASC 321, which results in investment income, gains and losses, and tax credits being presented gross on the income statement in their respective line items.
The ASU requires specific disclosures for all investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the PAM, including investments within that elected program that do not meet the conditions to apply the PAM.
For public business entities, the ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. The amendment in this ASU must be applied either on a modified retrospective or a retrospective basis except for LIHTC investments not accounted for using the proportional amortization method.
