Accounting Standards Update: Topic 842 and Topic 323

ASU 2023-01, Leases (Topic 842): Common Control Arrangements

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update, ASU 2023-01, Leases (Topic 842): Common Control Arrangements to simplify the accounting rules under ASC 842, Leases as it relates to leases when the lessor and lessee are under common control. ASU 2023-01 was previously summarized in Accounting Standards Update: Leases (Topic 842): Common Control Arrangements.

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 FASB has also issued 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) to address the accounting for tax benefits arising from investments in tax credit programs other than low-income housing.

Summary

ASU 2023-02 expands the availability of the proportional amortization method of investment recognition to investments in tax credit structures such as New Market Tax Credits, Historic Rehabilitation Tax Credits, and Renewable Energy Tax Credits. Entities impacted by this ASU are companies such as financial institutions that invest in tax credit programs.

Background

Governments have tax credit programs to incentivize investor participation in certain activities, such as creation of affordable housing, rehabilitation of historic buildings, and development of renewable energy sources, by providing investors with credits on their federal tax liabilities in exchange for providing capital to such projects. Under existing guidance, investments in partnerships or other legal entities are generally accounted for under the equity method. An accounting alternative exists specifically for investments in LLCs that receive low-income-housing tax credits (LIHTCs). That alternative is called the proportional amortization method and is generally viewed by investors as a method of recognition that better reflects the economics of the investment where the purpose is to pass through the benefits of the tax credits to the investor. The method recognizes the cost of the investment by amortizing it through income tax expense offsetting the tax credits and other benefits received. Amortization is computed proportional to the total tax benefits expected to be received.

The proportional amortization method was limited specifically to LIHTCs, and investors had asked the FASB why the proportional amortization method wasn’t also allowed for recognition of investments in similar tax credit structures. Ultimately, the FASB agreed, and ASU 2023-02 expands the availability of the proportional amortization method to other tax credit structures that meet specific criteria. Not all tax credit structure investments will meet the eligibility criteria so it’s important to consult with your CPA about adoption of the ASU.

Effective Date and Transition

For public companies, the updated guidance is effective for fiscal years beginning after Dec. 15, 2023. Private companies have an additional year to apply the guidance, which is effective for private companies for fiscal years beginning after Dec. 15, 2024. Early adoption in any interim period is permitted.

The new guidance is required to be applied retrospectively using one of the following two approaches:

1. A modified retrospective basis, which requires a cumulative catch-up adjustment to retained earnings as of the beginning of the fiscal year in which the standard is adopted, or
2. A full retrospective basis, which requires all prior periods presented to be revised to conform to the new accounting guidance. A cumulative catch-up adjustment to retained earnings is made as of the beginning of the earliest period presented.

For questions on how to implement these new accounting standards, please contact your KSM advisor or complete this form.