FASB EITF Approves Changes to GAAP Accounting For LIHTC

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On November 14, the Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) reached consensus on amendments to Generally Accepted Accounting Principles (GAAP) for accounting by investors in low-income housing tax credit (LIHTC) investments.

The changes will allow the cost of LIHTC investments, on investors’ financial statements, to be amortized “below the line” in income tax expense along with the tax credits. If investors elect to adopt this new accounting treatment (they could continue to use the cost or equity method if they wish), the method of amortizing an LIHTC investment changes from the effective yield method to the proportional amortization method.

It is widely believed that these changes will bring more investor capital to affordable housing investments.

The changes need final approval from the FASB, which is scheduled to meet on December 11. Assuming final approval then, early adoption would allow investors with a calendar year end to apply this new guidance for 2013, as well as for future years.

The EITF also agreed that LIHTC investments are to be amortized over the period of the tax benefits (both tax credits and other tax benefits). However, as a practical expedient, the amortization computation can be based solely on the tax credits if such computation does not produce a significantly different amortization result from one which is based upon both tax credits and other tax benefits.

The EITF deferred any decision regarding the applicability of the guidance to other tax credit investments.

 

Qualification Criteria for New Accounting Treatment

Under the approved guidance, an entity may elect to adopt the new accounting treatment to account for its LIHTC investment “below the line” and use the proportional amortization method if all of the following conditions are met:

 

  1. It is probable that the tax credits allocable to the investor will be available.
  2. The investor does not have the ability to exercise significant influence over the operating and financial policies of the limited liability entity, and substantially all of the projected benefits are from tax credits and other tax benefits (for example, tax benefits generated from the operating losses of the investment).
  3. The investor’s projected yield based solely on the cash flows from the tax credits and other tax benefits is positive.
  4. The investor is a limited liability investor in the affordable housing project for both legal and tax purposes, and the investor’s liability is limited to its capital investment.

 

A nationwide task force of LIHTC investors and sponsors, led by Raymond James Tax Credit Funds and working with Bentley Stanton at Novogradac & Company LLP and Mike Beck at CohnReznick LLP, developed the white paper which was the basis for the resulting accounting changes.