The Financial Accounting Standards Board (FASB) has issued an accounting standards update, ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects” to “provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit.”
Under current U.S. GAAP, a reporting entity that invests in a qualified affordable housing project may elect to account for that investment using the effective yield method if certain conditions are met. If such conditions are not met the investment would likely be accounted for under the cost or equity method of accounting. The update allows for the use of the proportional amortization method. Under this method the net investment performance is recorded as a component of income tax expense (which is also the prescribed classification under the effective yield method). Per the update, to qualify for the proportional amortization method, all of the following conditions must be met:
- It is probable that the tax credits allocable to the investor will be available.
- The investor does not have the ability to exercise significant influence over the operating and financial policies of the limited liability entity.
- 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).
- The investor’s projected yield, based solely on the cash flows from the tax credits and other tax benefits, is positive.
- The investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment.
ASU 2014-01 is to be applied retrospectively and is effective for public business entities for annual periods (and interim periods within those annual periods) beginning after December 15th, 2014. For all other entities, the update is effective for annual periods beginning after December 15, 2014 (and interim periods within annual periods beginning after December 15, 2015). The update allows for early adoption.
Compliance with, and understanding of, FASB standards updates can be complex. If you would like to benefit from our expertise in these areas or if you have further questions on this Advisory, do not hesitate to contact our Audit and Assurance Specialists, or call us at 1-800-239-1474.