EITF Defers Adoption of Revised GAAP LIHTC Guidance

Published by Michael Novogradac on Friday, September 13, 2013 - 12:00am

The Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) at its meeting this morning deferred approval of revised standards that would allow investors to use a “proportional amortization” (as opposed to effective yield) method to recover the cost of their investments in LIHTCs “below the line.”  These revised standards, if ultimately adopted, should expand the pool of potential LIHTC investors and is something that the industry has been working toward for years.  Unfortunately the deferral of a decision today will keep some equity investors on the sidelines a few more months.

In discussing the guidance, the EITF spent considerable time on staff’s suggested insertion of “no substantive participating rights” language.  The EITF ultimately directed staff to alter the language to be more consistent with equity method of accounting guidance.   The EITF also discussed cash flow classification, impact of investor loans and contingent rights.

Regarding “proportional amortization”, the EITF considered effective yield (4 votes) and proportional over tax credits (1 vote) vs. tax credits and other tax benefits (9 votes).

Impairment was also discussed.  Should a “more likely than not” standard be used and could any allowance be restored?  Twelve (12) members supported using a valuation allowance approach.

For balance sheet presentation, there were 8 votes for reporting the investment as a deferred tax asset.

The next regularly scheduled meeting is November 14, 2013.

If the guidance is ultimately adopted, the cost of LIHTC investments could generally be amortized “below the line” even when a guarantee is not provided, if certain other criteria are met, including that  the expected tax credits and other tax benefits exceed the amount invested.

More specifically, EITF staff had suggested, in advance of today’s meeting, that an investment had to meet the following conditions:

1. It is probable that the tax credits allocable to the investor will be available.

2. The investor retains no substantive participating rights in the investment, 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 limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment.

The amendments in this Update would be applied retrospectively. (This received 8 votes.) Early adoption would be permitted as of the beginning of the fiscal year of adoption for financial statements not yet issued. Under the staff proposal the guidance would have been effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.

There was discussion of allowing investors currently using effective yield method to continue to use the effective yield method of accounting treatment for those prior investments.  This concept received 12 votes of support.

Industry stakeholders, led by Ron Diner at Raymond James Tax Credit Funds Inc., formed a group in 2010 to support the change, and last year Novogradac & Company partner Bentley Stanton and Michael Beck of CohnReznick addressed the issues surrounding accounting methods and tax credit investments in a white paper. “Significant Changes Needed in Accounting for Affordable Housing and Other Tax Credit Investments” described the need for changes to the accounting rules that reflect the unique nature of tax credit investments.

The EITF previously instructed staff to draft updated LIHTC GAAP guidance at its March meeting and released an exposure draft of guidance in April. It invited comments on the draft until June 17. An article in the September issue of the Novogradac Journal of Tax Credits discusses the proposal and some of comments that stakeholders submitted.

A significant issue that remains is how today’s discussion regarding GAAP accounting for the LIHTC impacts GAAP accounting for new markets tax credits, historic tax credits and renewable energy tax credits. The updated guidance currently does not preclude application to other tax credits.

There was discussion of expanding to new markets tax credits, historic tax credits and renewable energy tax credits, among other tax driven investments.  There was a sense that more analysis was needed.  Members expressed a desire to develop a plan to address other tax credits.  A suggestion was made to address GAAP accounting for new markets tax credits next.  Discussion included allowing analogous application as well as precluding application to other tax credits.  There was support for some level of analogous treatment (10 votes).

Regarding re-exposure, some members felt it was clearly needed.  Others disagreed.  Staff noted 3 items haven’t received feedback: deferred tax assets treatment, valuation allowance rules and no provision for deferred taxes.  Support for re-exposure had 3 votes, support for simply doing outreach approach had 11 votes.

I’ll be discussing the meeting in more detail in my Sept. 17th Tax Credit Tuesday podcast and the proposed changes will be a topic of considerable conversation at the 20th Annual Novogradac Affordable Housing Conference next month in San Francisco.

Bentley Stanton will be writing an article about the effect that the proposed changes would have on the LIHTC industry for the November issue of the Novogradac Journal of Tax Credits.

Please join me in thanking Ron Diner, Michael Beck and Bentley Stanton for all they have done to get us to this point.  Both fortunately and unfortunately, the march continues. . . .