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FASB to Expand Use of Accounting Method to More Tax-Credit Investments

Jan. 18, 2023

The change largely affects financial firms such as banks and insurers, which often invest in these programs to lower their tax liabilities

The Financial Accounting Standards Board is moving to permit companies to apply a certain accounting method to more tax-credit investments, enabling them to record similar spending in a consistent way.

Federal and state governments offer tax-credit programs to encourage investment in areas such as affordable housing, community development and clean energy. Companies invest in these programs to receive credits that reduce their tax liabilities. In recent years, more businesses have invested in renewable-energy tax credits as investors push them to boost corporate sustainability efforts.

To account for most tax credit-investments, businesses currently have to use the equity method, which requires them to record a share of the profits or losses associated with the investments. Companies, however, don’t consider this approach reflective of the underlying value of investments, causing an issue as more of them invest in tax-credit programs.

There is another way to account for these investments, called the proportional amortization method. Under that approach—which was only available for investments related to low-income-housing tax-credit programs—companies match their investment losses with the income-tax credits and other benefits, such as depreciation, that they received in the same

The FASB, which sets accounting standards for U.S. companies, on Wednesday voted to allow companies to use this amortization method for any tax-credit investments that meet certain criteria. For example, to apply the method, the returns of an investment that is being amortized have to be in the form of tax credits and other tax benefits.

The rule primarily affects public and private financial institutions, such as banks and insurance companies, which often make these types of investments. It is set to go into effect for public companies in early 2024 and for private businesses a year later. The FASB expects to issue the new standard by late March, a spokeswoman said.

The standard-setter in September 2021 added the project to its agenda. It is separate from an existing project on accounting for climate-related transactions, such as renewable-energy credits, which are certificates that regulators offer to energy providers when they deliver energy to a power grid. The FASB hasn’t proposed a rule on that yet.

Some executives and companies in recent months have said the FASB’s tax-credit-accounting proposal didn’t go far enough. The proposed rule should be expanded to cover state-based premium tax-credit programs, which provide refundable tax credits to insurers that have tax liabilities in particular states and are similar to income tax-credit programs, Kevin Spataro, senior vice president of accounting policy and research at insurance firm Allstate Corp. , wrote in an October letter to the FASB.

“Due to the nature and construction of these programs, the [proposed rule] should allow these structures to be included in its scope and allow the proportional amortization to be applied,” Mr. Spataro said at the time.

The FASB decided against including these programs as it intended its project to have a narrow scope.

Bank of America Corp. said in October it was concerned that the proposal was too narrow and that it wouldn’t meet the FASB’s goal of having similar accounting rules for similar tax-credit structures.

“The board should provide expanded guidance and or examples as to how to apply this guidance,” Michael Tovey, the bank’s corporate controller, said in a letter to the FASB at the time.

Bank of America declined to comment Wednesday, while Allstate didn’t immediately respond to a request for comment.

[CFO Journal]

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