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EITF Agrees: Accounting Guidance for Investments in Affordable Housing Tax Credits Needs Revision


 

On March 14, 2013, the FASB Emerging Issues Task Force (EITF) considered, Accounting for Investments in Affordable Housing Tax Credits (Issue 13-B), and voted to propose new guidance regarding when those investments will qualify for use of the effective yield method. Since the mid-1990s investors have had to meet strict requirements in order to apply the effective yield method, which severely limited the number of investments that qualify for its use. Investments that failed to meet the requirements generally were required to apply the equity method of accounting.

Revision of the Accounting Guidance:

The significant change that is expected to be proposed in the accounting guidance relates to the requirements that must be met in order to qualify for the effective yield method, specifically regarding the need for guarantee and whether or not other tax benefits besides the tax credits can be included in the measurement.

The presentation of an investment in affordable housing tax credits is significantly different under the two methods. Under the equity method, investment costs are presented on a pretax basis while the tax credits and other tax benefits are presented as a component of the income tax provision. Under the effective yield method, investment costs are netted with the tax credits and presented as a single net tax benefit component of the income tax provision. In other words, the effective yield method eliminates the income statement geography problems of the equity method and allows the costs and benefits of the investment to be presented together in a more understandable presentation.

Benefits of a Revision:

Such a change would be a major enhancement to the accounting for investments in affordable housing tax credits, which has long been perceived as a concern of many potential investors that has potentially limited the appetite of some investors for these investments.

Consideration by the EITF of the accounting for investments in affordable housing tax credits was the culmination of a sustained effort by a working group of concerned industry stakeholders which was spearheaded by Ron Diner of Raymond James Tax Credit Funds, Inc. in collaboration with Mike Beck, CohnReznick Partner, and Bentley Stanton of Novogradac.

To facilitate the effort, Mike Beck co-authored a white paper with Bentley Stanton entitled, Significant Changes Needed in Accounting for Affordable Housing and Other Tax Credit Investments, which was issued in June 2012.

The EITF staff will develop new proposed accounting guidance which will be exposed for public comment. Once the process has been completed the EITF will finalize its recommendations and submit them to the FASB for final approval. We encourage all interested parties to participate in the standards setting process of making their views known during the exposure draft comment period.

Contact:
If you have any questions regarding the effective yield method or would like to join the working group, please contact Mike Beck, CohnReznick Partner in Charge - Real Estate Audit and Assurance, at 404-847-7728 or michael.beck@cohnreznick.com or Beth Mullen, CohnReznick Affordable Housing Practice - National Director, at 916-930-5750 or beth.mullen@cohnreznick.com


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

 
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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