FASB Updates Accounting Standards for LIHTC Sites
The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update No. 2014-01. This accounting standards update provides the guideline for the new accounting treatment the board approved in December for investments in qualified affordable housing properties. Many believe this change will increase the flow of capital to affordable housing.
These new standards affect how entities account for limited partnership investments in low-income housing tax credit (LIHTC) projects, allowing the cost of LIHTC investments to be amortized “below the line” in income tax expense along with the tax credits.
If an investor elects to adopt this new accounting treatment, the method of amortizing an LIHTC investment changes from the effective yield method to the proportional amortization method, if the following conditions are met:
- It is probable that the tax credits allocable to the investor will be available;
- The investor does not participate in the operation of the investment, and substantially all of the projected benefits are from the tax credits and other tax benefits;
- The investor's expected return is positive, based solely on the cash flows from the tax credit and other tax benefits; and
- The investor holds a limited interest (LLP or LLC) in the affordable housing project for both legal and tax purposes, and the investor's liability is limited to its capital investment.
For LIHTCs that do not meet the criteria, the investment would be accounted for as either an equity or cost method investment.
The updated standards are effective for public businesses for annual periods and interim reporting periods beginning after Dec. 15, 2014. Private companies will be required to comply with the new standards by the same date for their annual reports, but they will have until after Dec. 15, 2015, to make changes to their quarterly statements.
To read the recently issued accounting standards update, click here.