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Recent FASB Guidance and Implications for Affordable Housing Projects Susan Wilson, CPA Partner – Austin, Texas Novogradac & Company LLP [email protected]
Recent FASB Guidance and Implications for Affordable Housing Projects
Susan Wilson, CPA Partner – Austin, Texas
Novogradac & Company LLP [email protected]
novogradac.wordpress.com
Reasons FASB Accepted to Review EITF 94-1 Guidance
Conditions of the Effective Yield Method
are too restrictive Requires availability of tax credits to be guaranteed by a creditworthy entity
Projected yield based solely on the cash flows from guaranteed tax credits to be positive
Many investments do not qualify for the
Effective Yield Method Users do not benefit from the better reporting method
Concerns that accounting influenced investment
Requires availability of tax credits to be guaranteed by a creditworthy entity
Projected yield based solely on the cash flows from guaranteed tax credits to be positive
Users do not benefit from the better reporting method
Company income Pass-through book loss Net income before tax Tax expense, pre-credits (35%) Tax credits Net tax expense Net income after tax
50,000,000 5,500,000
44,500,000 15,575,000
10,000,000 5,575,000
38,925,000
Equity Method
Effective Yield Method
( )
( )
50,000,000 0
50,000,000 17,500,000 6,500,000
11,000,000 39,000,000
( )
Previous Presentation for Accounting Methods
(net of amortization)
Proportional Amortization Method
An entity must meet ALL of the following conditions to elect the Proportional Amortization Method:
New Criteria for Accounting for LIHTC Projects
1. 2. 3. 4.
Proportional Amortization Method
An entity must meet ALL of the following conditions to elect the Proportional Amortization Method:
It is probable that the tax credits allocable to the investor will be
available.
1. 2. 3. 4.
New Criteria for Accounting for LIHTC Projects
Proportional Amortization Method
An entity must meet ALL of the following conditions to elect the Proportional Amortization Method:
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).
1. 2. 3. 4.
New Criteria for Accounting for LIHTC Projects
Syndicator
Developer
Fund
Operating P-Ship
Investor(s)
LIHTCs Losses
SIGNIFICANT INFLUENCE
LIHTCs Losses
Proportional Amortization Method
An entity must meet ALL of the following conditions to elect the Proportional Amortization Method:
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).
1. 2. 3. 4.
New Criteria for Accounting for LIHTC Projects
Proportional Amortization Method
Items that are tax benefits
Operating losses
Items that are not tax benefits
Cash distributions Management
fees Other tax credits
“Substantially All” Definition
Proportional Amortization Method
An entity must meet ALL of the following conditions to elect the Proportional Amortization Method:
The investor’s projected yield based solely on the cash flows
from the tax credits and other tax benefits is positive.
1. 2. 3. 4.
New Criteria for Accounting for LIHTC Projects
Proportional Amortization Method
An entity must meet ALL of the following conditions to elect the Proportional Amortization Method:
The investor is a limited liability investor in the 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.
1. 2. 3. 4.
New Criteria for Accounting for LIHTC Projects
Syndicator
Developer
Fund
Operating P-Ship
Investor(s)
LIHTCs Losses
LIHTCs Losses
Limited Liability Investor
Limited Liability Investor
Limited Liability Entity
Proportional Amortization Method
New Criteria for Accounting for LIHTC Projects – Election • When to evaluate if these conditions are met?
• For LIHTC investments not accounted for using the Proportional Amortization Method those investments shall be accounted for under the Equity or Cost Method
• Apply as an accounting policy NOT investment by investment
At the time of the initial investment
Upon occurrence of an event that changes the nature and design of the entity
Year 1 Year 15
Proportional Amortization Method
• Amortization generally based on: tax credits, and other tax benefits
• But, as a practical expedient: Amortization may be based on tax credits only
if, “substantially similar” to using tax credits and other tax benefits
Calculation/Approach
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Company income Pass-through book loss Net income before tax Tax expense, pre-credits (35%) Tax credits Net tax expense Net income after tax
50,000,000 5,500,000
45,500,000 15,575,000
10,000,000 5,575,000
38,925,000 (net of amortization)
Equity Method
Proportional Amortization
Method
( )
( )
50,000,000 0
50,000,000 17,500,000 6,400,000
11,100,000 38,900,000
( )
( )
New Presentation for Accounting Methods
Transition
Effective beginning 12/15/2014
This method should be applied
retroactively
Early adoption is permitted for financial
statements not yet issued
When Will this Method be Effective?
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Transition
• Apply accounting changes retrospectively
• The cumulative effect of the change on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented
• An offsetting adjustment, if any, shall be made to the opening balance of retained earnings for that period
• Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects
Implementation Guidance
www.taxcredithousing.com
Transition
• If the reporting entity already uses the Effective Yield Method to account for its LIHTC investments, it can continue the Effective Yield Method for those LIHTC investments upon transition
• Transition from Effective Yield Method
•Should evaluate eligibility to use the Proportional Amortization Method
• On the basis of facts and conditions that existed at the time of the initial investment; AND
• Upon a change in the nature of the investment or in the relationship with the limited liability entity
Implementation Guidance
Transition
• The nature of and reason for the change in accounting principle, including an explanation is preferable
• The method of applying the change, including all of the following: •A description of the prior-period information that has been retrospectively adjusted, if any •The effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per-share amounts for the current period and any prior periods retrospectively adjusted •The cumulative effect of the change on retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the earliest period presented •If retrospective application to all prior periods is impracticable, disclosure of the reasons therefore, and a description of the alternative method used to report the change
Required Disclosures When Changing Methods
Benefits of Application
• The investment can be structured in a manner primarily limited to the tax benefits
• Further limits substantial participation in operating and financial decisions by the investor in the limited liability entity
• Reduces the restrictions under the Effective Yield Method • Presentation of investment performance is net of taxes • Presentation in a manner more consistent with the nature of the
LIHTC investment
of the Proportional Amortization Method
Potential Impact on the Industry
• If conditions are met and the election is made, will affect investors and may or may not affect syndicators
• Will not directly affect developers • Investment in LIHTC deals will be more appealing to a new set of
investors • Bring in interest/demand from economic investors • Offer investor diversity • Potential resurgence of multi-investor funds (less chance of
significant influence) • Reduces volatility in the market • Impact on pricing (?)
Recent FASB Guidance and Implications for Affordable Housing Projects
Susan Wilson, CPA Partner – Austin, Texas
Novogradac & Company LLP [email protected]
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