The Financial Accounting Standards Board is moving to allow companies to apply a certain accounting method to more investments in tax credits, allowing them to record similar expenses consistently.
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 companies have invested in renewable energy tax credits, as investors push them to boost corporate sustainability efforts.
To account for most tax credit investments, companies must use the equity method, which requires recording a portion of the profits or losses associated with the investments. Companies, however, do not consider this approach reflective of the underlying value of investments, causing a problem as more of them invest in tax credit programs.
There is another way to account for these investments, called the proportional depreciation method. Under this approach—which was only available for investments linked to low-income housing tax credit programs—companies matched their investment losses with income tax credits. income and other benefits, such as depreciation, that they received in the same period.
The FASB, which sets accounting standards for US companies, on Wednesday voted to allow the companies use this depreciation 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 mainly affects public and private financial institutions, such as banks and insurance companies, which often make these types of investments. It is set to enter into force for public companies in early 2024 and for private companies one year later. The FASB expects to issue the new standard by the end of March, a spokesman said.
The standardist in September 2021 added the project to his agenda. It is separate from an existing project accounting for transactions in the climate, such as renewable energy credits, which are certificates that regulators offer to energy suppliers when they supply energy to an electrical network. The FASB has not yet proposed a rule on this.
Some executives and companies in recent months have said that the FASB’s tax credit accounting proposal did not go far enough. The proposed rule should be expanded to cover state tax credit programs, which provide refundable tax credits to insurers that have tax liabilities in particular states and are similar to state tax credit programs. income, Kevin Spataro, senior vice president of accounting policy. and research to the insurance company
Allstate corp.
he 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 their scope and allow proportional depreciation to be applied,” said Mr. Spataro at the time.
The FASB decided not to include these programs because it intended its project to have a narrow scope.
Bank of America corp.
said in October that it was concerned that the proposal was too narrow and that it would not meet the FASB’s goal of having similar accounting rules for similar tax credit structures.
“The board should provide expanded guidance and or examples of 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 did not immediately respond to a request for comment.
Write to Mark Maurer at mark.maurer@wsj.com.
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