New Accounting Treatment for Credit Investments

Transcription

1 New Accounting Treatment for Credit Investments Jennifer Seamons Key Community Development Corporation Frederick Copeman CohnReznick LLP Todd Crow PNC Real Estate Robert Golden Capital One Novogradac & Company LLP 1

2 New Accounting Treatment for Credit Investments Novogradac & Company LLP 2

3 novogradac.wordpress.com 3

4 New Presentation for Accounting Methods Equity Method Proportional Amortization Method Investor Company income Pass through book loss Net income before tax Tax expense, pre credits (35%) Tax credits Net tax expense Net income after tax (net of amortization) 50,000,000 ( 5,500,000) 45,500,000 15,575,000 ( 10,000,000 ) 5,575,000 38,925,000 50,000,000 ( 0 ) 50,000,000 17,500,000 ( 6,400,000 ) 11,100,000 38,900,

5 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 Many investments do not qualify for the Effective Yield Method Users do not benefit from the better reporting method Projected yield based solely on the cash flows from guaranteed tax credits to be positive Concerns that accounting influenced investment 5

6 Previous Accounting and Basis for Change SEPTEMBER 2010 Meeting with HUD MARCH 14, 2013 FASB EITF meeting to consider proposal NOVEMBER 14, 2013 FASB EITF approves changes to GAAP Accounting for LIHTC JANUARY 2014 Release of codification of rules DECEMBER 11, 2013 FASB ratifies the amendments twitter.com/novogradac 6

7 Previous Accounting and Basis for Change SEPTEMBER 2010 Meeting with HUD MARCH 14, 2013 FASB EITF meeting to consider proposal NOVEMBER 14, 2013 FASB EITF approves changes to GAAP Accounting for LIHTC JANUARY 2014 Release of codification of rules DECEMBER 11, 2013 FASB ratifies the amendments twitter.com/novogradac 7

8 Proportional Amortization Method New Criteria for Accounting for LIHTC Projects An entity must meet ALL of the following conditions to elect the Proportional Amortization Method:

9 Proportional Amortization Method New Criteria for Accounting for LIHTC Projects 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

10 Proportional Amortization Method New Criteria for Accounting for LIHTC Projects 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)

11 Proportional Amortization Method Significant Influence Ability to exercise significant influence over operating and financial policies of an investee may be indicated in several ways, including the following: a. Representation on the board of directors b. Participation in policy-making processes c. Material intra-entity transactions d. Interchange of managerial personnel e. Technological dependency f. Extent of ownership by an investor in relation to the concentration of other shareholdings (but substantial or majority ownership of the voting stock of an investee by another investor does not necessarily preclude the ability to exercise significant influence by the investor) Determining the ability of an investor to exercise significant influence is not always clear and applying judgment is necessary to assess the status of each investment

12 Proportional Amortization Method Substantially All Definition Items that are tax benefits Items that are not tax benefits Operating losses Cash distributions Management fees

13 Proportional Amortization Method Substantially All Exception Certain transactions between the investor and the limited liability entity, other than the investment, will not be considered when determining whether the conditions are met provided that: The reporting entity is in the business of entering into such other transactions Other transactions entered into at market rates commensurate with rates offered to other counterparties with similar quality The reporting entity does not acquire substantive participating rights as a result of such other transactions Examples of transactions not considered A financial institution that regularly extends loans to other housing projects Interest rate swaps and caps Trustee services

14 Proportional Amortization Method New Criteria for Accounting for LIHTC Projects 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

15 Proportional Amortization Method New Criteria for Accounting for LIHTC Projects 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

16 Proportional Amortization Method Calculation/Approach 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

17 Transition Implementation Guidance 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 Can choose to continue Effective Yield Method for existing investments

18 Example of Change in Accounting Principle The table below illustrates how a company would adjust its retained earnings to reflect a change in investment methods Beginning retained earnings as previously reported $29,114,000 $27,372,000 Prior-period adjustment: change in accounting principle, less tax effect - (2,422,000) Beginning retained earnings adjusted 29,114,000 24,950,000 Add: Net income 4,163,000 4,163,000 Ending retained earnings $33,278,000 $29,114,

19 Transition Implementation Guidance 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

20 Application and Benefits Who is Affected? All reporting entities that invest in a LIHTC project through a limited liability entity that is a flow-through entity for tax purposes Entities that may be affected Developers NO! Syndicators - MAYBE Investors YES/MAYBE 20

21 Transition Required Disclosures When Changing Methods 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

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25 Market Impact Effects? EXPAND pool of investors ENHANCE attractiveness of large loss to credit transactions Tax-Exempt bond developments Developments with soft debt with accruing interest HA transactions, for example MINOR IMPACT on high demand CRA properties 25

26 New Accounting Treatment for Credit Investments Jennifer Seamons Key Community Development Corporation Frederick Copeman CohnReznick LLP Todd Crow PNC Real Estate Robert Golden Capital One Novogradac & Company LLP 26