Financial accounting: EITF update.
ISSUE NO. 94-1
EITF Issue no. 94-1 provides guidance on how to account for investments in limited partnerships that operate qualified affordable housing projects.
Investors in such entities receive tax deductions from operating losses and tax credits. The tax credits are allowable on the tax return each year over a 10-year period if a sufficient number of units are rented to qualifying tenants and are subject to gross rental restrictions from the tenant. These credits are subject to recapture over a 15-year period starting with the first year tax credits are earned.
The projects usually are established as limited partnerships that pass the tax benefits directly to the investors. In most cases, the limited partners derive no economic benefit from the investment other than the expected tax benefits. In other cases, the eventual disposition of the property is expected to produce some return of capital in addition to the expected tax benefits.
How would an entity that invests in a qualified affordable housing project through a limited partnership account for its investment? Arguments centered around whether the accounting for such investments should (1) reflect the tax attributes of the investment by recognizing the tax benefits as earned and amortizing the cost of the investment over the life of the project to provide an effective yield or (2) view the investment as a real estate partnership and account for such investment in accordance with SOP 78-9.
The EITF reached a consensus that the investor should not recognize affordable housing credits in its financial statements before their recognition in the investor's tax return.
The EITF also reached consensuses that permit investors to use either the effective yield method (subject to certain conditions explained below) or the guidance in SOP 78-9.
The effective yield method may be followed if all of the following conditions are met:
1. The availability (but not necessarily the realization) of the tax credits allocable to the investor is guaranteed by a creditworthy entity through a letter of credit, a tax indemnity agreement or a similar arrangement.
2. The investor's projected yield based solely on the cash flows from the guaranteed tax credits is positive.
3. The investor is a limited partner in the affordable housing project for both legal and tax purposes and the investor's liability is limited to its capital investment.
The principle underlying the effective yield method is that the investor recognizes tax credits as they are allocated and amortizes the initial cost of the investment to provide a constant effective yield over the period that tax credits are allocated to the investor. Further information about this method is discussed in EITF Abstracts.
Securities and Exchange Commission registrants should be aware the SEC observer commented that it was the SEC staffs belief that it would be inappropriate to extend the effective yield method of accounting to analogous situations.
The EITF observed that SOP 78-9 generally required use of the equity method of accounting for limited partnership investments unless the limited partner's interest was so minor that the partner had virtually no influence over partnership operating and financial policies.
The AICPA is reconsidering the guidance in SOP 78-9 in its project Accounting for Investors' Interests in Unconsolidated Real Estate Joint Ventures. An exposure draft of a proposed SOP is expected to be available for public comment in the first quarter of 1996.
The following consensuses were reached regarding investments accounted for under SOP 78-9 (either cost or equity method):
1. A limited partnership investment in a qualified affordable housing project should be reviewed periodically for impairment.
2. A liability should be recognized for delayed equity contributions that are unconditional and legally binding. A liability should be recognized for equity contributions that are contingent on a future event when that contingent event becomes probable. For additional guidance on delayed equity contributions, see Issue no. 85-16, Leveraged Leases, FASB Statement no. 5, Accounting for Contingencies, and Statement of Financial Accounting Concepts no. 6, Elements of Financial Statements.
The following consensus was reached regarding investments accounted for under the cost method:
Any excess of the carrying amount of the investment over its estimated residual value (calculated at the end of the last period in which tax credits are allocated to the investor without reflecting anticipated inflation) should be amortized during the periods in which tax credits are allocated to the investor. Annual amortization should be based on the proportion of tax credits received in the current year to total estimated tax credits to be allocated to the investor.
EITF Abstracts includes an example of the application of these consensuses to a limited partnership investment in an affordable housing project accounted for under the cost, equity and effective yield methods.
EITF Abstracts, copyrighted by the FASB, is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700.
RELATED ARTICLE: EXECUTIVE SUMMARY
* EITF Issue no. 94-1 Accounting problem: May an investor in a limited partnership that operates a qualified affordable housing project account for its investment using either the effective yield method (subject to certain conditions) or the guidance in SOP 78-9? Consensus: Yes.
By LINDA C. DELAHANTY, CPA, technical manager, and LINDA A. VOLKERT, CPA, senior technical manager, of the AICPA technical information division.
Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report, identifies Financial Accounting Standards Board emerging issues task force (EITF) consensuses as sources of established generally accepted accounting principles.
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|Title Annotation:||emerging issues task force; accounting for affordable housing tax benefits|
|Author:||Volkert, Linda A.|
|Publication:||Journal of Accountancy|
|Date:||Dec 1, 1995|
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