Ref #2014-24

Statutory Accounting Principles Working Group

Maintenance Agenda Submission Form

Form A

Issue: ASU 2014-01 Accounting for Investments in Qualified Affordable Housing Projects

Check (applicable entity):

P/C Life Health

Modification of existing SSAP

New Issue or SSAP

Description of Issue:

ASU 2014-01: Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01) is an Emerging Issues Task Force consensus, which FASB issued as amendments to the accounting standards codification in January 2014. The amendments are expected to allow more entities to qualify to use the election of applying the proportional amortization method to account for affordable housing project investments than the number of entities that currently qualify for the effective yield method.

Proportional Amortization Method Replaces Effective Yield Method

Prior to ASU 2014-01, GAAP permitted three different accounting methods for these types of investments. The effective yield method was optional for entities that met the strict GAAP criteria. Entities that met the effective yield criteria but chose not to apply it or those that did not qualify, were required to apply either an amortized cost method or an equity method.

Pursuant to ASU 2014-01, the cost method and equity methods remain, but the proportional amortization method will replace the current effective yield method. Both proportional amortization method and the effective yield method are optional. Both permit amortization of the investment and the tax credits and other tax benefits to be presented as a component of income tax expense. Current use of the effective yield method is limited under GAAP because of strict criteria, including that the availability of the tax credits is guaranteed by a creditworthy entity. ASU 2014-01 modifies the guaranteed criteria to instead require an assessment that receipt of the tax credits is probable.

Qualifying Investments have the Election of Gross or Net Presentation

The proportional amortization method guidance in ASU 2014-01 will allow an investor that meets certain criteria the option of amortizing the cost of its investment, in proportion to the tax credits and other tax benefits it receives, and to present the amortization of the investment and the tax benefits as a component of income tax expense. That is, both the pretax effects and related tax benefits of such investments are reported as a component of income taxes (“net” within income tax expense.)

Investors that do not qualify for “net” presentation under the new guidance will continue to account for such investments under the equity method or cost method, which results in losses recognized in pretax income and tax benefits recognized in income taxes (“gross” presentation of investment results). ASU 2014-01 also makes changes to the proportional amortization calculation by adding tax benefits as an addition to the existing amount for tax credits to the calculation.

Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefit received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). To qualify for the proportional amortization method, all of the following conditions must be met:

1.  It is probable that the tax credits allocable to the investor will be available.

2.  The investor does not have the ability to exercise significant influence over the operating and financial policies of the limited liability entity.

3.  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).

4.  The investor’s projected yield based solely on the cash flows from the tax credits and other tax benefits is positive.

5.  The investor is a 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.

A reporting entity is required to evaluate whether the conditions have been met to apply the proportional amortization method to an investment in a qualified affordable housing project through a limited liability entity at the time of initial investment on the basis of facts and circumstances that exist at that time. Reevaluation of the conditions is based on specified changes in circumstances.

Effective Date and Disclosures

The amendments in ASU 2014-01 are effective beginning after December 15, 2014, and interim periods within annual reporting periods beginning after December 15, 2015 with early adoption permitted. If the proportional amortization method is elected, the method is required for all eligible investments in qualified affordable housing projects.

ASU 2014-01 contains impairment criteria and new disclosures to enable users of its financial statements to understand the nature of its investments in qualified affordable housing projects, and the effect of the measurement of its investments in qualified affordable housing projects and the related tax credits and other tax benefits on its financial position and results of operations.

Existing Statutory Accounting Guidance Rejects the Elective of Net Presentation.

The related statutory accounting guidance on affordable housing projects is in SSAP No. 93—Accounting for Low Income Housing Tax Credit Property Investments (SSAP No. 93) which adopts Emerging Issues Task Force No. 94-1: Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects (EITF 94-1) with modifications.

SSAP No. 93 does not permit the optional effective yield method, which ASU 2014-01 replaces with the optional proportional amortization method. Instead, SSAP No. 93 requires a modified amortized cost method for all (guaranteed or non-guaranteed) state and federal programs within the scope of SSAP No. 93. SSAP No. 93 adopted modifications to the GAAP amortized cost methodology. Investments in state Low Income Housing Credits Investments that do not fall within the scope of SSAP No. 93 are required to follow the equity method guidance in SSAP No. 48.

The current SSAP No. 93 amortized cost method determines the amortization amount with a statutory accounting modification to include federal tax benefits during the holding period. A reporting entity investor amortizes any excess of the carrying amount of the investment over its estimated residual value during the periods in which federal tax credits are allocated to the investor. Annual amortization is based on the proportion of federal tax credits and other tax benefits received in the current year to total estimated federal tax credits to be allocated to the investor. On initial review, the amortization calculation in SSAP No. 93 is very similar to the proportional amortization calculation in ASU 2014-01 for the proportional amortization method, as it requires.

(Initial Cost of Investment - Expected Residual Value) × Actual Current Tax Credits and Other Tax Benefits

Total Estimated Tax Credits and Other Tax Benefits

SSAP No. 93 requires a gross presentation in that income or losses under from the qualified affordable housing project and the amortization of the investment are in investment income and the tax benefits are reported in income tax expense.

Existing Authoritative Literature:

SSAP No. 93— Accounting for Low Income Housing Tax Credit Property Investments adopts Emerging Issues Task Force No. 94-1: Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects (EITF 94-1) with modification:

8. The modifications to EITF 94-1 are as follows:

a. State Low Income Housing Tax Credit property investments, which comply with the requirements of paragraph 1 of this statement are included and will receive the accounting treatment prescribed by this statement.

b. LIHTC investments (regardless of whether they are guaranteed) shall be initially recorded at cost and carried at amortized cost unless considered impaired as discussed in paragraphs 12-15 of this statement. The amortized cost method utilized shall be similar to the amortized cost method discussed in EITF 94-1 with a modification to include tax benefits during the holding period because the primary value of the LIHTC is derived during the property holding period (typically 15 years or less). An illustration has been provided in Appendix A to this statement. A reporting entity investor using the cost method shall amortize any excess of the carrying amount of the investment over its estimated residual value during the periods in which tax benefits are allocated to the investor. The estimated residual value used in determining the amount to be amortized is the estimated residual value at the end of the last period in which tax benefits are allocated to the investor and should not reflect anticipated inflation. Annual amortization should be based on the proportion of tax benefits received in the current year to total estimated tax benefits to be allocated to the investor.

c. Federal tax credits shall be recognized in the income statement as an offset to federal taxes in the tax reporting year in which the tax credit is utilized in accordance with SSAP No. 101—Income Taxes, A Replacement of SSAP No. 10R and SSAP No. 10 (SSAP No. 101). State tax credits shall be recognized in the income statement as an offset to state premium tax or state income tax, whichever is applicable, in the tax reporting year in which the credit is utilized.

d. Tax benefits received, other than tax credits, shall be accounted for pursuant to SSAP No. 101. Amortization shall be reported as a component of net investment income.

e. AICPA Statement of Position 78-9, Accounting for Investments in Real Estate Ventures (SOP 78-9) is rejected for purposes of statutory accounting in SSAP No. 48. This statement does not intend to establish SOP 78-9 as applicable to statutory accounting.

f. FASB Interpretation No. 46, Consolidation of Variable Interest Entities is (FIN 46) rejected for purposes of statutory accounting in SSAP No. 3—Accounting Changes and Corrections of Errors (SSAP No. 3). This statement does not intend to establish FIN 46 as applicable to statutory accounting.

g. Many LIHTC investments require future equity contributions by the investor (equity contributions), that may be contingent on a variety of conditions, such as such as receiving representations, contract performance, meeting occupancy requirements, etc. If the commitment by the investor to provide equity contributions meets the definition of a liability as defined in SSAP No. 5R—Liabilities Contingencies and Impairments of Assets a liability shall be recorded. If the commitment to provide equity contributions does not meet the definition of a liability, the contingent commitment shall be disclosed in the notes to the financial statements with other contingent commitments.

h. EITF 85-16: Leveraged Leases (EITF 85-16) is adopted for purposes of statutory accounting in SSAP No. 22—Leases (SSAP No. 22). This statement does not intend to readdress the conclusions reached in SSAP No. 22.

i. SSAP No. 97—Investments in Subsidiary, Controlled, and Affiliated Entities, a Replacement of SSAP No. 88 (SSAP No. 97) should be utilized to account for investments that qualify as subsidiary, controlled or affiliated entities.

j. The impairment guidance contained in this statement shall be followed.

k. For statutory accounting purposes, deferred taxes are not reported as a component of income from continuing operations in the income statement; rather deferred taxes are recognized as a separate component of gains and losses in unassigned funds (surplus).

Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups):

Low-income housing investments are reflected as invested assets in statutory accounting and have specific lines in Annual Statement Schedule BA - Other Invested Assets. In addition, there are specific categories on Schedule BA for different categories of properties for purposes of risk-based capital.

Convergence with International Financial Reporting Standards (IFRS):

IFRS does not contain any guidance specific to accounting for investments in qualified affordable housing projects.

Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:

None

Recommending Party:

Robin Marcotte, NAIC Staff

July 2014

Recommended Conclusion or Future Action on Issue:


SSAP No. 93 previously rejected the concept of net presentation and optional presentation. Therefore, SSAP No. 93 does not currently permit an elective net presentation method (effective yield or proportional amortization) and does not incorporate the qualifying criteria for the elective application of a net presentation, which ASU 2014-01 updates. In addition, statutory accounting typically tries to avoid the use of optional accounting to preserve comparability.

SSAP No. 93 eliminates electives by explicitly requiring a gross presentation for all state and federal programs that qualify under the law. The modified amortized cost method of gross presentation in SSAP No. 93 recognizes the amortization of the investment and any income earned in investment income and separately recognizes the tax credits and benefits as a component of income tax expense. Staff is unaware of any existing invested asset category that is amortized directly into income tax expense, and notes that doing so would be a substantive change in the treatment of amortization for invested assets. Such a change would have several ripple effects, particularly for reporting entities, which are subject to AVR and IMR.

While staff is aware that gross presentation makes these assets, which are primarily purchased for their tax credits, look less than profitable, it should be noted that these investments typically generate only a negligible amount of income and there are existing disclosures on unexpired tax credits and amortizing an invested asset into income taxes does not provide additional transparency.

The following chart summarizes the differences in presentation:

“Gross” presentation (required by SSAP No. 93 and by GAAP amortized cost method) / “Net” Presentation (optional for entities that qualify under ASU 2014-01)
Amortization of the investment cost down to residual value over the holding period / Reported as a component of net investment income / Reported as a component of income tax expense
Tax Credits and other tax benefits / Reported as a decrease to income tax expense / Reported as a decrease to income tax expense

With the changes in ASU 2014-01, the GAAP asset amortization calculation moves closer to the guidance in SSAP No. 93 by including tax credits and benefits. As such, staff recommends that the Working Group move this item to the nonsubstantive active listing, and direct staff to prepare guidance to reflect the following:

1)  SSAP No. 93 guidance for investment calculation should incorporate the ASU 2014-01 GAAP amortization to prevent a GAAP/SAP difference in the amount and timing of the recognition of amortization for these assets.