The Financial Accounting Standards Board (FASB) released an accounting standards update to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits.

The update aims to improve how companies disclose their investments in tax credit structures by letting them use proportional amortization, a method that FASB stakeholders believed gives investors and other capital allocators a better understanding of the returns from investments made mainly for the purpose of receiving income tax credits and other income tax benefits, Accounting Today reported.

FASB constituents asked the board to extend the application of the proportional amortization method to qualifying tax equity investments that generate tax credits through other programs, Accounting Today reported.

The updated standard was a result of a consensus by FASB's Emerging Issues Task Force (EITF). Reporting entities were previously allowed to apply the proportional amortization method only to qualifying tax equity investments in low-income housing tax credit (LIHTC) structures, resulting in the EITF’s addressing the issue. They contended that tax equity investors in economically similar investments that are made mainly for the purpose of receiving income tax credits and other income tax benefits should have the same election as LIHTC investors to account for those investments using the proportional amortization method, according to Accounting Today.

The proposed update “would permit reporting entities to elect to account for their tax equity investments, regardless of the program from which the income tax credits are received, using the proportional amortization method if certain conditions are met,” it states.

The amendments are effective for fiscal years beginning after Dec. 15, 2023, including interim periods within those fiscal years, for public entities. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. If an entity adopts the amendments in an interim period, it should adopt them as of the beginning of the fiscal year that includes that interim period.