If consolidation is not required, an investor may account for an equity investment using the equity method under ASC 323, as an equity investment under ASC 321, or using the proportional amortization method (if applicable qualifying criteria are met).

Application of the equity method of accounting is discussed in ASC 323, Investments—Equity Method and Joint Ventures.

A key question in determining whether the equity method of accounting applies is whether the investor has significant influence over the investee. Equity method accounting is often applicable for investments in single power plant entities because they typically have a limited number of equity investors, each of which has significant influence. In performing this analysis, the first step is to consider whether the investee is a corporate entity, limited partnership, or limited liability company because the evaluation of significant influence differs depending on the entity’s legal structure.

This section should be read in conjunction with PwC’s Equity method investments and joint ventures accounting guide, which provides further information on applying the equity method of accounting.

In accordance with ASC 323-10-15-7 and 15-8, determining whether a reporting entity can exercise significant influence over an investee that is a corporation is a matter of judgment. There is a presumption (which can be overcome) that an investment in at least 20% of the voting common stock (or in-substance common stock) of the investee leads to a conclusion that significant influence exists.

However, the reporting entity should analyze each investment to determine the nature of the instrument and the rights attached to those instruments. In particular, once the reporting entity has concluded that the underlying investee is a corporation, it should evaluate whether the investment qualifies as common stock or in-substance common stock, as discussed in Question UP 9-1 and Question UP 9-2.

It depends. Single power plant entities may issue one or more classes of preferred stock. ASC 323-10-15-3 indicates that the guidance on the equity method of accounting is applicable only to investments in common stock or in-substance common stock of a corporation. Thus, the equity method would not apply if the investor holds only preferred stock that is not in-substance common stock.

However, if the investor has any amount of common stock or in-substance common stock, all of its holdings and relationships, including any preferred stock investments, should be considered in evaluating significant influence.

In-substance common stock is defined by ASC 323-10-20.

Whether the investment has risk and reward characteristics that are substantially similar to the investee’s common stock is a matter of judgment. ASC 323-10-15-13 provides three characteristics to consider in assessing whether shares are substantially similar to an investment in common stock, as follows:

This guidance is not applicable if the investment is in a limited partnership or limited liability company that functions like a partnership.

Many single power plant entities are limited partnerships. The SEC staff expects the equity method of accounting to be applied for investments in limited partnerships, unless the investor has virtually no influence over the investee or the investment qualifies for another method of accounting, such as proportional amortization.

Consistent with this guidance, and regardless of whether the investor is subject to SEC rules, we would generally expect an equity investment in a limited partnership to be accounted for using the equity method of accounting unless the holding is less than 3 to 5% of the equity.

Single power plant entities are often organized as limited liability companies. There is no specific guidance that provides one accounting model for investments in limited liability companies. Limited liability companies have characteristics of corporations and partnerships but are also dissimilar from both in certain respects. Thus, the relevant accounting guidance for an investment in a limited liability company will depend on whether the investee functions more like a partnership or a corporation:

In accordance with ASC 323-30-35-3, investments in limited liability companies that maintain specific ownership accounts for each investor (similar to a partnership account structure) should be treated consistent with limited partnership investments. ASC 272, Limited Liability Entities (ASC 272) provides additional guidance in assessing whether a limited liability company should be viewed similar to a corporation or similar to a partnership. The factors discussed in ASC 272-10-5-4 are highlighted in Figure UP 9-3.

Figure UP 9-3
Should a limited liability company be evaluated as a corporation or a partnership?

Reporting entities should consider factors including the structure of the capital accounts, decision-making, tax reporting, and responsibility for liabilities of the entity. None of the factors described in Figure UP 9-3 are determinative on their own. The determination should be based on the predominant characteristics of the entity. If the limited liability company has, on balance, more characteristics of a limited partnership than of a corporation, the reporting entity would generally apply the equity method of accounting, assuming ownership is at least 3 to 5% of the share capital. If the limited liability company more closely resembles a corporation, and the investor does not hold significant influence (i.e., at least 20% of the common stock) or the limited liability company more closely resembles a partnership but the investor holds less than 3% ownership, then the accounting would follow ASC 321 unless the investment qualifies for and the investor has elected to use the proportional amortization method.

In March 2023, the FASB issued ASU 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credits Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force). ASU 2023-02 expands the availability of the proportional amortization method of accounting, provided certain criteria are met. The guidance in ASU 2023-02 is effective for public business entities for fiscal years beginning after December 15, 2023. For all other entities, the guidance is effective one year later, and the guidance can be early adopted by any entity.

Previously, use of the proportional amortization method of accounting was allowed only for investments in specific affordable housing tax structures and could not be applied by analogy to tax equity investments in renewable power plant entities. After adoption of ASU 2023-02, a reporting entity may elect to apply the proportional amortization method to its investments in tax credit programs, and account for its individual investments under this method if the criteria in ASC 323-740-25-1 are met.

Under the proportional amortization method of accounting, the equity investor’s investment is amortized in proportion to the income tax credits and other income tax benefits received each period in relation to the total of such benefits to be received over the life of the investment. The amortization is presented net of the related tax credits and other tax benefits within the income statement as a component of income tax expense (benefit).

A reporting entity may elect to apply this method as an accounting policy election that must be made on a tax-credit-program-by-tax-credit-program basis; however, each individual investment within a “tax credit program” must meet the criteria in ASC 323-740-25-1 to be accounted for under the proportional amortization method. Because “tax credit program” is not specifically defined in the guidance, investors can apply judgment as to how they wish to group similar types of investments. Common tax credit programs may include those related to low income housing, new markets, historic rehabilitation, solar, and wind. Reporting entities will need to apply their grouping conventions consistently. For example, if a reporting entity decides that solar investment tax credits constitute a “tax credit program,” and it elects to apply the proportional amortization method to investments in solar investment tax credit structures, then it would be required to apply the proportional amortization method to all investments in solar investment tax credit structures unless an individual investment in a solar investment tax credit structure does not meet the criteria for application of this method.

Although use of the proportional amortization method is no longer limited to investments in certain affordable housing structures, the criteria are still expected to limit the types of investments that qualify. Many tax equity investments in renewable power plant entities would not meet the criteria because “substantially all” of the expected benefits often do not arise from income tax credits and other income tax benefits. In those instances, application of either the equity method of accounting or the guidance in ASC 321 should be followed, based on the facts and circumstances.

See TX 3.3.6 for additional details on applying the proportional amortization method of accounting.

The proportional amortization guidance includes specific disclosure requirements; see FSP 16.5.4 for additional details. Those disclosures are required not only for investments accounted for under the proportional amortization method, but for all investments within the tax credit programs for which the reporting entity has elected to apply the proportional amortization method, including investments within that elected program that do not meet the criteria in ASC 323-740-25-1.

When an investment does not qualify for use of the equity method or proportional amortization method, an investor in a single power plant entity should consider whether ASC 321 is applicable. ASC 321 provides guidance for equity interests that meet the definition of an equity security, as well as other equity interests (such as investments in partnerships, unincorporated joint ventures, and limited liability companies) that are required to be accounted for like equity securities under ASC 321.

The appropriate accounting under ASC 321 depends on whether the equity investment has a readily determinable fair value:

Typically, single power plant entities are private entities with a limited number of owners, and equity shares are not traded on an exchange or over-the-counter market. As a result, although the reporting entity should consider the facts in each situation, common equity interests in these entities that are not accounted for under the equity method of accounting or following the proportional amortization method generally are eligible for the measurement alternative.

Refer PwC’s Loans and investments guide for further discussion on the accounting for equity interests.