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Accounting Topics

Accounting Topics

Moderator: Richard G. Blumenreich, principal-in-charge, Tax Credit and Energy Advisory Services, KPMG in the US.

Panelists: Stuart Logan, Audit Partner, Audit Quality Professional Practice, KPMG in the US; Joseph Yusz, Director, Accounting Advisory Services, KPMG in the US; Milton Massery , Director of Accounting, Cypress Creek Renewables.

While Hypothetical Liquidation at Book Value (HLBV) is applied to flip partnership transactions, questions remain around the exact role HLBV plays and other effects on GAAP.
"We're looking at whether just applying HLBV technically as it's written is always the right result, or whether overlapping GAAP principles on top of that is more appropriate," Blumenreich said.

Renewables partnerships are complex, tax-motivated capital structures which complicates the accounting from both the developer's and the tax equity investor's point of view, Yusz explained. The investment is in the underlying interest, which can be treated as cost method of accounting or, more commonly among these types of investors, recorded as an equity benefit. HLBV is then commonly used for allocating income loss, and it attempts to measure how much better - or worse - an investor is from one point in time to the other, while incorporating different preferential rights, economic interests and priorities.

Consider taking a GAAP-centric vs. a tax-centric point of view.
Those with what Logan called a "tax mind" calculate the tax basis following the literal application of the LLC agreement. The result is a "very, very pedantic application, very detailed," adding that, "it just drives up costs, it drives up the level of precision that most investors don't really need and don't really want."

Meanwhile, the GAAP-centric view takes practical policy elections in the application of HLBV that represent the same principles but reduces the cost of compliance both near and long term .

"You definitely see those two views out there," Logan said. "But the question remains, how does [the tax-centric view] comply with the accounting standard that emphasizes substance over form? So you have this immediate conflict."

A set policy helps the consistent application of the basis difference when evaluating tax equity structures.
Over the last few years, the SEC has not issued many comment letters regarding HLBV and accounting for income and loss. However, there's a desire for more understanding around the methodologies and basis for allocation related to these complicated capital structures, Joseph Yusz said.

"When it comes down to it, the regulators are requesting more robust disclosure," he said. "In most cases, they are not challenging whether you can do that or not."

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