the advisor

Issue 2, 2014  |  Table of Contents
 

Accounting Considerations with Tax Increment Financing


Among economic incentives, tax increment financing (TIF) is a common financial tool of local governments to spur growth. Essentially, TIF provides upfront funding of development efforts, which are repaid by the resulting higher incremental future tax revenues.

Often, municipalities are the government agency sponsoring a TIF district, and they may levy special assessments to fund the construction of infrastructure improvements. Alternatively, a business that intends to develop its own real estate may create a TIF entity to finance such improvements. TIF entities are authorized under various statestatutes to issue bonds for infrastructure construction efforts. Overall, the goal of TIF is to bring new business into a local economy.

One important aspect for an entity to consider is the potential accounting ramifications of involvement with TIF. More specifically, when would Generally Accepted Accounting Principles (GAAP) require the recognition of a liability on an entity’s financial statements? The answer is, it depends on the circumstances.

The specific TIF liability guidance under GAAP – FASB Accounting Standards Codification (ASC) Topic 970-470 – is designed around whether the special tax assessments used to finance the TIF are fixed or determinable in both amount and duration. If so, a liability should be recognized by the property owners being assessed. Furthermore, the more common guidance offered by GAAP related to Contingencies (ASC Topic 450), Guarantees (ASC Topic 460), and Variable Interest Entities (ASC Topic 810-10) must also be considered.

Some common examples involving the use of municipal bonds and/or a TIF entity for site preparation by a developer include:

  1. A municipality issues bonds and levies a special assessment on the property equal to the face amount of the bonds, with similar terms. As the assessment is fixed to both amount and duration, a TIF liability should be recognized by the property owner for the special assessment.
     
  2. A TIF entity issues bonds. Upon completion, the infrastructure assets (including related land) pass to the municipality, which levies an annual tax (in addition to the normal property tax assessment) in an amount to cover the TIF entity’s annual debt service requirements. As the assessment is fixed to amount and duration, a TIF liability should be recognized by the property owner for the TIF entity debt.
     
  3. A TIF entity issues bonds. Upon completion, the infrastructure assets (including related land) pass to the municipality, which will fund the TIF entity’s annual debt service requirements through normal property taxes, as the assessed value of the developed property is expected to increase. As the assessment is not fixed to amount or duration, a TIF liability should not be recognized by the property owner.

In addition to examples 1 and 2, the special assessment of the TIF entity debt remains with the property, respectively. Therefore, upon a sale or partial sale of the development, either the entity must pay the remaining assessment or the pro rata portion of the TIF entity debt, or the purchaser must assume the respective obligation.

The accounting considerations with TIF could have a significant impact on an entity’s balance sheet. Within GAAP, there are often exceptions to the general rules as well as further considerations that should be made related to specific agreements and the municipality involved; therefore, questions may arise on whether liabilities are created with involvement in TIF.