Accounting Principles Board •
American Institute of Certified Public
Accountants 666 Fifth Avenue, New York 19, N. Y.
Copyright 1963 by American Institute of Certified Public Accountants
ACCOUNTING FOR THE "INVESTMENT CREDIT"
1. The Revenue Act of 1962 provides for an "investment credit" which, in general, is equal to a specified percentage of the cost of certain depreciable assets acquired and placed in service after 1961. It is subject to certain statutory limitations and the amount available in any one year is used to reduce the amount of income tax payable for that year. The full amount of the investment credit is treated for income tax pur-poses as a reduction in the basis of the property. An investment credit once allowed is subject to recapture under certain circumstances set forth in the statute.
2. Some decision as to the nature of the investment credit, i.e., as to the substance of its essential characteristics, if not indispensable, is of great significance in a determination of its accounting treatment. We believe there can be but one useful conclusion as to the nature of the investment credit and that it must be determined by the weight of the pertinent factors.
3. Three concepts as to the substance of the investment credit have been considered by the Board: (a) subsidy by way of a contribution to capital; (b) reduction in taxes otherwise applicable to the income of the year in which the credit arises; and (c) reduction in a cost otherwise chargeable in a greater amount to future accounting periods.
4. There is no significant disagreement with the view that the investment credit is a factor which influences the determination of net income. The basic accounting issue before us therefore is not whether the investment credit increases net income but, rather, the accounting period(s) during which it should be reflected in the operating statement. Resolution of the accounting issue, in large part, rests upon the account-ing principles relative to the realization of income. This is true for both regulated and nonregulated companies. (See paragraph 17 of this Opinion.)