The Financial Accounting Standards Board (FASB) has voted to delay implementation of the lease accounting standards for non-public business entities. The proposed implementation date for private companies will now be January 1, 2021 (still subject to final approval). Public business entities remain subject to the new standards effective January 1, 2019. Under the new standard, most leases will be reflected on a lessee’s balance sheet as a liability — the obligation to make lease payments — and a related “right of use” (ROU) asset.
How does this affect a bank’s regulatory capital in its capacity as lessee? Is the ROU asset included in regulatory capital, like most tangible assets, or deducted from regulatory capital, like most intangible assets? According to the Basel Committee’s responses to frequently asked questions (FAQs), if the underlying asset being leased is a tangible asset, the ROU asset: 1) is included in regulatory capital, 2) is included in the risk-based capital and leverage ratio denominators, and 3) should be risk-weighted at 100%.
This is expected to reduce capital ratios at most banks.
This change will also impact the bank’s clients’ corporate balance sheets and should be considered in a clients’ financial position, ability to repay loans and compliance with covenants on existing loans.
Implementing the new Lease Standard
If you have a comprehensive listing of all of your operating leases now (which you need anyway for current financial statement disclosures), then you already have the building blocks for creating the new ROU Assets and Lease Obligations. Once 2021 begins to draw near, your VonLehman advisor can help you assess and calculate which leases must or may not need to be capitalized. In the meantime, you should be disclosing this pending change in your annual financial statements. Please contact me if you have any questions.