Leasing Standard Update: Effective Date, Balance Sheet and Call Reports Affected

Leasing Standard ASC 842 Creates Notable Changes for Banks and Customers

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Overview

  • This leasing standard (ASC 842) may not only affect a bank’s balance sheet, but also the balance sheet of its customers.
  • Banks will be directly and indirectly affected by this new standard. No matter the asset size of the bank, almost all lease some type of asset. That could mean a bank branch, computer equipment, vehicles, etc.
  • Leases entered into by all entities, with a term in excess of 12 months, will have a direct balance sheet effect beginning January 1, 2022 – with a right-of-use (ROU) asset and lease liability recognized – with the income statement effect differing based on how the lease is classified (either financing lease or operating lease).

Effective Date Delayed to 2022, but Banks should Calculate Effects

FASB officially delayed the leasing standard effective date for non-public entities to December 15, 2021 (i.e. January 1, 2022).

Additional Effects

Balance Sheet Effect:

    • The ROU asset should be reflected in Schedule RC, line 6 “Premises & Fixed Assets”
    • The related liability should be reflected in Schedule RC, line 20 – “Other Liabilities”
    • See call report instructions for further details

Capital Ratios Effect:

    • Regulators are still questioning whether the ROU asset is “intangible” or not for call reporting purposes.
      • If deemed an intangible asset – it should be deducted from regulatory capital
      • If deemed a tangible asset – it must be risk-weighted 100% and included in the lessees calculations of total risk-weighted assets, as well as total assets for leverage capital purposes
    • Ultimately, after this new standard is implemented, it will decrease both the total capital ratio and Tier 1 leverage ratio. Adding a ROU lease asset will increase total assets, while capital remains unchanged (after the year-one cumulative effect adjustment to retained earnings), thus leading to lower capital ratios.

While 2022 may seem distant, banks need to invest the time needed to calculate and consider the effects this will have on their balance sheets and, perhaps more importantly, their capital ratios.

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