PCC Worried Over Private Banks’ Insufficient Preparation for Lease Standard

April 29, 2019

Private Company Council (“PCC”) members are alarmed over how many private banks are unaware of the impact the Financial Accounting Standards Board’s (“FASB”) leases standard will have on their balance sheets. During talks at an April 2 meeting on Accounting Standards Update (“ASU”) No. 2016-02, Leases, PCC member Dev Strischek commented that banks are coming to the realization that the standard requires them to capitalize their leases on the balance sheet.

Banks heavily rely on operating leases for their branches and office space leases. Operating leases were previously not included on balance sheets, but banks must now record all long-term leases as a liability. The long-term leases’ corresponding right-of-use asset must also be recorded and capitalized on the balance sheet. According to Strischek, bankers know the new lease accounting guidance will raise their leverage ratios, but only a few are aware of the right-of-use assets.

As a result of this change, Strischek said the right-of-use asset will lower the rate of return on asset number. While some banks have been proactive in limiting their lease exposure, Strischek stated that there is still plenty of work to be done.

Discussions at the PCC meeting indicated that banks’ lack of preparation for ASU No. 2016-02 is contributed to the overwhelming number of new accounting standards that companies must conform to in a short timeframe. In addition, banks are primarily focused on implementing ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit losses on Financial Instruments.

In recent years, the FASB has hosted educational webinars and provided outreach on these standards and others. Another resource includes a regularly updated implementation portal on the FASB website.