ASU 2016-02, Leases Update: FASB officially delayed the leasing standard effective date for non-public entities to December 15, 2021 (i.e., January 1, 2022).
This standard may not only affect a bank’s balance sheet, but also the balance sheet of their customers.
Overview of the ASU Lease Update Effects
Effects on Banks: Banks will be directly and indirectly affected by this new standard. No matter the asset size of the bank, almost all operations lease some type of asset, such as a bank branch, computer equipment, vehicles, etc.
Effects on Balance Sheets: Leases that are entered into by all entities, with a term in excess of 12 months, will now have a direct balance sheet effect – 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).
- 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
Effects on Capital Ratios:
- Regulators are still questioning whether the ROU asset is “intangible” or not for call reporting purposes
- If deemed an intangible asset – should be deducted from regulatory capital
- If deemed a tangible asset – must be risk-weighted 100% and included in the lessee’s calculations of total risk-weighted assets, as well as total assets for leverage capital purpose
- 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 calculate and consider the effects this will have on their balance sheets and, perhaps more importantly, their capital ratios.
Other ASU Update Notables:
ASU 2016-13, Financial Instruments – Credit Losses (CECL): This standard was delayed for non-public entities to December 15, 2022 (i.e., January 1, 2023).
ASU 2020-04, Reference Rate Reform: In March 2020, the FASB issued ASU No. 2020-04 – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.
The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform.
These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. ASU No. 2020-04 is effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020.
ASC 350-20, Intangibles – Goodwill and Other: On March 30, 2021, FASB issued a standard that provides an alternative to goodwill impairment triggering event evaluations for private companies. Currently, GAAP states that goodwill must be tested for impairment when a “triggering event” occurs that indicates it is more likely than not that the fair value of goodwill is below its carrying value – i.e., throughout the entire year.
Many operations provided comments to FASB stating that many private companies only complete GAAP financial statements on an annual basis and performing this evaluation throughout the year is time consuming and costly. Thus, FASB concluded that private companies can now elect to perform a goodwill trigger event assessment at the end of the reporting period. For example, a bank may only prepare GAAP financials for an audit as of 12/31. The bank can now elect to evaluate goodwill for impairment at 12/31 rather than throughout the year.
Contact a K·Coe banking advisor with questions regarding the application of Accounting Standard Updates for your business.
