Understanding the Impact on Balance Sheets & Borrowers
You’ve probably already heard that FASB has updated the new lease standards, but what does the new standard mean for a bank?
The effective date for non-public entities is December 15, 2019 (i.e., January 1, 2020). Early adoption is permitted.
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 now have a direct balance sheet effect – with a right-of-use asset and lease liability recognized – and the income statement effect differing based on how the lease is classified (either financing lease or operating lease).
What amount will you need to record? The standard states that the amount recorded for both the asset and liability to be the present value of payments to be made during the lease term.
I am about to enter into a lease agreement, how can I exempt it? The only way to “exempt” a lease would be to make it cancellable at any time or to have the term be less than 12 months.
Yes, operating leases will now be reflected on the balance sheet. Banks will be indirectly affected as they now need to better understand how their borrowers are reporting and treating the lease obligations, as a lessor and lessee.
In short, January 1, 2020 is quickly approaching and financial institutions will be affected directly and/or indirectly and will need to understand the impact this updated standard will have on their balance sheets, as well as their borrowers.
Please reach out to K·Coe Isom’s banking advisors with questions surrounding the new lease standard, or register for our upcoming Lease Standards webinar in January 2019 here.