FRB Provides Guidance for State Member Banks on New Lease Accounting Standard

The Federal Reserve Board ("FRB") provided guidance on the treatment of operating leases for state member banks under Regulation H.

According to the Supervision and Regulation Letter, under the current accounting standard on leases, lessees recognize lease assets and lease liabilities as investments on the balance sheets for finance leases, but do not recognize lease assets and lease liabilities as investments on the balance sheets for operating leases. Under the new standard, lessees will recognize lease assets and lease liabilities as investments on balance sheets for virtually all leases. The new standard's effect on lessor accounting for lease transactions is not significant.

The FRB stated that the additional lease recognition may impact the balance sheets of several institutions. Given that the leases are treated as investments, the change may prompt some firms to evaluate whether their total investments exceed their capital stock in violation of applicable regulations.