Accounting Changes on the Horizon for Financial Institutions
There are unprecedented and significant changes to the authoritative accounting literature on the horizon. Many of these changes arise from the Financial Accounting Standards Board’s (FASB) and International Accounting Standards Board’s (IASB) efforts to converge their accounting standards. There are six joint projects by the FASB and IASB that are expected to significantly affect virtually all companies. The six projects are:
- Financial instruments
- Revenue recognition
- Financial statement presentation
- Financial instruments with characteristics of equity
In this issue of Financial Institution Insights , we highlight the Leases project. The other projects will be highlighted in future Financial Institution Insights issues.
In summary, the proposed model would require lessees to recognize an asset for the right to use the leased asset, and a liability for the obligation to make the rental payments. Accordingly, off-balance-sheet accounting (i.e. operating leases) would no longer be appropriate. The most significant implication for lessees will be the gross up of the balance sheet as a result of this proposed standard. Other implications to depository institutions include:
- The increase in total assets for lease assets from others will decrease the leverage capital ratios
- The increase in total assets will reduce the return on asset ratios
- Institutions will need to reevaluate buy vs. lease analysis on a prospective basis
- Loan covenants with customers may need to be modified
- Potential significant financial implications will occur for customers in the leasing business
- Potential significant financial implications will result for institutions with leasing divisions
As of the publication date of this article, the FASB recently decided to expose the proposed leases accounting standard for a second time because of the significance of the changes made to the original exposure draft. While no announcement has been made regarding dates, it is expected that the revised exposure draft will be issued later in 2011, and the final standard is not likely to be issued until 2012.
For a more in-depth review of the Leases project and of each of the highlighted projects, McGladrey & Pullen has prepared an additional publication, More Accounting Changes Coming.
For more information, please contact McGladrey & Pullen Partner Tim Tiefenthaler at 702.759.4050.