Frequently asked questions on changes to lease accounting – FAQ issued by the Basel Committee

Frequently Asked Questions on Changes to Lease Accounting

Press Release

The Basel Committee has issued responses to a set of frequently asked questions addressing the regulatory capital implications arising from recent changes to lease accounting standards issued by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB).

In 2016, the IASB and FASB introduced significant revisions to the accounting treatment of lease transactions. These standards became effective from 1 January 2019 for calendar year-end entities, with early adoption permitted. While there are certain differences between the two frameworks, both standards introduce a fundamental change by requiring most leases to be recognised on the lessee’s balance sheet through a lease liability and a corresponding right-of-use (ROU) asset.

These developments have raised important questions for banks in their capacity as lessees, particularly in relation to the regulatory capital treatment of the newly recognised right-of-use asset.

Regulatory Capital Treatment of the Right-of-Use Asset

Nature of the asset

A key consideration is whether the right-of-use asset should be classified as a tangible or intangible asset for regulatory capital purposes. The Basel Committee clarified that where the underlying leased item is a tangible asset, the associated right-of-use asset should not be deducted from regulatory capital.

Inclusion in capital and leverage calculations

Where the underlying leased asset is tangible, the right-of-use asset should be included in both risk-based capital and leverage ratio denominators. This treatment reflects the objective of the revised lease accounting standards, which seek to more accurately capture the economic substance of leasing arrangements by recognising both the obligation to make lease payments and the control over the economic benefits of the leased asset.

Risk weighting

For regulatory capital purposes, the right-of-use asset associated with a tangible underlying asset should be assigned a risk weight of 100 percent. This approach is consistent with the historical treatment applied to owned tangible assets and to leased assets previously recognised under finance lease accounting.