What Major Change in Lease Accounting Means for Banks
A new federal lease accounting rule will significantly alter how banks must assess their clients' balance sheets by increasing reported liabilities, potentially causing covenant violations, necessitating loan document revisions, higher loan-loss reserves, and possibly increased loan rates.
Banks are bracing for the impact—on two fronts—of a new federal rule that will change how companies account for the cost of leasing everything from equipment to automobiles to space in office buildings or shopping centers.
Banks must account for this dramatic change in how their clients’ balance sheets appear. Ane Ohm, CEO of LeaseCrunch®, a Milwaukee firm that makes lease accounting software, stated, "Banks should review all loan documents, and rewrite them if necessary upon maturity or renewal, to prevent unintended violations."
A common covenant in bank loans is a requirement for the client to maintain a specific ratio of debt to cash flow. Ohm explained, "If debt levels increase past a certain threshold, that could violate the covenant."
She further noted, "It may be necessary for a bank to increase loan-loss reserves, or even raise loan rates, to account for the fact that clients will have elevated liabilities."
"Banks are going to be getting new information about their clients and they’re going to use it," she said.