BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

ADDRESS OFFICIAL CORRESPONDENCE

TO THE BOARD

S - 2362

December 19, 1977

TO THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS AND THE OFFICERS

IN CHARGE OF BRANCHES

SUBJECT: Financial Accounting Standards Board’s Statement of Financial Accounting 

Standard No. 13

Page 1 o f 2

Effective January 1, 1977, the Financial Accounting Standards Board’s Statement of 

Financial Accounting Standard (SFAS) No. 13 “Accounting for Leases” revised significantly the 

accounting for lease transactions. The Statement requires “capitalization” of leased property by 

the lessee whenever the lease agreement meets the criteria of a capital lease. Further, existing 

capital leases entered into prior to January 1, 1977 will be required to be retroactively restated no 

later than fiscal year ending December 31, 1981. The effect on lessor accounting for lease 

transactions is relatively minor. The Board adopts this SFAS as generally accepted accounting 

applicable to State member banks that are on an accrual accounting basis. [Fotne1

- Beginning with the supervisory call report for the year ended December 31, 1977, specific reporting instructions

for capital lease transactions will be issued. In general, all capital lease property will be included in the fixed asset

caption and capital lease liability will be included in the expanded caption, “mortgage indebtedness and capital lease

obligations.” Accounting for capital lease expenses will continue to be reported in the captions related to the nature

of the leased property (i.e., occupancy or equipment expense). EndofFte 1.]

State member banks may be lessees pursuant to capital lease agreements which require 

capitalization of leased property. In cases where State member banks have entered into bank 

premises capital lease agreements in 1977 or retroactively restate premises accounts related to 

pre-1977 capital leases as required by SFAS No. 13, increases in the carrying value of the bank 

premises may exceed the amount of the bank’s capital stock.

This may raise questions with respect to section 24A of the Federal Reserve Act, under 

which a State member bank may not, without the Board’s approval, make an investment in bank 

premises, or in stock, bonds, debentures, or other such obligations of any corporation, holding 

the bank premises, if such investments, in the aggregate exceed the capital stock of the bank. The 

Board is of the opinion that its approval is not required under section 24A where a change in 

generally accepted accounting principles requires a State member bank to capitalize premises 

leased in the year 1977 or restate retroactively leased premises pursuant to capital lease 

agreements entered into prior to the year 1977. Thus, if an investment in bank premises is 

increased to an amount in excess of a State member bank’s capital stock by virtue of
Page 2 of 2

capitalization of a lease entered into by the bank prior to January 1, 1978, the bank need not seek 

the Board’s approval under section 24A. However, the Board’s approval would be required 

under section 24A where such excess investment in bank premises derives from the 

capitalization of a lease entered into January 1, 1978 or subsequent thereto.

Very truly yours,

// signed by//

Theodore E. Allison 

Secretary