Page 1 of 2

BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION

AND REGULATION

SR 19-7

March 21, 2019

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE 

BANK AND TO FINANCIAL INSTITUTIONS SUPERVISED BY THE FEDERAL 

RESERVE

SUBJECT: Statement on the Implications of the New Lease Accounting Standard on Regulation H

Applicability: This guidance applies to state member banks, including those with $10 billion or less 

in consolidated assets, that file regulatory reports prepared in accordance with generally accepted 

accounting principles (GAAP).

The purpose of this letter is to provide state member banks with guidance on the treatment 

of operating leases as an investment in bank premises under Regulation H upon the implementation 

of the new lease accounting standard.1

In February 2016, the Financial Accounting Standards Board (FASB) issued a new 

accounting standard on leases, Accounting Standards Update No. 2016-02, Leases (Topic 842),

which revises the accounting for lease transactions.2 The most significant change in the new 

accounting standard is to lessee accounting for operating leases. Under existing accounting 

standards, lessees recognize lease assets and lease liabilities on the balance sheet for finance leases, 

but do not recognize lease assets and lease liabilities on the balance sheet for operating leases. The 

new standard requires lessees to record a right-of-use asset and a lease liability on the balance sheet 

for virtually all leases. Therefore once a state member bank adopts the standard, operating leases

(other than leases that meet the accounting definition of a short-term lease as well as certain types 

that are accounted for outside the scope of Topic 842), including those entered into prior to the 

standard’s effective date, will be recorded on lessees’ balance sheets. In general, the new standard’s 

effect on lessor accounting for lease transactions is not significant. 

 1 The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within 

those fiscal years, for public business entities. For all other entities, the standard is effective for fiscal years beginning 

after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application 

of the new standard is permitted. An institution that early adopts the new standard must apply it in its entirety to all 

lease-related transactions.

2 Refer to https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176167901010.
Page 2 of 2

Upon adoption of the new lease accounting standard, the carrying value of bank premises

will include leases recorded on the balance sheet, and may exceed the amount of the bank’s capital 

stock. This excess may raise questions with respect to Section 24A of the Federal Reserve Act

(Section 24A),

3 under which a state member bank may not, without the approval of the Board of 

Governors of the Federal Reserve System (Board), make investments in bank premises if such

investments, in the aggregate, exceed the capital stock of the bank.4

The Board maintains the opinion that approval by the Board is not required under Section 

24A where a change in U.S. GAAP requires a state member bank to capitalize premises leased prior 

to the effective date of the new standard.5 Thus, if prior to adoption of the new accounting 

standard, a state member bank’s investment in bank premises is less than capital stock, but that 

investment increases to an amount in excess of capital stock by virtue of adopting the new standard, 

the bank need not seek the Board’s approval under Section 24A. However, approval will be 

required under Section 24A for any bank premises investment in excess of capital stock made 

following adoption of the new standard.6 

Reserve Banks should distribute this letter to the state member banks in their districts and to 

appropriate supervisory staff. Questions regarding this letter should be directed to the following 

individuals in the Accounting Policy Section in the Division of Supervision and Regulation: Lara 

Lylozian, Manager, at (202) 475-6656; and Meg Buckley, Accounting Policy Analyst, at (202) 452-

3981; or to David Alexander, Counsel, in the Legal Division, at (202) 452-2877.

In addition, institutions may send questions via the Board’s public website.7

Michael S. Gibson

Director

 3 See https://www.federalreserve.gov/aboutthefed/section24a.htm.

4 Section 24A is implemented by the Board’s Regulation H, which generally requires a state member bank to provide 

fifteen days notice prior to an investment in bank premises unless the bank’s aggregate amount of investment in bank 

premises is less than or equal to the bank’s perpetual preferred stock and related surplus plus common stock and related 

surplus, as those terms are defined in the instructions to the Federal Financial Institutions Examination Council

Consolidated Reports of Condition and Income. See 12 CFR 208.21(a).

5 The Board has previously expressed the view that a change in GAAP that results in the capitalization of leased 

property by a lessee does not necessitate approval under Section 24A for leases entered prior to the effective date of the 

change. See the Board’s December 19, 1977, policy statement (S-2362), which is available here.

6 For more information on the appropriate treatment of capital leases for the purposes of the Federal Reserve’s 

Regulation H and Section 24A, see S-2362.

7 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.
Page 1 of 2

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

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.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 

 1 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).
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//

Theodore E. Allison

Secretary