In 2016, The Securities and Exchange Commission (SEC), released a “no-action letter” providing relief to broker-dealers from the effects of the Financial Accounting Standards Board’s (FASB) previously issued new accounting standard for operating lease assets and liabilities, known as ASU 2016-02, Leases, or “Lease Accounting Update” (Topic 842).

According to the letter, for regulatory net capital purposes, a broker-dealer is now allowed, “to add back the value of an operating lease asset to the extent of the associated operating lease liability. If the operating lease liability is greater than the associated operating lease asset, the broker-dealer would deduct for net capital purposes the amount by which the liability exceeds the associated lease asset.” This no-action letter is effective for only a broker-dealer that has adopted FASB ASU No. 2016-02.

Background Topic 842

In February 2016, Accounting Standard ASC 842, was finalized and issued by the Financial Accounting Standards Board (FASB).

The new accounting standard was created with the intention to increase transparency and provide better comparability among organizations for the recognition of lease assets and lease liabilities, and the disclosure of key information about leasing arrangements. However, 842 was seen as problematic for broker-dealers, as it would have had a significant impact on broker-dealers’ calculation of net capital requirements under Exchange Act Rule 15c3-1. This no-action letter seeks to resolve such conflicts, by allowing broker-dealers to treat capitalized operating lease assets as allowable to the extent of the related operating lease liability.

Taxation and regulatory issues regarding SEC guidelines can be complex. If you would like to benefit from our expertise in these areas or if you have further questions on this Advisory, do not hesitate to contact our Financial Institutions specialists, or call us at 1-800-239-1474.

Contributing author: Cristina Lopez