By: Turnkey Trading Partners Accounting Team

On December 15, 2021 the Financial Accounting Standards Board (“FASB”), the organization responsible for setting US Generally Accepted Accounting Principles (“GAAP”), changed its view of how lease accounting should be handled. Almost all CFTC registered, NFA member firms are required to adhere to US GAAP accounting standards while preparing financials. That is, under US regulation firms are not permitted to utilize cash or international standard accounting for official books and records in most instances. FASB’s change to lease accounting obligations should have been considered and accounted for during calendar year 2022. As the year comes to a close Turnkey’s accounting team wanted to remind readers of this obligation.

FASB – ASC 842 

FASB’s changes were issued under advisory ASC 842 available for review here.  Previously FASB allowed for companies to pay their lease as an expense. Each month the lease was due and each month it was paid. The transaction was quite simple to book and frankly had little impact on CTA-PR, CPO-PQR, 1-FR, and Focus filings. However, under ASC 842 book keeping entries got a bit more complex. FASB starting in 2022 required leases to be recorded on a company’s balance sheet if the lease term is greater than twelve (12) months.  What this means is that lessees must recognize a lease liability which represents the present value of the future lease payments, offset by a “right of use asset, which represents the right the lessee has to utilize the leased space. This change created quite the problem for NFA and the CFTC. Specifically, under the new FASB GAAP standards, firms with a net capital obligation would not carry the asset portion of the lease booking as “good capital”. This asset under CFTC and NFA regulations is required to be carried as “non-current” and thus would not offset the lease liability reducing a firm’s capital by the corresponding lease liability. Enter CFTC No Action Letter 18-19.

CFTC No Action 18-19

FASB first floated the above lease accounting change in 2016. At that time the accounting world was abuzz with dialog about this significant change in standards. Knowledgeable CFTC and NFA practitioners and business operators (including Turnkey) raised concerns about the impact this obligation would have on regulated filings. After nearly two (2) years the CFTC came to the industry’s rescue and issued No Action 18-19. The CFTC had reviewed comments from many industry participants and in summation viewed the change to net capital presentation that would occur due to ASC 842 to be an “unintended consequence” of the new presentation format. On this basis the CFTC determined it was allowable for registrants to “add back” an operating lease asset to a firms balance sheet in order to offset the corresponding lease liability. This ultimately would, at least on regulatory filings, offset the capital penalty incurred due to leases being considered “full or current” liabilities but only “non-current” assets on company books.

Practical Impact

Turnkey has noticed that many firms within the industry have not updated accounting practices to consider FASB ASC 842. We have also noticed that NFA has not been focused on enforcement in this area – yet. Turnkey has however observed, starting last year, an increasing number of certified auditors engaging in dialog while preparing certified audits over ASC 842. CFTC registered, NFA member firms need to be aware of this change to accounting standards to maintain proper books and records.

  • First; determine if your original lease is for longer than twelve (12) months;
  • If your lease is 12 months or shorter book the lease as you always have
  • If your lease is greater than 12 months seek professional assistance in following ASC 842
  • Company books must reflect the asset and liability entries for leases subject to ASC 842
  • Regulatory filings (1-FR and Focus) can be adjusted to offset capital reductions

Should your firm require assistance in ensuring that it is meeting its lease accounting obligations under US GAAP as required by the CFTC and NFA please contact Turnkey today. Someone from our accounting team would be happy to discuss your unique situation to determine if we may be able to assist.

Do you have specific questions regarding the content of this article? Contact Turnkey Trading Partners for assistance and to speak with someone today.