Circular to Banks on Treatment of Leased Assets for Regulatory Purposes

BANK OF BOTSWANA
CIRCULAR TO BANKS: NO. 1/2022 ISSUE DATE: November 9, 2022 SUBJECT: CIRCULAR TO BANKS ON TREATMENT OF LEASED ASSETS FOR REGULATORY CAPITAL PURPOSES

1. Introduction
   1.1 The International Accounting Standards Board (IASB) issued the International Financial
   Reporting Standard (IFRS) 16 in 2016 to replace the International Accounting Standard (IAS) 17. The purpose of the new accounting standard is to provide guidance on presentation of assets under the operating lease on the balance sheet of a lessee. Under IAS 17, operating leased assets were recognised in the books of a lessee as an off-balance-sheet item, with rental payments over the leased asset as an expense item in the income statement. The standard, which came into effect on January 1, 2019, requires a lessee to present assets under an operating lease on a balance sheet by recognising a right-of-use (RoU) asset and a corresponding lease liability.
2. Purpose
   2.1 The purpose of this circular is to provide guidance to all banks operating in Botswana
   on the treatment of the RoU assets on regulatory capital, following adoption and implementation of IFRS 16 on January 1, 2019.
3. Authority
   3.1 The circular is issued by the Bank of Botswana (Bank), pursuant to its authority set forth
   in sections 13 and 14 of the Banking Act (Cap. 46:04).
4. Guidance on Regulatory Treatment of the Right-of-Use (RoU) Asset for Capital
   Purposes
   4.1 A bank shall comply with the requirements of lease accounting as prescribed by IASB. In
   addition, a bank should have documented accounting policies and operating manuals to govern the processes and to ensure consistency in implementing and applying IFRS 16, and appropriate systems to gather data required for the new accounting requirement.
   4.2 The Basel Committee on Banking Supervision (BCBS) has provided guidance on the
   treatment of the RoU asset for regulatory capital purposes. In that regard, the Bank, consistent with the BCBS guidance, wishes to guide banks as follows:
   (a) If the underlying leased asset is a tangible asset, the RoU asset should be risk￾weighted at 100 percent, consistent with the risk weight applied to a lessee’s owned tangible assets and to leased assets under leases accounted for as finance leases in accordance with existing accounting standards. (b) If the underlying leased asset is an intangible asset, the RoU asset should be

2 deducted from regulatory capital.
(c) The RoU asset (tangible) should be included in the denominators of risk-based capital and leverage ratios.
4.3 The categorisation of the RoU asset as tangible or intangible for regulatory purposes
should follow the accounting designation of the underlying asset.
5. Effective Date of the Circular
5.1 The circular shall come into effect on the date of issuance.
6. Enquiries
6.1 Any further clarification sought with regard to interpretation of the circular should be
addressed to the Director, Banking Supervision Department, Bank of Botswana, Private Bag 154, Gaborone. Godfrey Ngidi DIRECTOR BANKING SUPERVISION DEPARTMENT