19 January 2016

Business as usual for fleets despite introduction of new lease accounting rules

Leasing and rental will retain their status as essential forms of vehicle finance despite the long-awaited publication of a new lease accounting standard by the International Accounting Standards Board (IASB), according to the British Vehicle Rental and Leasing Association (BVRLA).

The new standard, following a ten-year review, becomes mandatory from January 1st 2019, but as with any other change to accounting standards, companies will need to ensure that they produce a set of comparative accounts for 2018.

The BVRLA says it is confident that its members, which include Activa Contracts, will adapt their business processes to help customers with financial reporting as required by the IASB’s new International Financial Reporting Standard (IFRS) 16 Leases. It succeeds the current International Accounting Standard 17 Leases.

The new standard is intended to bring all leased assets onto the balance sheet, giving a more complete picture of a business’s financial commitments and thus greater transparency as to its financial health.

Hans Hoogervorst, IASB chairman, said: ‘These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often-substantial lease obligations.

‘The new Standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy.’

The new approach to lease accounting, called the right-of-use model, differs substantially from the current standard, which does not require operating leases (contract hire) to be reported in company accounts. Finance leases and corresponding obligations to make lease payments already do have to be recognised on a company’s balance sheet.

Under the new model, a lessee must identify the right to use a leased asset on its balance sheet and incur a corresponding liability for future rental payments.

Following much behind-the-scenes debate, the final version of the standard includes some major simplifications which mean that short term hire vehicles, informal vehicle extensions and ancillary leasing services such as vehicle maintenance and accident management as well as excess mileage payments do not have to be reported. It also gives fleets the option to report leases on a portfolio level rather than individually.

Initially, the new standard will only apply to public sector organisations and firms that report to IFRS. Publicly listed companies already have to make a note to the annual report, which reflects any operating lease rentals payable.

Most UK firms report to the UK’s Generally Accepted Accounting Principles (GAAP) and will be unaffected until such time as they converge with the IFRS standard.

Despite the change, bringing leased vehicles onto the balance sheet will not erode the key benefits of leasing, according to BVRLA chief executive Gerry Keaney.

He said: ‘Vehicle leasing continues to grow in popularity and this has very little to do with any balance sheet advantages.

‘Its main value comes elsewhere, sheltering companies from the risk of fluctuating vehicle values, providing them with extra flexibility and purchasing power and freeing-up precious working capital that would otherwise have been spent buying an asset.’

Nevertheless, businesses will need to ensure they report on their liabilities – rental payment arising under the lease – and their asset - the right to use the leased asset. The BVRLA says that ‘will inevitably impose a new reporting burden’ but should be ‘relatively straightforward’ as long as organisations are able to measure the two values and account for them in a consistent and simple manner.

Mr Keaney concluded: ‘Our members already advise customers on how to reduce fleet costs and emissions and I am confident they can add even more value by helping them with their reporting requirements.’

The BVRLA added: ‘Affected firms may wish to speak to their auditors or accountant to fully understand what changes will need to be made with the way the company prepares and reports its accounts. This may also lead to a requirement for changes to accounting IT systems. Communicating the changes to its key stakeholders will be important at some stage.’