23 November 2015

New lease accounting standard set for 2019 introduction

The long-awaited new common standard for accounting for all leases is expected to be published by the end of 2015 and will be applicable from 1st January 2019.

After years of discussion the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are finally nearing the compilation of the new standard.

For businesses leasing vehicles it means that the assets and liabilities arising from any lease contracts are recognised in financial accounts for companies accounting to International Financial Reporting Standards.

Historically, financial leases have had to be reported on the balance sheet, but not operating leases.

The new approach to lease accounting, referred to as the ‘right of use approach’, differs substantially from the current standard which is based on an analysis of the risks and rewards inherent in the lease.

Under the ‘right of use’ model, a lessee would always recognise an asset, (the right to use the leased item), and a corresponding liability, i.e. rental payment, on its balance sheet, whereas under the current standard, a lessee recognises the leased asset only under so-called finance leases with a note to the accounts for operating lease liabilities.

Publicly listed companies already have to make a note to the annual report, which reflects any operating lease rentals payable.

The lease accounting rules only apply to publicly quoted firms that report to the International Financial Reporting Standards and the public sector. 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).

That, said the British Vehicle Rental and Leasing Association (BVRLA), was relatively straightforward if able to measure the two values and account for them in a consistent and simple manner.

In a statement, the BVRLA said: ‘Bringing these leased items onto a firm’s balance sheet will not in itself erode the commercial benefits of leasing. Leasing has already proven its value, sheltering companies from the risks associated with vehicle values and ensuring that more capital remains available than when assets are purchased outright. But it will inevitably impose a new reporting burden.’

FASB Chairman Russell G. Golden said: ‘We believe that this new standard is important because it will provide investors, lenders and other users of financial statements with a more accurate picture of the long-term financial obligations of the companies to which they provide capital.’