Fleet News

Funding: Accounting rules will hit transport sector

Rob Riddleston, head of transport and logistics, Barclays Corporate

With the Base Rate held at 0.5% and economists predicting this historical low will remain into next year and possibly to 2013 it’s not hard to see that we are living in an unusual interest rate environment.

Barclays is already starting to see an increase in the number of businesses swapping floating rates into fixed to take advantage of the flattening rate curve.

But the interest rate swap is by no means the only instrument for businesses looking to manage risks from the potential future economic uncertainties they face.

One of the issues currently facing transport and logistics companies is proposed changes to lease accounting rules which will affect how lease commitments are reflected on corporate balance sheets.

The transport and logistics sector could be among the hardest hit as a result of the overhaul, which is expected to come as early as 2013.

Often leasing most of their vehicles, companies with multiple long leases will be forced to recognise these payments as a liability on their balance sheet rather than the current standard of having some off-balance sheet.

We have already seen a number of clients enter into contracts to mitigate their risk, such as reducing their inflation exposure in exchange for certainty around their commitments.

Any company which leases assets, including vehicles, machinery or real estate, should adopt a proactive stance and, if they haven’t already, start considering how these changes will impact their business.

Hedge accounting may also help businesses bring stability back to their earnings by mitigating volatility, using derivatives to manage risk.

Despite the potential benefits, some businesses have shied away from applying hedge accounting practices due to the onerous rules currently in place.

However, the new accounting standard IFRS 9 coming into effect in 2015, will significantly broaden the qualifying criteria for businesses looking to apply hedge accounting.

Very broadly speaking, if a transaction makes sense from a risk management perspective then it should qualify under the new hedge accounting rules.

Those companies which constantly evaluate the risks they face in the widest sense, and seek access to a range of solutions and strategies to combat these risks, will be better placed to navigate the current economic environment.

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