Fleet managers must not let the new lease accounting standards “fall off the radar”, according to Zenith’s head of consultancy Claire Evans.
The changes, which take effect from January 1, 2019, will mean leased assets (including vehicles on operating leases) are brought on to companies’ balance sheets. They are being introduced by the International Accounting Standards Board (IASB) with the aim of giving a more complete picture of a company’s financial position.
“They wanted to create consistency so that when investors are looking at accountants everything is declared and it’s not a case of looking down through notes,” Evans told members of fleet representative body ACFO at a recent East Anglian and Midlands regional meeting.
“They were already reported, they were just reported somewhere else so there shouldn’t be any major impact,” she said. “Just make sure your investors understand the changes when they come in and understand what will be changing in your accounts.”
Companies that report under UK GAAP (generally accepted accounting principles) are not included in the changes but Evans predicts that, by the time the changes come in, they will be.
Under the new reporting requirements, fleet managers will need to know the monthly rental of their vehicles, as well as the depreciation and interest elements of the rental which may vary month to month, particularly towards the latter part of the contract when companies will pay less interest and more capital.
Companies will also need to report any changes made during the contract such as mileage and term amendments.
Some companies may choose to ‘early adopt’ and leasing companies are already considering how to change the management information and reports they provide to customers.
“Reporting is a key element of this change,” Evans said. “Make sure your finance teams are aware of what it means for cars and that you are working with your leasing providers so they are geared up to provide you with the information your finance department is going to need to report these properly.”
Fleet managers that use multiple leasing companies also need to consider how they will manage different reports from different providers.
Evans said: “January 2019 seems like a long time away but it’s going to come round quickly and there are different types of transitional arrangements so it may be the case that you have to rework the previous year’s accounts to do that comparison. So I would say the sooner we start to engage the better. Don’t leave it, start having these conversations now.”
Will companies switch funding method?
Employee car ownership (ECO) schemes and short-term rental (under 12 months) will be the only off-balance sheet funding options under the new rules but Zenith’s Claire Evans does not foresee a significant increase in companies choosing those methods.
“There are still so many benefits from leasing, you still get your VAT benefits and the benefit of fixed costs, and that is outweighing the financial implication for companies,” she said.
“ECO is only going to suit certain companies so we won’t see a mass shift to a different funding method.
“It’s possible there will be more long-term daily rental but we’ve not had that feedback from customers. But if being on-balance sheet is something people really don’t want they could say ‘we’re not providing company cars anymore, we’re just providing cash and long-term rental’.
“But the feedback we have had is that people still see the benefits of contract hiring and you wouldn’t necessarily shift a whole fleet for the impact having the vehicles on-balance sheet would have.”
Companies that take out a six-month lease and then choose to extend should not be affected by the changes in Evans’s view.
“It’s about the original intention,” she said. “If the original intention was six months and you extend it and it tips over that 12 months you shouldn’t really be caught up in this.”
However, she said companies cannot simply start taking out 11-month leases and extending as “that would be picked up”.