Fleet News

Fleets get a warning on Enron crisis

PRESSURE is mounting for contract hired vehicles to be recorded on the balance sheets of end-user fleets, rather than the balance sheets of leasing companies, following a European Union ruling to adopt International Accounting Standards.

The fall-out from the Enron crisis in the United States has led to a global demand from investors for greater transparency and consistency in the way that companies compile their financial reports.

The International Accounting Standards Board (IASB) is investigating the possibility of forcing companies to record operating leased (contract hired) assets on their own balance sheets as part of its mission to establish global financial reporting standards.

In a statement to the Committee on Banking, Housing and Urban Affairs of the United States Senate, Sir David Tweedie, chairman of the IASB, said: 'The last 20 years have seen a number of attempts by companies to remove assets and liabilities from balance sheets through transactions that may obscure the economic substance of the company's financial position.

'A company that owns an asset, say an aircraft, and finances that asset with debt, reports an asset (the aircraft) and a liability (the debt). Under existing accounting standards in most jurisdictions, a company that operates the same asset under a lease structured as an operating lease reports neither the asset nor the liability.'

In this example, an airline company could operate without reporting any of its principal assets – its aircraft – in the same way that fleets with large numbers of contract hired cars and vans do not show either the vehicles or the lease liabilities on their balance sheets.

Tweedie described such a situation as 'clearly not a faithful representation of economic reality,' and said the UK Accounting Standards Board (a member of the IASB) was working on this issue.

'There is a distinct possibility that such a project would lead us to propose that companies recognise assets and related lease obligations for all leases,' he said.

And what the IASB approves will become law throughout the European Union in three years time, after the European Council of Ministers last week adopted a regulation requiring listed companies to prepare their consolidated accounts in accordance with International Accounting Standards from 2005 onwards.

John Lewis, director general of the British Vehicle Rental & Leasing Association, said the association was keeping a close eye on developments, although he added that recent research indicated that the balance sheet treatment of contract hire was no longer among the top ten reasons for fleets deciding to contract hire their vehicles.

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