The British Vehicle Rental and Leasing Association (BVRLA) believes leasing and rental will continue to be essential forms of vehicle finance despite the introduction of new lease accounting proposals announced by the International Accounting Standards Board (IASB).
The IASB’s proposals are intended to bring all leased assets onto the balance sheet, giving a more complete picture of a business’s financial position.
If introduced, they would require any publically quoted companies leasing assets – computers, vehicles or property, for example – to account for them, giving greater transparency to investors.
This new approach to lease accounting, called the ‘right of use’ model, differs substantially from the current standard, which does not require operating leases to be reported in company accounts.
Under the new model, a lessee (leasing customer) would identify the right to use a leased asset on its balance sheet and incur a corresponding liability for future rental payments.
The board consulted widely before finalising the new proposals and has tried to make them as simple as possible in order to reduce the extra reporting burden on lessees.
Initially, the new standards will only apply to publicly quoted firms that report to IASB standards.
Most UK firms report to the UK’s generally accepted accounting principles (GAAP) and will be unaffected until these converge with IASB standards.
There is no date set for this at present.
Even if a company is affected, bringing leased vehicles onto a firm’s balance sheet will not erode the key benefits of leasing, according to Gerry Keaney, chief executive of the BVRLA.
He said: “Leasing has proved its value, 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.
“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.”
Following the current consultation the IASB will publish a final standard towards the end of 2013. There will be a transition period before the new standard becomes mandatory in a few years’ time.
The BVRLA is confident that its members will be able to adapt their business models and help their customers with any extra accounting burden that the new standards impose.
Issues that fleet operators/lessees need to consider:
Maintenance and servicing
Fees relating to maintenance, fleet management, and other service costs are excluded. With only the finance element having to be reported, leasing companies may be asked to separate the finance and maintenance charges. This is unlikely to be a problem for a leased car, where the finance and maintenance are noted separately for VAT purposes, but this probably won’t be possible for a commercial vehicle. Where the finance element cannot be separated, the customer would have to set out the full rental value on their balance sheet.
Short term hire
Customers renting vehicles for less than 12 months will be required to use a simple accounting model. This would keep their reporting burden to a minimum because they would not need to calculate the net present value of the rental.
Contingent rentals are not an issue under the current proposals and customers will not be required to account for any end of rental and excess mileage charges.
Leasing firms would not have to provide any financial information relating to the asset’s value at the end of the lease term, so residual values can be ignored.
Options to extend
A lessee with a formal option to extend the term of their lease, and who expect to do so, would be required to calculate the value of the asset for the period of the extension and include this on their balance sheet. The lessee would be required to consider all relevant factors, including options to renew at market value at the date of renewal. In practice, as most leasing companies use fixed-term leases without formal options to extend, this requirement is unlikely to affect many customers. Those who have been informally permitted to continue using a vehicle after the lease term has expired – while awaiting delivery of a new vehicle, for example – would not have to account for the period of informal use.
Auditors would continue to decide if a lease has to be accounted for by applying the ‘materiality’ or ‘non-core’ rules. In short, this means that if the vehicle being leased has little financial impact on the accounts, it can be ignored.
Will all companies that lease be affected?
The proposed lease accounting rules would only apply to publicly quoted firms that report to the standards of the IASB. Most small and medium-sized enterprises reporting to the UK’s generally accepted accounting principles (GAAP) will be unaffected until UK standards converge with those of the IASB. There is no deadline for this at present.
More information on lease accounting can be found on the BVRLA website here.
The revised draft of the proposals is available from the IFRS website here.