Business as usual despite new lease accounting rules, says BVRLA
So says the British Vehicle Rental and Leasing Association (BVRLA), adding that it is confident that its members will be able to adapt their business processes to help customers with financial reporting as required by the new standard (IFRS 16 Leases).
The launch of a new standard has been worked on by the IASB since 2006, prompted by concerns over ‘structuring opportunities’ under the current standard whereby businesses using operating hire didn’t need to disclose assets on the balance sheet, only in the notes to the financial statements.
The new standard becomes mandatory from 1 January 2019 and is intended to bring all leased assets onto the balance sheet, giving a more complete picture of a business’s financial commitments.
This new approach to lease accounting, called the ‘right of use’ model, requires a lessee to identify the right to use a leased asset on their balance sheet and incur a corresponding liability for future rental payments.
The final standard differs from the draft issued in 2013 and includes some major simplifications which mean that short-term hire vehicles, informal vehicle extensions and ancillary leasing services (eg maintenance) do not have to be reported. It also gives fleets the option to report leases on a portfolio level rather than individually.
Hans Hoogervorst, IASB chairman, commented: “The new standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy.”
Initially, the new standard will only apply to public sector organisations and firms that report to International Financial Reporting Standards (IFRS). Most UK firms report to the UK’s Generally Accepted Accounting Principles (GAAP) and will be unaffected until such time these converge with IFRS standard.
Commenting on the new standard, BVRLA chief executive Gerry Keaney said that bringing leased vehicles onto the balance sheet will not erode the key benefits of leasing.
“Vehicle leasing continues to grow in popularity and this has very little to do with any balance sheet advantages.
“Its main value comes elsewhere, 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.”