Automotive leasing and rentals are set to retain their status as essential forms of vehicle finance despite the publication of the new lease accounting standard by the International Accounting Standards Board (IASB) today.
The new standard becomes mandatory from 1 January 2019, but as with any other change to accounting standards, companies will need to ensure that they produce a set of comparative accounts for 2018.
The British Vehicle Rental and Leasing Association (BVRLA) is confident that its members will be able to adapt their business processes to help customers with financial reporting as required by the IASB’s new standard (IFRS 16 Leases).
The new standard 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, 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 their balance sheet and incur a corresponding liability for future rental payments.
The final version of the standard includes some major simplifications which mean that short-term hire vehicles, informal vehicle extensions and ancillary leasing services (e.g. maintenance) do not have to be reported. It also gives fleets the option to report leases on a portfolio level rather than individually.
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.
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.
Gerry Keaney is chief executive of the British Vehicle Rental and Leasing Association