Fleets: Lease accounting will ‘bite in the long term’

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In the long term smaller companies with company cars, especially those who provide cars on contract hire, will feel the bite when the new lease accounting rules come into effect, a company car specialist told AccountingWEB

Alastair Kendrick, MHA MacIntyre partner, says the consequence of this new standard “is that you will see a move from contract hire to outright purchase, or finance lease”.

To avoid the “long term bite”, Marcus Puddy, MD of fleet consultancy company PVS, advises smaller companies who are not already reporting under this new standard to switch to best practice as soon as possible.

The International Accounting Standards Board (IASB) announced early in January that the new accounting standard for leases of more than 12 months will become mandatory from 1 January 2019. The new standard requires companies to account for leases on the balance sheet, which gives investors a more complete picture of the businesses’ liabilities. This affects all items companies currently carry on a long lease, including the company car.

At the time of the announcement, IASB chairman Hans Hoogervorst told Reuters: “It’s a major change and will affect around half of all companies, especially airlines, shipping and retail. They will have significantly different financial statements.”

According to Kendrick, this change will not inflict too much change for the bigger companies. They will treat this news as a “non-event” since many of them are already reporting under this standard. However, this change may force smaller companies over the next 12-18 months to consider what they are going to do about their funding methodology.

Agreeing, Puddy said the effect of this change will hinge on how the companies report their ratios. “If they report their profits on an EBITDAE basis, this will have a negative effect on their ratios. If they report on a normal standard it would be no different to any other business”.   

The new lease accounting rules will assist companies’ decision on whether they should lease or buy, Puddy says, because both assets are on the register.

From a leasing perspective, the new standard will lead to an administration increase ensuring the reports are up and running. Once those reports are up and running, Puddy shrugged off this being much of an issue.

The British Vehicle Registration and Leasing Association (BVLA) echoed this business as usual opinion. The trade body’s chief executive Gerry Keaney said: “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.” 

Richard Hattersley
Community Assistant
AccountingWEB
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By KWest
01st Jun 2016 08:48

As a matter of interest is there any indication that the National Audit Office will be adopting IFRS 16 in respect of PFI; so popular with Gordon Brown when he was Chancellor?

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