Financial reporting rule change coming

By Ian Hill, managing director, Activa Contracts

The fleet industry is undergoing an unprecedented volume of legislative change, dominated by the impact of the Worldwide harmonised Light vehicles Test Procedure (WLTP) and introduction of the General Data Protection Regulation (GDPR).

However, it appears the January 1, 2019, introduction of new International Financial Reporting Standards – IFRS 16 – has, unfortunately, taken a back seat.

A decade in development, IFRS 16 does not initially impact on all businesses – only those that report to IFRS and public sector organisations.

Most UK firms report to the UK’s generally accepted accounting principles (GAAP) and will be unaffected until such time, presently unknown, as they converge with the IFRS standard.

However, contract hire and leasing companies are now receiving enquiries from customers asking ‘what do we need to do’ to comply with IFRS 16?

IFRS 16 aims to give greater transparency to company finances and future financial commitments.

Historically, vehicle contract hire – operating lease – arrangements have been off balance sheet with payments booked in the profit and loss account (finance leases have always been reported on balance sheets).

But, IFRS 16 changes the rules and the lease liability must be recognised on organisations’ balance sheets, although there are exceptions.

In the new world of IFRS 16, lessees must report on their balance sheet the separate financial components of a vehicle lease, represented by the monthly rental.

That means using discounted cashflow to depreciate the asset over the lifetime of the contract, detail reductions/payments in the lease liability over the contract length and account for the interest on the lease liability.

Additionally, a formal extension to extend the lease term would require the lessee to calculate the value of the vehicle and include the extension period on the balance sheet – but an informal extension, while awaiting delivery of a new vehicle, would see rentals charged to the profit and loss account.