With new international standards predicted to make accounting for leased company cars more complex and costly, fleet managers need to prepare now experts warn.

Independent lease giants, ALD, Arval and LeasePlan have united in their opposition to the proposed new rules, saying they will impose “an extraordinary level of complexity on all sorts of businesses, contrary to its intentions of simplification and transparency”.

A draft of the new rules will be published within a year and they are expected to come into force by April 2011.

They will create an international common standard, likely to result in rules that mean all leases are accounted for on a company’s balance sheet as assets and liabilities – the asset of having the use of the leased machine, vehicle or piece of equipment and the liability of having to pay for its lease.

The BVRLA said it was not opposed in principle to the new rules.

However, it said they need to be simple for its members and in particular their customers to implement.

While the BVRLA said it was too early to start issuing advice, others disagree.

“Fleet managers need to talk with their finance directors and determine the impact of this change and decide what they should do in light of this,” advises Alastair Kendrick, director of employment tax services at Mazars LLP.

Judging by the international responses to a discussion paper on the subject, which closed last week, most experts agree that a common accounting standard is needed especially for large ticket leases, such as for aircraft.

However, some respondents say there is a no need to bring leased company vehicles into the scope of the new rules.

The BVRLA said short-term, non-core leased assets should be accounted for as ‘notes to the accounts’, as happens now.

“This would reduce the financial reporting burden for our members’ customers and still maintain the desired transparency to users of accounts,” said BVRLA chief executive, John Lewis.

“If the IASB listens to our lobbying then putting this information on the balance sheet should not require a much higher level of reporting, just a different type.”

In his response, Bjorn Mogensen, corporate accountant at the multinational giant Novo Nordisk, said: “We are convinced that balance sheet recognition of leased company cars and other assets of an administrative nature will not bring any value to users of financial statements.”

He suggests that a threshold should be set or a principle based on the nature of the leased asset be used to ensure company cars are not included in the new rules.

An approach favoured by many, including the Arval, LeasePlan and ALD collective, is that a cost analysis be carried out.

“No further step should be taken before a thorough cost / benefit review is undertaken,” said the trio in a joint statement.

The Danish Accounting Standards Committee also favours this approach, as does Leaseurope, which represents the interest of lease companies across Europe.

“The wide spectrum of arrangements that use the contractual form of a lease cannot all be heaped into the same bag,” said Tanguy van de Werve, Leaseurope’s director general.

“The future approach is likely to create immense complexity and considerable costs for the preparers of accounts.”

Mark Venus from BNP Paribas and chair of Leaseurope’s accounting committee, added: “The vast majority of leases are for low value items such as cars, photocopiers, IT and telecom equipment and other straightforward assets.

"These are very different to the real estate or aircraft leasing contracts that standard setters are focused on.”

Leaseurope’s major concern is that the new rules will create “excessive complexity” for companies that lease.

“Although no firm will be immune to this complexity, it will be those companies who have small ticket leases who will be the hardest hit.

"The complexities and resulting costs may discourage the use of leasing,” it warned.

But the two governing bodies – the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) – seem to be planning to include leased company vehicles in the new rules.

If this happens, there could be a major impact on the vehicle leasing sector here.

“Many concerns will decide against wanting cars on their balance sheet.

"I have seen some comments from within the leasing industry suggesting that this will further increase leasing costs,” said Kendrick.

“I believe this combination will make many concerns wonder whether it is time to reduce their cars.

"We are already seeing a growth in the number of companies who have scrapped cars for all but essential car users and this added complexity will make more follow.”

There are still several issues, such as if the proposed new rules will impact on who claims the capital allowance relief.

“Traditionally those who report an asset on their balance sheet can claim the capital allowances,” explains Kendrick.

“If this is to occur then this will significantly add to costs and administration.

"The problem is made more difficult seeing the proposed change would arise historically meaning employers would have to re-do their tax computations for vehicles on the fleet back to when those cars first got leased.”

Guidance on these issues is expected when the IASB and FASB publish the draft rules.

 

Time line

  • IASB and FASB launch project on lease accounting: July 2006
  • International working group established: December 2006
  • Working group meets for the first time: February 2007
  • First discussions on new rules: March 2007
  • Boards decide to concentrate only on lessee accounting: July 2008
  • Public discussion paper launched: March 2009
  • Discussion paper closes: July 2009
  • Proposed rules likely to be published: Autumn 2010
  • New rules expected to come into force: April 2011
     

Idiot's guide to the proposed new rules

 

 

  • It is proposed that all leases, from a leased company car to a jumbo jet, must be accounted for as an asset and liability.
  • The asset is having the use of the vehicle
  • And the liability is having to pay for its lease.
  • This will complicate accounting procedures and increase costs for companies that lease.
  • Currently, accounts just recognise lease payments as an expense.