Lease accounting plans need a rethink

Accounting-standard setters need to simplify their proposals for leasing to achieve their goal of bringing more transparency to company accounts, says the BVRLA.

The association has called on the International Accounting Standards Board (IASB) to re-examine its plans to bring all leased assets and liabilities onto the balance sheet. The message was delivered in the BVRLA’s response to an IASB consultation on the proposals, which closed this week.

“Most people accept the need to make major leased assets and liabilities more transparent,” said BVRLA chief executive John Lewis.

“But whether you are talking to leasing companies, their customers or accounting firms, there is almost total consensus that the plans being put forward are over-complicated and will fail to achieve their objective.”

The BVRLA’s response highlights a number of issues that the IASB urgently needs to address:

Contingent rentals – Instead of focusing solely on closed-end, fixed term rentals payable under their lease agreement, the current proposals will force companies to make their own subjective estimates on the impact of ‘contingent rentals’ – unpredictable charges that can include things such as lease extensions, excess mileage and damage fees. This added complexity will not deliver the comparable and transparent reporting the IASB is looking for.

Excessive burden – The proposals are aimed at discouraging the ‘structuring’ of large individual leases, but will end up being very burdensome if applied to thousands of individual, small-value leases. If the board does insist that contingent rentals are accounted for, companies should be allowed to do so on a portfolio basis (i.e. across the whole fleet) rather than individually.

Short-term leases – Low value transactions lasting less than 12 months should be excluded from the proposals. In the vehicle rental business customers do not specify a specific vehicle and this type of arrangement should be viewed as service contract.

Transition period – The BVRLA believes that affected firms should be given a minimum of four years to make the necessary system and process changes required to meet the new accounting requirements.

The BVRLA is confident that the proposed standards will not erode the key commercial benefits of leasing, but it is keen to ensure that they do not put an excessive accounting burden on businesses that are not trying to hide anything.

The IASB is now expected to review the consultation responses before publishing a final standard in the first half of 2011.

Whatever form the new leasing standards arrive in, the association believes its members will be able help their customers meet any new reporting requirements.