Employees ‘could lose company cars’

Company cars could be withdrawn by some American-owned companies, while other British-based businesses could struggle to raise funds and short-term leases could become prevalent.

That’s according to several leading accountants, who have been weighing up proposed changes which would see leased company cars recorded on balance sheets.

Leasing will remain an essential vehicle finance route even when new international accounting standards are introduced.

However, some accountants believe the measures raise fundamental issues that businesses must consider.

Proposals by the International Accounting Standards Board (IASB) will see all leased assets being reported on a company’s balance sheet with a corresponding liability being incurred for future rental payments.

Presently only finance leases, often where the fleet takes the residual value risk, must be reported on a company’s balance sheet.

Potential problems

The planned changes have resulted in several leading accountants highlighting potential issues.

The inclusion of leased vehicles on a company’s balance sheet could alter a business’s gearing and therefore its ability to raise funds with overdraft facilities squeezed.

There is also concern over the increased visibility of company car provision at UK-based businesses that are foreign owned, particularly a US parent, where a company car culture is less prevalent.

In addition, they suggest it could result in a move to company cars being sourced on sub 12-month agreements which do not have to be fully reported on company balance sheets under the proposals.

Timeline of new rules

The new accounting standards are aimed at giving a complete overview and greater transparency of an organisation’s financial position and are expected to become mandatory in about three years’ time.

Initially, the new standard, which is expected to be finalised late this year, will apply to publicly quoted firms that report to IASB standards.

Most UK businesses report to the UK’s generally accepted accounting standards principles (GAAP) and will be unaffected until they converge with IASB standard. A date has yet to be set for this to happen.

Credit scoring

Gearing focuses on the capital structure of a business – that means the proportion of finance which is provided by debt relative to the finance provided by equity or shareholders.

A business with a gearing ratio of more than 50% is traditionally said to be highly geared. A business with gearing of less than 25% is traditionally described as having low gearing. Something between 25% and 50% would be considered normal for a well-established business which is happy to finance its activities using debt.

Alastair Kendrick, tax director at accountants MacIntyre Hudson, said: “When vehicles are included on a company’s balance sheet, bankers will adjust the organisation’s credit score accordingly. That will impact on a company’s risk position and ultimately the amount of money it can borrow.”

The new accounting standards impact on all leased assets, not just vehicles and Gareth Shaw, chief financial officer at asset finance company Maxxia, believes it is the ‘big ticket’ assets which could cause issues.

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