Accounting changes may prompt fleets to switch to rolling rentals

Rental companies are talking up rolling rental deals as a way for fleets to avoid new lease accounting rules that require vehicles to be reported on balance sheets.

The lease accounting changes, which take effect from January 2019, will mean leased assets (including vehicles on operating leases) will be brought on to companies’ balance sheets. Keeping vehicles off-balance sheet helps to keep the debt-to-equity ratio low.

The rules are being introduced by the International Accounting Standards Board (IASB) with the aim of giving a more complete picture of a company’s financial position.

They apply only to companies that report under IASB such as those listed on the stock exchange; the UK Generally Accepted Principles (GAAP), under which the majority of small to medium size companies report, are not affected.

Rental companies are excited by the fact that the forthcoming IAS16 standard allows organisations to keep a leased asset off-balance sheet if the duration of the lease is below 12 months and the treatment of the asset is uniform across all vehicles of a similar type.

David Brennan, Nexus Vehicle Rental chief executive, said: “We are expecting more fleet operators to turn to rental due to the flexibility it provides. 

“Unlike leased vehicles, short-term hires aren’t required on balance sheets from 2019 and this, coupled with the economic uncertainty posed by Brexit, is causing many operators to switch to rental as their chosen funding method.”

Clive Forsythe, Europcar UK Group corporate sales director, said there has been a definite move towards greater use of mid- and long-term rental solutions by its corporate customers.

Forsythe said this has largely been driven by fleets looking for flexibility, both in relation to cost and accessing the right vehicle for the job, compared with outright purchase or three-to-four  year lease deals.

However, Caroline Sandall, deputy chair of fleet representative body ACFO, urged fleets to be cautious if adopting a fleet-wide approach to switch to 12 month rentals.

She said: “I understand why rental companies are looking at this and that – for some fleets – this may be attractive. 

“However, it is likely to be limited to certain fleets where their company portfolio is such that this change in accounting rules does matter or where the admin burden is such that they want to avoid it.”

Brennan said fleets should be aware of the lease accounting changes, but as the deadline for transition draws closer, they “should be thinking seriously about how they choose to access vehicles from 2019”.

He believed there was widespread uncertainty about how the changes will impact fleets.

Sewells’ Fleet Market Report 2016 showed 81% of those surveyed stated the ability to keep leased vehicles off balance sheet was important, (37% said it was very important and 44% said it was important). Only 5% said the balance sheet treatment wasn’t important.

However, the British Vehicle Rental and Leasing Association (BVRLA) has consistently said the accounting changes will not erode the key benefits of leasing. Gerry Keaney, BVRLA chief executive, 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.”

Peter Jardine, Countrywide group fleet manager, said decisions on a fleet’s asset funding were usually down to the view of the finance director. 

“Some companies might not want to have as much liability on the balance sheet,” he said.

Jardine is planning to move a proportion of the Countrywide fleet of 4,300 cars across to outright purchase but this action is fuelled by cost savings and flexibility of disposal.

However, he added: “The lease accountancy changes make the decision easier as there is no longer the off balance sheet advantage to contract hire.”

Sandall said that if a fleet could or should be using long terms contracts and switches to 12-month rental, it could be seen as skirting around the rules and therefore at risk of scrutiny.

“Make sure any arrangements are cleared by internal accounting teams and/or seek external guidance to comply with the ‘letter of law’ – but also with the spirit of the legislation,” she said.