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Firms warned to watch out for new lease accounting rules

Contract hire has replaced outright purchase as the most popular vehicle funding solution and one of the chief benefits frequently promoted by experts is that it is an off-balance sheet product.

But, if the International Accounting Standards Board has its way that benefit won’t apply for much longer. New accounting rules set to be in force in the second quarter of 2011 will mean that all leased assets - including cars and vans - must be reported within a firm’s accounts.

As a result, a range of organisations including the Finance and Leasing Association (FLA), the Forum of Private Business (FPB) and the British Vehicle Rental and Leasing Association (BVRLA) are warning businesses about the proposed changes.

Although, the BVRLA says that the Board’s proposals are not intended to damage the fundamental commercial benefits of leasing, all the organisations are concerned at the increased administration burden that will result from the new rules if implemented, particularly for smaller firms.

And, says the FLA and FPB the administration burden will be most significant for small businesses, including at least 400,000 companies required by law to prepare financial accounts.

The Board’s proposals date back around a decade and the organisation is due to issue
a draft of its new lease accounting standard in the second quarter of 2010 before introducing the final rules 12 months later.

Current accounting rules mean that office and business equipment, such as company
cars and vans, that are funded via contract hire are treated as off balance sheet, while vehicles and other equipment bought outright by companies or on finance lease, for example, must be reported on a firm’s balance sheet.

The new rules, if adopted, will require all companies that lease equipment to report those items on the company balance sheet as an asset and their obligation to pay for them as a liability.

However, only the finance element of the lease will need to be reported. There will be no requirement to report service, maintenance or repair charges that are linked to a vehicle.

Publicly listed companies already have to make a note to the annual report, which reflects any operating lease rentals payable.

And the BVLRA is arguing for all businesses to be able to declare short-term non-core leased assets, such as vehicles, via a note to the accounts, which would reduce the financial reporting burden for companies.

While, the Board has been considering the changes for many years one of the reasons behind the measures is to make company accounts more transparent and complete in the wake of a number of global financial scandals, notably Enron in the United States.

Stephen Sklaroff, director general of the FLA, said: “We are not against leased equipment appearing on balance sheets. But the standard-setters need to follow the European Commission’s advice to ‘Think Small First’ and consider whether the compliance regime is too onerous for small businesses.

“Surely, we should differentiate between large corporates with millions of pounds of leased equipment and small businesses. Britain’s businesses will be the catalyst to economic recovery, so we need to give them all the help we can.”

And Phil Orford, chief executive of the FPB, said: “Rules and regulations must exist to facilitate best practice and productivity, and not unjustifiably add to the bureaucratic burden faced by entrepreneurs. Leasing is often an effective method of controlling costs, so it would be disappointing if complying with the new rules were made more time-consuming and expensive.

“Our recent research shows that red tape costs small businesses almost £12 billion per year. Setting a requirement for businesses of all sizes to add leased equipment to their balance sheets would be to ignore issues of scale at a time when small business owners are most in need of a proportional approach.”

Equally, the BVRLA says that it has ‘no argument in principle’ with the Board’s wish that a company’s accounts reveal a complete picture of its assets and liabilities. However, it too is calling for reporting simplicity.

Of particular concern to the BVRLA is the proposal that lessees should have to estimate the probability of having to extend a lease contract or pay for extra mileage or vehicle refurbishment costs.

The BVRLA says: “It is unrealistic to require such items, which are not material to a businesses’ overall performance, to be accounted for in such minute detail.”

Fleet Operations managing director Ross Jackson said: “It is clear that significant behind-the-scenes discussions continue to take place to ensure that the new accounting standards remain as simple as possible.

“However, it is important that companies understand what could be asked of them as far as business accounting is concerned if the new regulations are introduced in 18 months as expected. We will continue to keep customers informed about the Board’s proposals as they become clear.”

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