5 questions about the new Lease Accounting StandardsFor your fleet
The International Accounting Standards Board (IASB), responsible for issuing International Financial Reporting Standards (IFRS), has introduced a new standard for lease accounting. This new standard will change accounting for vehicle fleets.
In order to help your transition, here are five questions about the new lease accounting standards that are relevant for all fleet managers.
1. How are vehicle leases accounted for in the current situation?
Currently vehicles leases can be classified in two basic categories:
- Finance lease
- Operating lease
Under a finance lease, the lease assets (vehicles) are recorded on the balance sheet of the company using the vehicles. With an operating lease, the leased vehicles are currently not included on the balance sheet.
Not including the operating leases on the balance sheet has been criticised for not providing a clear and transparent picture of the benefits and obligations a company has resulting from operating leases.
By also incorporating the operating leases onto the balance sheet, the standards setters aim to increase the transparency and consistency of the related financial reporting.
2. What will change?
Aimed at improving transparency and comparability between companies that lease and buy their assets, IFRS 16 will require businesses to recognise a right to use a vehicle and a liability to make payments on their balance sheet.
Under IFRS lease accounting, companies will also have a revised Profit or Loss profile, recognising depreciation and interest rather than a lease expense.
The idea is that, under a lease contract, a lessee acquires the right to use an asset and pays for that right in the form of lease instalments. Lessees will be required to state these rights and obligations arising from lease contracts on their balance sheets.
Recognition of lease arrangements on the balance sheet generally may affect a number of key financial ratios, such as solvency and leverage ratios, but it will have a positive effect on one’s EBITDA under IFRS 16.
3. To what companies does this apply?
For companies reporting under the IFRS standard, this will apply to all (listed) companies in the European Union, as well as in some other jurisdictions including Australia. The exception is the United States (US GAAP standard).
4. How are these changes going to affect fleets?
In view of the differences between these new standards, it is important you know which accounting regime is applicable for your company. In certain cases, it may be that both regimes (IFRS and US GAAP) are applicable, such as when a business is a subsidiary of a US-based company.
Recognising your lease contracts on the balance sheet will inevitably affect a number of key financial ratios. Furthermore, the new method of accounting will cause more work for those responsible for preparing and auditing your accounts, especially in the beginning.
5. Do the benefits of (operational) leasing for international fleets remain?
Yes. Absolutely, yes. The benefits will continue to include:
- operational service efficiency and flexibility
- a predictable mobility cost
- removal of residual value and maintenance risk
- not spending your company’s capital on buying depreciating assets
For more information about the new lease accounting standards, speak to a LeasePlan consultant.