5 questions about the new lease accounting standardsFinance
Accounting for vehicle fleets is about to change and it’s important for all fleet managers to understand what that means. The International Accounting Standards Board (IASB), which issues International Financial Reporting Standards (IFRS), introduced a new standard for lease accounting in 2016 that will come into effect from January 2019.
Here are five questions about the new lease accounting standards (International Financial Reporting Standard 16 Leases [“IFRS 16”]) that are relevant for all fleet managers.
1. How have vehicle leases accounted for?
Vehicles leases have always been classified in two basic categories:
- Finance lease – where lease assets (like your vehicles) are recorded on your company’s balance sheet.
- Operating lease – where your vehicles do not appear on your balance sheet.
And some criticise this approach for failing to provide clarity and transparency regarding the benefits and obligations companies enjoy and incur with operating leases.
2. What will change?
Noting that the changes affect larger private companies, listed companies and credit unions, (rather than SMEs, which are less likely to adopt IFRS accounting standards), accountant, Jackie Russel Green summarised the impact of the changes when they were announced in 2016:
“[C]ompanies that lease assets from others (lessees) will now be required to recognise nearly all of their leases on their balance sheets (there are some exceptions for leases of low value items and lease periods of less than one year).”
The goal here is to make company positions more transparent and allow comparison between companies that lease and buy their assets.
Since it will apply to most, if not all, larger vehicle fleets the new standards will require your business to recognise a right to use an asset (your vehicles) and a liability to make payments (lease instalments) on your balance sheet. It will also mean some related changes to your companies profit and loss picture since vehicle depreciation and interest will need to be considered rather than lease expenses.
This change may affect key financial ratios, such as solvency and leverage ratios, but it may have a positive impact on your companies EBITDA by virtue of the changes’ effect on your P&L.
3. To what companies does this apply?
This will apply to all (listed) companies in the European Union, a companies in other jurisdictions including those in New Zealand, which operate under IFRS accounting standards. US based companies, however, operate under the US GAAP standard and won’t be affected by the change.
4. How are these changes going to affect fleets?
For some lessee companies, both regimes (IFRS and US GAAP) may be applicable – such as, for instance, subsidiaries of US companies.
It will be important that the new standard is understood in assessing fleet management options and associated costs and there will be work for your finance department in ensuring that leased vehicles are properly accounted for under the new standard.
5. Are the benefits of (operational) vehicle leasing affected by the changes?
No. The benefits will continue to include:
- Efficiency and flexibility around operational servicing
- Predictable mobility costs
- Avoidance of residual value and maintenance risk
- Not spending your company’s capital on buying depreciating assets
Talk to a LeasePlan consultant to understand how IFRS 16 may affect your fleet management responsibilities from next year.