For 10 years, accounting academics and lessors have been arguing about the ways in which leases are recorded on your balance sheets. Now, a change to the rules has been approved. We take a look at what it is, and what it could mean for your fleet.
What is the change?
It’s an ‘accounting standard’, known as the International Financial Reporting Standard 16 (Leases)—we’ll call it IFRS16 from now on. IFRS16 replaces the previous guidelines (International Accounting Standard 17). The old IAS17 standard prescribed one set of accounting practices and policies applicable to leasing vehicles. The new IFRS16 standard prescribes a different set of accounting practices and policies.
What does it mean?
Historically, there has been a difference in the way finance leases and operating leases have been accounted for. A finance lease is a lease in which the risks associated with that lease are borne by the lessee. An operating lease is a lease in which the risks are borne by the lessor.
In the 1980s, it was determined that finance leases represented a liability for the fleet company. These liabilities were ruled essential for inclusion in the balance sheets of fleet companies that held finance lease agreements. In other words, they didn’t simply put the cost of renting the vehicles down in the profit and loss part of the ledger: they also had to account for the risks posed by taking out the lease in the first place. That risk was, and is, primarily expressed as the amount of money the vehicle is assumed to be worth at the end of the rental contract.
The new accounting standard wipes the slate clean, and does away with the distinction between a finance lease and an operating lease. Now both are treated identically for accounting purposes. And that means that whatever type of lease your fleet vehicles are on, you’ll need to include a liability on your balance sheets.
You’ll also need to change the way you account for rental vehicles in your profit and loss columns. Instead of accounting for the actual rental cost, you’ll be required to record interest costs and depreciation.
When does it take effect?
IFRS16 takes effect from 1 January 2019. However, you may have to start accounting under the IFRS16 guidelines some time prior to 2019, so you can compare 2018 figures in your 2019 accounts.
If you are involved in low-value or short-term leases, you don’t have to worry: IFRS16 doesn’t apply here.
How will it impact you?
The major impact of IFRS16 is the potentially drastic change it could have for your balance sheets.
According to the International Accounting Standards Board (IASB), there are more than three trillion dollars worth of active lease commitments that will be affected by the change. With only 15% of these commitments currently on the balance sheets, the shift in the visibility of vehicle financing will be significant.
Fleet managers and lease operators seem optimistic that the change will have little effect at ground level. Leasing companies believe the benefits of leasing vehicles, including outsourcing, service integration, and no residual value risk, outweigh the impact of holding the asset on your balance sheet. Limited liability companies, though, will need to consider their own circumstances.
The most noticeable cost to you in the short term is likely to be the time expense of preparing for the change: finding out if you are affected, discovering the data you will need to present in your accounts, and determining whether that data relates to a lease (which you do have to account for) and a service (which you may not).
It’s important to note that the IFRS16 guidelines apply to all leases, and not just vehicle leases, and therefore that the three-trillion-dollars-plus figure identified by the IASB includes non-vehicle leases of far more expensive things, like retail premises and office buildings. So the true impact of IFRS16 on the fleet management sector is yet to be determined. How much of your accounting has to change will depend on whether your vehicle leasing is defined by IFRS16 to be short-term or low value (in which case you don’t have to do anything, see above).
The full implications of the new standard will reveal themselves in the period between now and the start date of January 2019. As more information becomes available, we’ll bring it to you.