Lease accounting plans need a rethink

15 December

Accounting-standard setters need to simplify their proposals for leasing to achieve their goal of bringing more transparency to company accounts, claims the BVRLA.

The association has called on the International Accounting Standards Board (IASB) to re-examine its plans to bring all leased assets and liabilities onto the balance sheet. The message was delivered in the BVRLA’s response to an IASB consultation on the proposals, which closed this week.

“Most people accept the need to make major leased assets and liabilities more transparent,” said BVRLA chief executive, John Lewis.

“But whether you are talking to leasing companies, their customers or accounting firms, there is almost total consensus that the plans being put forward are over-complicated and will fail to achieve their objective.”

The BVRLA’s response highlights a number of issues that the IASB urgently needs to address:

Contingent rentals – Instead of focusing solely on closed-end, fixed term rentals payable under their lease agreement, the current proposals will force companies to make their own subjective estimates on the impact of ‘contingent rentals’ – unpredictable charges that can include things such as lease extensions, excess mileage and damage fees. This added complexity will not deliver the comparable and transparent reporting the IASB is looking for.

Excessive burden – The proposals are aimed at discouraging the ‘structuring’ of large individual leases, but will end up being very burdensome if applied to thousands of individual, small-value leases. If the board does insist that contingent rentals are accounted for, companies should be allowed to do so on a portfolio basis (i.e. across the whole fleet) rather than individually.

Short-term leases – Low value transactions lasting less than 12 months should be excluded from the proposals. In the vehicle rental business customers do not specify a specific vehicle and this type of arrangement should be viewed as service contract.

Transition period – The BVRLA believes that affected firms should be given a minimum of four years to make the necessary system and process changes required to meet the new accounting requirements.

The BVRLA is confident that the proposed standards will not erode the key commercial benefits of leasing, but it is keen to ensure that they do not put an excessive accounting burden on businesses that are not trying to hide anything.

The IASB is now expected to review the consultation responses before publishing a final standard in the first half of 2011.

Whatever form the new leasing standards arrive in, the association believes its members will be able help their customers meet any new reporting requirements.

-ends-

Note to editors:

Auditors
Auditors would continue to decide if a lease has to be accounted for by applying the ‘materiality’ or ‘non-core’ rules. In short, this means that if the vehicle being leased has little financial impact on the accounts, it can be ignored.

Will all companies that lease be affected?
The proposed lease accounting rules would only apply to publicly quoted firms that report to international financial reporting standards. Most small and medium-sized enterprises reporting to the UK’s generally accepted accounting principles (GAAP) will be unaffected until UK standards converge with those of the IASB. This is not expected to take place until after 2015.
More information on lease accounting can be found on the BVRLA website here

About the BVRLA
The British Vehicle Rental and Leasing Association is the national trade body for companies engaged in the leasing and rental of cars and commercial vehicles. Its members provide short-term rental, contract hire and fleet management services to corporate users and consumers. They operate a combined fleet of around 2.5 million cars, vans and trucks, buying nearly half of all new vehicles sold in the UK. Through its members and their customers, the BVRLA represents the interests of more than two million business car drivers and the millions of people who use a rental vehicle each year. As well as lobbying the government on key issues affecting the sector, the BVRLA regulates its members through a mandatory code of conduct.

For more information:
Toby Poston – Head of Communications
toby@bvrla.co.uk
tel: 01494 545700

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