Lease accounting overview

What is happening?

BVRLA members can access more detailed information and get an update on the latest discussions from the quick links on the right.

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are working on a common standard for accounting for all leases which will ensure that the assets and liabilities arising from any lease contracts are recognised in financial accounts for companies accounting to International Financial Reporting Standards.

Historically, financial leases have had to be reported on the balance sheet, but not operating leases. The new approach to lease accounting, referred to as the ‘right of use approach’, differs substantially from today’s standard which is based on an analysis of the risks and rewards inherent in the lease. Under the right of use model, a lessee would always recognise an asset, (the right to use the leased item), and a corresponding liability, i.e. rental payment, on its balance sheet, whereas under the current standard, a lessee recognises the leased asset only under so-called finance leases with a note to the accounts for operating lease liabilities.

How will this impact my business?

Publicly listed companies already have to make a note to the annual report, which reflects any operating lease rentals payable. The lease accounting rules only apply to publicly quoted firms that report to the International Financial Reporting Standards and the public sector.

Businesses will need to ensure they report on their liabilities (rental payment arising under the lease) and their asset (the right to use the leased asset). This is relatively straightforward if you are able to measure these two values and account for them in a consistent and simple manner.

What does this change mean for leased assets?

Bringing these leased items onto a firm’s balance sheet will not in itself erode the commercial benefits of leasing. Leasing has already proven its value, sheltering companies from the risks associated with vehicle values and ensuring that more capital remains available than when assets are purchased outright. But it will inevitably impose a new reporting burden.

Further information

The following provide more detailed information and a background to the changes:

• A PDF download with further detail on the changes is available by clicking here.
• The BVRLA's response to the exposure draft is available by clicking here.
• The  exposure draft and other supporting documents can be accessed from the IASB's website.
• Leaseurope - For the European view of the changes.

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