After a ten year review, the International Accounting Standards Board (IASB) has now published a new International Financial Reporting Standard (IFRS) 16, which requires lessees (customers leasing an asset) to recognise assets and liabilities for most leases on the balance sheet. Lessor accounting remains generally unchanged. IFRS 16 will supersede the current lease standard International Accounting Standard (IAS) 17.
Previously, a lessee would have to determine whether the lease is a finance lease or an operating lease. This is effectively done by assessing the risks and rewards inherent in the lease. Contract hire arrangements are usually operating leases.
How will this impact customer's who lease vehicles?
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.
The BVRLA has produced an information sheet on the new standard which is available here
Leaseurope's press release anticipating the new standard is available here.