The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have published joint proposals to improve the financial reporting on vehicle leasing contracts.
The aim of the proposals is to provide a consistent approach to lease accounting for both the lessees and lessors, bringing all leased assets onto the balance sheet and giving a more complete picture of an organisation’s financial position.
If introduced, they would ensure publicly-quoted organisations leasing an asset – whether a computer, vehicle or property – would be required to account for it, giving greater transparency to investors.
The new approach to lease accounting, called the ‘right of use’ model, differs substantially from the current standard, which does not require operating leases to be reported in organisations’ accounts. Under the new model, a lessee would identify the right to use a leased asset on its balance sheet and incur a corresponding liability for future rental payments.
Sir David Tweedie, chairman of the IASB, said: “The leasing industry plays an important role in many economies by helping companies manage cash flow and working capital.
“However, much of the estimated annual $640 billion of lease commitments fails to appear on the balance sheet of lessees, thereby giving a false impression of companies’ liabilities and gearing.
“Our proposals would result in better and more complete financial reporting information about lease contracts being available to investors and others.”
Most UK firms report to the UK’s generally accepted accounting principles and will be unaffected until these converge with IASB standards. According to the British Vehicle Renting and Leasing Association (BVRLA) this is unlikely to happen for at least five years.
John Lewis, chief executive of the BVRLA, said: “Leasing has proved its value, sheltering companies from the risk of fluctuating vehicle values and freeing precious working capital that would otherwise have been spent buying an asset.
“Our members already advise fleet operators on how to reduce costs and emissions and I am confident they can add more value by helping customers with their reporting requirements.
“The board has come up with a one-size fits all proposal which means a lease will be dealt with in the same way, whether it is a ten-year lease for an aircraft or building worth millions of pounds, or a three-year lease for a car worth £10,000.
“It is unfortunate the standard-setters were unable to come up with a simpler way of accounting for short-term, low-value leases like those used in our industry, which do not usually have a material impact on a company’s accounts.”
The boards developed the proposals after considering responses to their discussion paper, ‘Leases: Preliminary Views’, which was published in March 2009.
The proposals are open for comment until 15 December 2010.
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