New accounting standards will affect car lease arrangements

If you read nothing else, read this…

  • A final standard of the lease accounting amendments by the International Accounting Standards Board will be published next year.
  • The amendments will require employers to show leased assets, including cars, on their balance sheets.
    The changes will affect all employers that account to IASB standards.
  • The cost of car leasing will have to be split, with the finance elements appearing on an organisation’s balance sheet, and operational fees on its profit and loss account.

New accounting standards will change the way organisations report their car leasing arrangements, says Tynan Barton

Accounting for company cars is about to turn a corner when the lease accounting amendments proposed by the International Accounting Standards Board (IASB) come into force. Just how big an impact the changes will have on company accounts is under debate. The proposals, announced in August, are intended to give a clearer picture of organisations’ finances by requiring all leased assets to appear on the balance sheet.

John Lewis, chief executive of the British Vehicle Rental and Leasing Association, says: “Unfortunately, car leasing is a bit of an unintended consequence [of the changes]. Employers are going to have to look at the systems and processes within their business for all types of lease.”

The changes will affect all UK employers that report to IASB standards. The draft proposals are available for consultation until December, and a final standard will be published in the first half of 2011. But when the UK’s Generally Accepted Accounting Principles converge with IASB standards, possibly in 2014, more employers will be affected.

The standards mean employers will have to split their lease costs into the finance elements, which will go on the balance sheet, and the maintenance and management fees, which will go on the profit and loss account. Alastair Kendrick, director of employment tax services at Mazars, says: “This will result in extra administration for the leasing company, for which it may charge. It could also affect organisations’ gearing, given that indebtedness will appear on balance sheets.”

For this reason, it is crucial that everyone involved in leasing company cars understands how the changes will affect accountancy practices. Natalie Foote, senior manager in Ernst and Young’s financial accounting advisory practice, says: “Make sure all stakeholders are aware of what this will do, and the fact it is not really going to impact them. The business has not fundamentally changed; it is just that the new rules mean the accounts will look different.”

Extra administration

The changes may not affect leasing costs much, apart from a possible charge for extra administration, but Kendrick says employers might want to consider other options. “A lot will ask whether they need to provide cars or offer cash instead,” he says.

Steve Whitmarsh, senior partnership manager at the RAC, says one benefit of contract hire is that the car can be treated as an off-balance sheet asset, so employers might want a less structured scheme. “They may move into a salary sacrifice, or encourage people to take cash. We could see a rise in maintenance-only fleet management.”
The BVRLA’s Lewis believes the inclusion of leased cars on balance sheets will not affect the popularity of leasing.

“People use car leasing for the commercial benefits of not having to tie up their capital, low monthly payments, the residual value risk, and added-value services such as maintenance and fleet management services,” he says. “We feel the benefits of leasing will stay the same.”

Ross Jackson, managing director of Fleet Operations and chief executive of Eurofleeting, points out that employers now use contract hire leasing for budgetary reasons. “That, and the fact that salary sacrifice is now being used with cars, means it probably will not change leasing in the UK.”

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