Six years ago work officially commenced on a project to review leasing international accounting standards – and it could be a further four years before changes are adopted that will impact on the way some organisations report their vehicle leasing liabilities.

The best estimate now is that some time in 2016 will be the adoption date of the new lease accounting standard being drawn up by the International Accounting Standards Board (IASB) and its United States equivalent, the Financial Accounting Standards Board (FASB).

That will mean the project, which formerly commenced in July 2006, although the British Vehicle Rental and Leasing Association (BVRLA) has documents relating to the proposed changes dating back to 2000, will have taken a decade despite at face value appearing to be relatively simple – to bring increased transparency to users of company accounts through the improved reporting of company assets and liabilities.

The BVRLA believes the latest developments could mean that the new accounting standard is announced in 2013, with a two-year transition period meaning it will be adopted in either the 2015/16 or 2016/17 financial years.

Currently, finance leases are reported on company balance sheets but operating leases are only reported via a note to the accounts.

Experts say that means investors and other users of financial statements must estimate the impact of operating leases on financial leverage and earnings.

In terms of vehicles, the proposals mean that organisations that lease would have to include comprehensive financial details in their company accounts. The proposed changes mean that a lessee would always recognise an asset – a vehicle – and a corresponding liability excluding maintenance on its balance sheet.

Nevertheless, for organisations for which off-balance-sheet accounting has been important, the liability that will be on the balance sheet in the future for what were operating leases could still be significantly less than if a vehicle was purchased, depending on capital allowance levels.
However, while the discussions to make the way that organisations report leased assets may be long-running, a conclusion could finally be on the horizon.

A first so-called ‘joint exposure draft’ detailing proposed revisions to accounting standards was published in 2010. It drew almost 800 responses requiring a ‘re-exposure draft’ to be drawn up with hopes high that it will now be published in the final quarter of 2012. It will be open for comment for four months, with experts forecasting that if there are no major delays the new accounting standard could be adopted some time next year.

However, BVRLA chief executive John Lewis warned that there remained plenty of deliberation ahead between the IASB and FASB and that: “We have been at this stage before, only for timescales to slip considerably.”

Despite the long-running saga, the BVRLA continues to believe that the final draft regulations will not have a major impact on either the administration or corporate reporting burden associated with using contract hire as a fleet acquisition method.

Lewis said: “Quoted companies already provide details of outstanding operating lease liabilities in the notes to their accounts, so the extra reporting impact shouldn’t be significant.”
When finally introduced, the regulations will initially apply to a small sub-sector of UK corporates – largely, those companies listed on the London Stock Exchange, those which already use IASB reporting standards and some public sector organisations.

Although there is discussion that UK Generally Accepted Accounting Practices (UK GAAP) – used by most small and medium-sized businesses – may be aligned to international standards in future and thus require firms to account for leases in a similar manner, Lewis said: “If this follows a similar path to the IASB project it could be a long way off.”

Brussels-based Leaseurope, which calls itself the ‘voice of leasing and automotive rental in Europe’, has suggested that there is “a very real danger that any new lease accounting standard will be so complex that it overshadows the economic benefits of leasing products”.

The BVRLA is a member of Leaseurope, but Lewis said: “Some users of big-ticket long-term funding leases, where the tax benefits flow directly to the lessee, may review policies in favour of purchase.

“But this will not be the same for a typical short-term non-funding lease, also known as contract hire, where the corporation tax benefits are priced into the lease and of course there are distinct VAT benefits that are not available on outright purchase."

Lewis added: “The vehicle leasing industry will be working very closely with customers that require help assessing and dealing with any impact from these lease accounting changes.”