The Enron and Worldcom scandals may
have emphasised the need to make business dealings more transparent
for investors, but even before then the people responsible for
setting accounting standards were looking at ways of improving
things. In the case of lease accounting, the work has been going on
for more than a decade.
Whether it is for aeroplanes, office blocks,
vehicles or photocopiers, leasing is an increasingly important
source of financing for businesses and therefore an obvious area
for accounting review.
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The International Accounting Standards Board (IASB)
wants to bring leased assets onto the balance sheet, thereby giving
a more complete picture of a company’s financial position. The
model it is suggesting requires any lessee to recognise its right
to use a leased item (as an asset) and the obligation to pay for it
(as a liability).
This is relatively straightforward if a lessee can
measure these two values and account for them in a consistent and
simple manner. Things can get over-complicated very quickly if
these values are treated differently, or if a lessee has to make
minor re-forecasting adjustments for every leased item during a
financial year.
Good in theory
The BVRLA has no argument in principle
with the IASB’s desire to see a complete picture of a company’s
assets and liabilities. But as leasing providers, our members need
any new accounting standard to be simple for them and, more
importantly, their customers.
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By GlobalDataIn particular, the IASB’s proposal that lessees
should have to estimate the probability of having to extend a lease
contract or pay for extra mileage or refurbishment costs is a
difficult one. It is unrealistic for such items, which are not
material to a business’s overall performance, to have to be
accounted for in such minor detail.
Whatever new standard is eventually adopted, the
people implementing it in the ‘front line’ will be financial
department managers, and their work will be checked by auditors. We
are confident that both sides will take a pragmatic view to issues
like the one just outlined, taking particular account of the
materiality of the amounts involved.
After all, the key objective is to give users of
company accounts an accurate and meaningful picture of the
financial position of the firm.
No damage to leasing
While the IASB’s proposals could, if not
corrected at this stage, lead to an additional reporting burden,
they are not intended to damage the fundamental commercial benefits
of leasing.
We do not believe that these rules will
lead to any reduction in the number of vehicles funded through some
form of finance agreement. These leases may look a little different
to the way they do now, but they will continue to be tailored to
meet the specific requirements of each industry sector or
customer.
The BVRLA will be calling for a relatively simple
standard that is easy to administer, and we would expect a
significant number of our members will be able to help and support
their customers to implement the new rules.
We will also be lobbying for the ability to declare
short-term, non-core leased assets by way of notes to the accounts,
as happens now, which would reduce the financial reporting burden
for our members’ customers.
Financial departments and auditors spend much of
their time trying to find order in chaos and any looming change on
the horizon can be an immense irritation for some and a terrifying
prospect for others.
When the International Financial Reporting
Standards were introduced in 2008, many people thought they would
create immense problems, but their introduction passed relatively
calmly.
The new lease accounting rules could have just as
smooth an introduction, provided that everyone involved in the
motor finance industry – lessors and lessees – acts together.
If this happens we may end up with a standard that
delivers real benefit to companies and investors, without imposing
a major administrative burden.
John Lewis
The author is chief executive of the
BVRLA
