The new leasing standard, released by the International Accounting Standards Board (IASB) on 13 January, will bring leases on to the balance sheet for the first time, overhauling the way listed companies account for lease contracts.

Simon Goldie, head of asset finance at the UK’s Finance & Leasing Association (FLA), said: ‘We remain concerned that the standard could put an additional burden on lessees and potentially deter some of them from using leases.

‘The next step in the process is for the new standard to be considered by the relevant European and national adopting authorities. We will continue to make our concerns clear to the European Financial Reporting Advisory Group (EFRAG), the European Commission and Parliament, and the UK Financial Reporting Council.’

IFRS 16 adopts a new approach, the ‘right of use’ model, which differs substantially from the current standard, which does not require operating leases to be reported in company accounts.

Under the new model, a lessee (leasing customer) would identify the right to use a leased asset on their balance sheet and incur a corresponding liability for future rental payments. For UK companies leasing car fleets, for example, this could mean additional liabilities will need to appear on the balance sheet.

The FLA’s concerns remain despite significant changes to the original proposals for the new standard, which were changed to include some major simplifications. As a result short-term hire vehicles, informal vehicle extensions and ancillary leasing services (ie, maintenance) do not have to be reported. It also gives fleets the option to report leases on a portfolio level rather than individually.

Initially, the new standard will only apply to listed entities and public sector organisations that report under International Financial Reporting Standards (IFRS). The FLA says most UK companies report under new UK GAAP and will be unaffected until such time as these converge with IFRS standard, although they will need to be prepared. IFRS for SMEs is also unaffected by the change.

The British Vehicle Rental and Leasing Association (BVRLA) is more positive in its response, saying it is confident that members will be able to adapt their business processes to help customers with financial reporting as required under IFRS 16.

BVRLA chief executive Gerry Keaney says bringing leased vehicles onto the balance sheet will not erode the key benefits of leasing for the sector.

‘Vehicle leasing continues to grow in popularity and this has very little to do with any balance sheet advantages.

‘Its main value comes elsewhere, sheltering companies from the risk of fluctuating vehicle values, providing them with extra flexibility and purchasing power and freeing-up precious working capital that would otherwise have been spent buying an asset,’ Keaney said.

Leaseurope, the trade body for European leasing companies, said a critical question was how straightforward it was for businesses to distinguish between leases and services. In a statement, it said: ‘A clearer and more meaningful solution to this problem will be essential to the success of the standard.’

Leaseurope said it plans to review the new standard in detail to see if the IASB has delivered rules that will work in practice for European businesses and will focus on analysis to ensure it properly reflects the extra costs for businesses that invest using leasing and does not overstate the benefits to users of accounts including investors.

Enrico Duranti, chair of Leaseurope, said: ‘Leasing delivers very significant, real economic benefits to millions of European businesses and changing the accounting treatment should have no impact on this.

‘However, it has been three years since businesses have had a chance to review the new rules and they have changed a great deal in that time. Leaseurope will be reviewing the new standard and the cost/benefit analysis in detail and providing our feedback to EFRAG, but it’s important that European companies that lease property, equipment or vehicles also alert EFRAG and the European Commission if they see any problems.’

Speaking at the launch, Hans Hoogervoorst, chairman of IASB said: ‘We do not expect this standard to be met with enthusiasm. Companies might think that there will quite a few costs involved – we have tried to limit these costs and at the same time the standard will provide management with better insight into lease liabilities. It might lead to better decisions between leasing on the one hand and buying equipment on the other hand, and to better capital allocation.

‘Currently many investors have been making their own adjustments, multiplying yearly lease payments by seven or eight times which is a very rough calculation.’

Find out more about IFRS 16, Leases, here

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