New leasing standards: how they will impact lease accounting and your fleet
On 16th May 2013 the revised Exposure Draft Leases was published jointly by the International Accounting Standards Board (IASB) and the US-based Financial Accounting Standards Board (FASB). The main objective of the document is to improve the quality and comparability of financial reporting and to properly reflect the assets and liabilities related to leases on the balance sheet.
What will change for you as lessee?
1. For lessee accounting, a right-of-use model is proposed that would require lessees to recognise most leases on your balance sheet based on the present value of the fixed lease payments (excluding services).
2. For expense recognition, two different types of leases are to be introduced based on the so-called consumption principle.
- Type A leases are those leases where a significant portion of the underlying asset is consumed. This is generally the case for vehicles and equipment. The accounting method is similar to current finance lease accounting (amortisation and interest). This results in a front-loading of expenses (compared to current operating lease accounting which has a fixed expense pattern).
- Type B leases are those leases where a relatively insignificant portion of the underlying asset is consumed. This is typically the case for property e.g. an office building. The accounting method is similar to current operating lease accounting.
The current operating leases for vehicles will become Type A leases. Because amortisation and interest are higher in the first half of the lease than the lease instalment, these Type A leases will be subject to front-loading of expenses. However, in case of a stable and balanced lease portfolio (fleet), the impact will be limited.
Leasing and service – making the distinction
The revised Exposure Draft also includes new guidelines to assess whether a contract contains a lease or a service, or both. Relevant for a lease is the use of an identified asset (explicitly specified in the contract). If the lessor has the right to substitute the asset – and can do so without limitation – the asset is not considered to be identified. This means the distinction between a lease and a service will become an extremely relevant matter for accounting purposes.
When will the new accounting methods become applicable?
It is foreseen that as of 1st January 2017*, all pre-existing leases will need to be re-assessed. Both the retrospective approach (applying the new accounting model retrospectively to all leases) and the simplified approach (applying the new accounting model as of transition date going forward to all leases) will be allowed.
What will this mean for you as lessee?
Despite the proposed accounting changes, leasing will remain attractive, offering many significant advantages over outright purchase:
• Service and administration are taken care of by lessor
• An effective source of finance
• Predictable costs
• No residual value risk
We at LeasePlan will ensure that our lessees will be provided with all relevant information regarding the upcoming changes.
In a next post, I will be looking at possible steps that you could take to adequately prepare for the upcoming changes in accounting rules.
*Comparative data for 2016 will also have to be available