New lease accounting standard, IFRS 16, came into force this month with some experts suggesting that its introduction could alter the structure of the international fleet market.
The new standard took effect from 1 January 2019 and is intended to bring all leased assets onto the balance sheet, giving a more complete picture of a business’s financial commitments. It applies to any companies and public sector organisations that report to International Financial Reporting Standards (IFRS).
A new approach to lease accounting, called the ‘right of use’ model, differs substantially from the previous standard, which does not require operating leases to be reported in company accounts.
Under the new model, a lessee, or leasing customer, identifies the right to use a leased asset on their balance sheet and incurs a corresponding liability for future rental payments.
Fleet Logistics CEO, Dr Jörg Löffler, said that new standard had the potential to change the way some fleets acquired their vehicles in the future.
“Several fleet operators have said to me that, because they now have to show leased vehicles on the balance sheet, it may be smarter to revert to buying them, using some form of bank financing and employing service providers to underwrite the residual values.
“There could be a gradual change, in my view, with some operators watching what the early adopters do, and then following suit - which could lead to a structural change in the fleet market,” he said.
The International Accounting Standards Board (IASB) has said that the new standard “will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy”.
To help companies make the right decisions regarding IFRS going forward, FleetVision the fleet consultancy arm of TÜV SÜD Group, is offering several levels of analysis and assessment to fleet clients and prospects to evaluate around the introduction of the new lease standard.
The first level is a readiness check and comprises an audit of the global fleet to ensure that consolidation of IFRS reporting from all supplying leasing companies is in place and is set to occur on a regular basis.
For companies with material off-balance sheet assets, the new standard could affect key accounting and financial ratios, and, as a result, debt covenants may be affected and may need to be renegotiated.
The new standard affects major commonly used financial metrics, such as the gearing ratio, current ratio, asset turnover, interest cover, EBIT, operating profit, net income, EPS, ROCE, ROE and operating cash flows.
These impacts may also lead organisations to reassess ‘lease versus buy’ decisions going forward to evaluate whether leasing rather than buying their vehicles remains the best option.
Many companies may still want to continue to lease their vehicles as the majority of the existing benefits from leasing will remain.
FleetVision will also look at the case for different types of funding and will perform a lease versus buy assessment in any set of countries, based on the business’s weighted average cost of capital (WACC) or borrowing rate, and using its extensive and highly detailed market data.
As IFRS 16 eliminates the distinction between operating and finance leases for leasing companies’ customers, this may lead the leasing industry to produce new products, such as short term leases, that retain the existing benefits of operating leases.
Under the new lease accounting standard, short term leases for a year or less with no renewal option would still qualify for off-balance sheet accounting treatment.
For those businesses sensitive to the changes affecting longer term leases, such shorter term contracts could become more appealing, especially on job-need fleets where vehicle choice is not such an issue.
Given this scenario, FleetVision will assess the full case for change, looking at all options available and assessing the decisions necessary to change the types of funding methods being used across a global fleet operating in many different countries.
FleetVision will also examine the case for moving from a leased fleet to a purchased fleet, as well as designing the most effective end-to-end inhouse or outsourced fleet management system.
This will include identifying and contracting all in-life service providers, executing supplier tenders and assessing all the day-to-day interfacing, invoicing and authorizations which would need to go with any new approach.
Thibault Alleyn, who heads FleetVision, said: “The new lease accounting standard has different implications for different companies depending on a variety of factors such as size, profitability, attitude to risk and ownership of assets and a host of other issues.
“The best advice is to consult with your fleet management provider to decide on the most appropriate course of action for your business going forward in the light of the new lease accounting rules.
“Our consultants are uniquely positioned in the market to design the optimal setup of your fleet across the globe, whether leased or purchased,” he added.
If you require any further information or advice on the above, please contact Thibault Alleyn on mobile: +32 475 705 755 or email email@example.com