Operating car lease and full-service leasing will
continue as customers’ first choice for business mobility following the
introduction of new international accounting standards, according to Alphabet.
The vehicle leasing and fleet management specialist has
issued a briefing paper on the implementation of International Financial
Reporting Standard 16 (IFRS 16), which is effective for
accounting periods beginning on or after 1 January. 2019
Clive Buhagiar, head of pricing and planning, Alphabet
GB, said: “Irrespective of IFRS 16, leasing’s impacts on balance sheet, risk
positioning and incorporated asset responsibilities are still lower than
ownership of cars.”
IFRS 16 abolishes the distinction between finance leases,
currently shown on balance sheet, and operating leases, currently off-balance
sheet. Instead, affected companies will show leased assets as ‘right to use
assets’ in their financial reporting, which must include depreciation and
interest cost on these assets and not the rental charge. The only leases exempt
from IFRS 16 are low value assets (under $5,000 or equivalent) and short-term
leases (under 12 months).
Therefore, attention to IFRS 16 in the fleet operating
and vehicle leasing sectors is mainly focused on its requirement for assets
financed via operating lease - contract hire - to be brought on-balance sheet.
That will change debt to equity relationships, gearing
ratios and capital ratios. It will also affect the reporting of other financial
metrics, such as earnings before interest, taxes, depreciation and
IFRS 16 will initially only affect banks, listed
companies and a few other, predominantly large, entities. That means, says Alphabet, that around 90% of
UK business will not be touched by the standard when it comes into effect.
Moreover, the UK Financial Reporting Council (FRC) has
said it is reconsidering whether key parts of IFRS 16 will be copied into UK
accounting rules at all, due to concerns
about their practicability for small and medium firms. If so, IFRS 16 will have
no impact on the great majority of fleet operators for the foreseeable
In respect of affected companies, the FRC said in April
that it expected it would provide information on their progress towards
implementation of IFRS 16 over the next 18 months, It predicts it will disclose
the likely impacts of the new standard once they can be reasonably estimated.
Mr Buhagiar said: “The question mark over whether the new
lease accounting rules will apply to UK SMEs, together with the fact that it is
too soon for feedback from companies implementing them, has undoubtedly
contributed to uncertainty among fleet operators.
“Whenever clear information is lacking, speculation tends
to fill the vacuum. Some commentators have predicted that listed businesses
will step away from vehicle leasing. Experts with fleet industry knowledge see
it very differently, however.”
British Vehicle Rental and Leasing Association chief
executive Gerry Keaney says the popularity of vehicle leasing has little to do
with balance sheet considerations.
He said: “Its main value comes elsewhere: sheltering
companies from the risk of fluctuating values, providing them with extra
flexibility and purchase power and freeing-up precious working capital.”
Alphabet believes that:
- With leasing, customers avoid potential
investment in additional internal asset management resources required by
wholly-owned vehicles such as purchasing, servicing, quarterly asset risk
assessments and remarketing.
- Businesses that turn away from leasing also risk
losing competitiveness when negotiating with supplier networks. Alphabet highlights
that it can leverage economies of scale and expertise in purchasing, services
and remarketing that enable it to offer highly competitive prices.
- Activating purchased vehicles will have a
greater impact on balance sheets than leasing them because the full list price
of the car will always be higher than its reporting value as a ‘Right of Use’
- With leasing, the asset risk and residual value
risk remain with the leasing company whereas companies that own vehicles assume
the risk themselves.
What’s more, it has been suggested that companies
affected by IFRS 16 might consider cashing-out their company drivers, so the
business no longer provided any cars for mobile employees. In effect, companies
that took this step would be increasing their dependence on ‘grey fleet’ to
deliver competitive business mobility.
Mr Buhagiar said: “Grey fleet’s drawbacks are
well-documented, especially in terms of its hidden costs and duty of care liabilities.
Given that the underlying purpose of IFRS 16 is to clarify the way leased
assets are accounted for, it would be paradoxical if listed companies’
responses to it included making their employees’ essential mobility more opaque
and harder to manage.”
He continued: “The consumer credit market also looks set
to tighten over the next 18 months or so, and this will affect the quality of
vehicle employees can afford. The Bank of England warned again in April 2017
that personal debt is rising dangerously fast and the Financial Conduct
Authority is specifically monitoring trends in private car finance.
“While cash-in-lieu-of-car policies almost invariably
compromise the quality of business-use vehicles - the average ‘grey fleet’ car
is seven years old - liability for occupational road risk remains with the