Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH

Automotive Leasing Business‘s Take on Leasing Accounting

Leaseurope One-Day-Business Forum – Brussels – 5th Nov 2007

2Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Automotive Leasing Business‘s Take on Leasing Accounting

1. Significance of Leasing to Captive Companies using the example of Volkswagen Group

1.1 Volkswagen Leasing GmbH1.2 International Leasing Activities within the Volkswagen Group1.3 Volkswagen Leasing GmbH‘s Client Base1.4 The Criteria for Differentiating the Operate and Finance Lease pursuant to IFRS and

German Tax Law

2. The Impact of the IASB Leasing Project

2.1 The Aim of the Leasing Project and the Standard-Setter‘s Criticism on the Current Regulations2.2 The „Right-of-use-Approach“2.3 The Impact of the Leasing Project on Volkswagen Leasing GmbH‘s clients

3. Conclusion

3Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Branch Verona/Italy

Branch Milan/Italy

100%

100%

LeasingLeasing

LeasingLeasingLeasing

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

4Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

International Leasing Activities of Volkswagen Group1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

5Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Volkswagen Leasing GmbH‘s Client Base

Private Customers

Volkswagen Employees

Corporate Customers

Individual CommercialCustomers

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

6Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Operate and Financial Lease according to German Tax Law

Main Distinctive Criteria according to German Tax Law

1. Relationship between basic lease period and the asset depreciation range of the leased property Leasing Period not less than 40% and not exceeding 90% of the asset depreciation range

2. Agreement for a put option on the part of the lessor No put option for the leased asset on part of the lessor

3. Agreement on the right of termination on the part of the lessee Contractual requirement on part of the lessee for a final payment

amounting to the costs not covered by the leasing relationship4. Agreement on profit sharing in the event of windfall profits

Lessor must receive a minimum of 25% of the amount exceeding the residual value of a leased property upon sale of the same

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

7Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Volkswagen Leasing GmbH’s Current Contracts according to German Law and according to IFRS

Operate Lease

Financial Lease

Operate Lease

Financial Lease

IFRS German Law

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

8Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

„I doubt you‘ve ever flown in an aircraft that‘s on the balance sheet“

Sir David Tweedie

The Standard-Setter‘s Criticism on the Current Regulations1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

9Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Aircraft on the Balance-Sheet?

Deutsche Lufthansa AG:Assets as of 31.12.2005

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

10Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

…a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Inconsistancy between the IAS 17 and the Framework

…a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Asset:

Liability:

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

11Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Currently discussed Accounting Models for Leasing Relationships

1. „Right-of-use-Approach“

2. „Whole-Asset-Approach“

3. „Executory-Contract-Approach“

4. „Current-Model“

1. “Right-of-use-Approach”

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

12Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

The „Right-of-Use-Approach“ impact on the lessee‘s Balance-Sheet

A L

Non Current Assets

Intangible Assets

Current Assets Trade Liabilities

… …

Lessee

Equity

Liabilities

The „Right-of-Use-Approach“ results in a Balance-Sheet-Extension on the part of the lessee!

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

13Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Economical Significance of SMEs

Enterprises TurnoverEmployees

Trainees Gross Value Added

Source: Institut für Mittelstandsforschung, Bonn, 2005

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

14Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Intention of German SMEs to report according to IFRS

No Yes

PricewaterhouseCoopers: IFRS in Medium-Sized Enterprises, 2005

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

15Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Leasing Project‘s Impact on Lesses‘ Balance-Sheet

Changes in the Intensity of Fixed Asset Investments of selected DAX/MDAX Companies*

Changes in % Number of Companies

Less than 1 % 7

1-2% 4

2-3% 2

3-4% 1

4-5% 1

More than 5% 3

* Leibfried/Rogowski in KoR 12/2005 p. 552

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

16Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Leasing Project‘s Impact on Lesses‘ Balance-Sheet

Changes in the Capital Ratio of selected DAX/MDAX Companies*

Changes in % Number of Companies

Less than 1 % 9

1-2% 5

2-3% -

3-4% 2

4-5% 1

More than 5% 1

* Leibfried/Rogowski in KoR 12/2005 p. 552

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

17Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Conclusion – Questionable Value Add of the Leasing Project- „Additional“ Information can already be deciphered from Annual Reports to large extent (notes).

- Fragmentation of leased assets into a multiple sub rights does not lead to a more accurate

picture of the reporting company but rather to confusing balance sheets.

- Besides a conceptional faultlessness a Standard has to be practicable. The practicability

would no longer be ensured.

- Discreation regarding Recognition of Leasing Properties in the lessees‘ balance-sheets

does not lead to the alarming deficiencies as described by Sir Tweedie and the SEC.

- Inconsistancy between the IAS 17 and the Framework could be rectified by means of an

adjustment of the Framework.

- A further increase of Complexity in Leasing Accounting -albeit only for a

Minority of lessees- is in any case unacceptable for Volkswagen Leasing GmbH!

1.

1.1

1.2

1.3

1.4

2.

2.1

2.2

2.3

3.

18Dr. André H. Grabowski – Chief Accountant – Volkswagen Leasing GmbH 5. November 2007

Thank you very much for your Attention!