LeasePlan UK Lease Accounting Standard Q&A

“Vehicle leasing continues to grow in popularity – and these changes do not erode the real benefits. For our customers, the value of leasing comes in the reduction in depreciation risk, the flexibility that it provides, as well as the freeing up of resource to focus on main business activities.”

Matthew WaltersHead of LeasePlan Consultancy Services

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IFRS 16 - Background

Therefore it is difficult for investors and others to• Get and accurate picture of a company’s lease assets and liabilities• Compare companies that lease assets with those that buy assets• Estimate the amount of off balance sheet obligations leading to overestimation

It is not a level playing field.

“Lessees should be required to recognise assets and liabilities arising from all leases on the balance sheet. The model must reflect that, at the start of a lease, the lessee obtains the right to use an asset for a period of time and has an obligation to pay for that right”

Leases are an important and flexible source of financing. Listed companies using IFRS Standards or US GAAP have an estimated $3.3 Trillion (US/Financial) lease commitments

Over 85% of these commitments do not appear on the balance sheet today

In January, the IASB published a new standard, IFRS16. These are the result of a ten-year review, and will require companies to include the assets they lease on their balance sheets, including ‘operating leases’. This is because IFRS16 moves away from the current ‘risks and rewards’ model to one based on who has the ‘right of use’ of an asset.

How is it changing?

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IASB Lease Project Timeline

August 2010Exposure Draft

May 2013Re-Exposure DraftIASB and FASB split

Jan 2016Final standardPublished

Jan 2019Standard intoLaw

Since January 2014Re-Deliberations

April 2015Final Draft Standard

Jan 2018Draft BalanceSheetRequirement

Jan 2017Possible earlyadoption

Certain leases have to reported on balance sheets, others do not. Those classed as ‘finance leases’, where the lessee assumes almost all of the risks and rewards, are currently treated as liabilities on the lessee’s balance sheet. ‘Operating leases’, where the risk and the reward stay mostly with the lessor, do not currently appear on balance sheets. This is true whether the company adheres to the International Financial Reporting Standard (IFRS) or the UK’s Generally Accepted Accounting Practice (UK GAAP). 

How are leases currently reported?

All types of leased assets, including vehicles. Over 85% of these commitments do not appear on balance sheets at the moment.

Which assets will have to be included?

Certain leases are exempt, and won’t have to be included on balance sheets: short-term leases (generally those lasting less than 12 months), those nearing completion (with less than 12 months left to run) and low-value assets (typically those costing less than £5,000 new). Ancillary leasing services, such as maintenance, and informal lease extensions will also not need to be reported on balance sheets.

Are there any exceptions?

It’s all about transparency, for investors and others. The changes should enable them to form a more complete picture of a company’s lease assets and liabilities, to fairly compare companies that lease with those that buy, and to estimate off-balance sheet obligations.

Why is this being done?

The new standard comes into force for financial reporting periods beginning on or after 1st January 2019.

When will these changes take effect?

These changes only affect your balance sheet, not the operational benefits of the lease itself. LeasePlan is here to help you adjust to the new arrangements.

Vehicle leasing continues to grow in popularity – and these changes do not erode the real benefits. For our customers, the value of leasing comes in the reduction in depreciation risk, the flexibility that it provides, as well as the freeing up of resource to focus on main business activities.

What else do I need to know?

For further information please speak to your LeasePlan Account Manager or a member of the LeasePlan Consultancy Services team

Tel:  0344 371 8032Email: consultancyservices@leaseplan.co.uk