changes to
lease accounting
View a summary of the important changes
Find out more about IFRS16
WHAT HAS HAPPENED?
A new lease accounting standard (IFRS16) was published last year and will come into effect on 1st January 2019. This will apply to all organisations reporting under International Financial Reporting Standards which includes PLCs, foreign owned companies and some public sector bodies. For UK limited companies, the new rules are expected to become effective in 2022.
All leases will be reported on balance sheet under the new rules, whereas previously operating leases (including contract hire) were reported off balance sheet. This applies to leases of property, ships, planes, trains, plant & machinery as well as motor vehicles.
WHAT OTHER IMPACTS ARE THERE?
The new lease accounting rules will impact key financial performance ratios which will be of interest to investors and lenders.
These include:
Gearing ratio (Debt to equity) will increase because financial liabilities increase.
EBITDA (Earnings before Interest Tax & Depreciation) will increase as lease costs are now treated as depreciation and interest.
Operating cash flow will increase because lease payments are now treated as financing activities.
Interest cover will decrease due to the effect of higher reported interest costs.
For property and large value equipment leases, the effect could be significant. This is unlikely to be the case for vehicle leases, however, even where large fleets are involved. This is because the value of each lease is relatively small and the term is relatively short.
However, there will be an increased reporting requirement. As each vehicle lease will be treated as a fixed asset, the volume of vehicles within a fleet will potentially present organisations with a greater administrative challenge. Any revaluation of the asset (such as a change in contract term or mileage), would require possible adjustment to the depreciation charge and an amendment to the corresponding liability and interest charge.
Additionally, if vehicles transfer between different companies within a group then there may be the need to treat the transfer as a disposal of a fixed asset within one company and an addition in another, based on the book value at the time of transfer.
IS VEHICLE LEASING STILL A GOOD OPTION?
Whilst the changes may initially be challenging, at Lex Autolease, we're committed to helping our customers deal with the new accounting rules so that they can continue to enjoy the many benefits of contract hire. These include (see table).
Find out more about IFRS16:
