Proposed Accounting Changes to Impact the Balance Sheet of Operating Lease Users
Our job at Fleet CEO isn’t to provide Accounting advice. It is however, important for us to make you aware of industry changes that can impact your business. One of those such changes, is the release of Exposure Draft ED/2010/09 Leases, by the International Accounting Standards Board (IASB). Part of a long term project, this exposure draft forms part of the consultation process regarding the proposed changes to the accounting treatment of leases. Open for comment till the 15th December 2010, this document proposes changes to the accounting recognition of assets and liabilities arising under leases.
Understanding today’s treatment
Fundamentally, there are two types of lease products used for the financing of vehicles and equipment, Finance Lease and Operating Lease. Under today’s standards they both have different accounting treatment. If a lease is classified as a Finance Lease, the assets and liabilities must be recorded on the lessee’s balance sheet. However, in the case of an Operating Lease the lessee does not have to show any assets or liabilities, with lease payments expensed directly through the profit and loss.
The exposure draft proposes recording all leases on the balance sheet. While this fundamentally does not change the Accounting Treatment of Finance Leases, it does mean that Operating Leases would need to be recognised on a company’s balance sheet. Under the proposed changes, taking out a lease would result in the recognition of an asset, reflecting the right to use an asset and a liability to reflect future lease payments. For a full explanation of changes, please download a copy of the exposure draft from the IFRS website; Download Exposure Draft; Download Snapshot Summary
What does this mean for Australia Fleet Operators
While this is an International Exposure Draft it provides clear guidance on the proposed treatment of Leases. The Australian Accounting Standards Board (AASB) has not yet published its own Exposure Draft and would be expected to do so before any changes are adopted in this country. For those company fleets that are heavily weighted towards the use of Operating Leases, the changes could have a significant impact on the structure of their balance sheet. The take up of Operating Leases in the last decade, has in part been due to the desire of company’s to offload assets from their balance sheet, so it will be interesting to see what influence if any, these changes will have on the market.
Disclaimer: Neither the author or Fleet CEO are Financial or Accounting Advisors. The information represented in the above article merely expresses the opinion of the author and we strongly encourage businesses to seek their own financial advice in regards to the proposed changes.