The International Accounting Standards Board’s (IASB)
project to overhaul the standards governing lessee accounting has
been slowly gathering place for some time. Its discussion paper
(DP), Leases: Preliminary Views, sparked a huge volume of
discussion, not least at a roundtable hosted by VRL, publishers of
Motor Finance, held in London in early July.
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The IASB states it wishes to move
to a standard which more accurately reflects that operating leases
– such as contract hire – give rise to “assets and liabilities that
should be recognised in the financial statements of lessees”,
rather than being kept off balance sheet, as is the practice at
present.
To that end, its DP proposes to do
away with the distinction between operating leases and finance
leases altogether, to make accounts more “transparent” and
“comparable” to analysts. As a corollary, the proposals aim to make
it impossible for complicated leases to be structured to classify
as operating leases in order to keep assets off balance sheet, and
thus to provide a “source of unrecognised financing” for the
lessee.
The proposals contain many
potentially worrying implications for the fleet industry, as Motor
Finance has noted (see MF March 2009, June 2009).
The heads of international fleet
lessors ALD, Arval, and Lease-Plan have issued a common position
paper in response to the DP, noting their “major reservations”
about progress so far. Below is a summary of the position paper’s
key points.
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By GlobalDataOutsourcing
The outsourcing of full service fleet
management cannot be considered as a structured operation aiming at
balance sheet optimisation. The financing within the product is a
straightforward operating lease without purchase option. Its
monthly all-in invoices are the closest possible reflection of the
total cost of ownership of the vehicle and therefore the most
rational criterion of choice and a real added value for
businesses.
Moreover, in a period of crisis,
vehicle operating leasing responds to the businesses’ concern to
prefer usage-based rather than fixed costs, and to avoid
patrimonial risks on resale values. In short, operating fleet
leasing is a genuine application of what IAS 17 defined as
“operating lease”.
The DP is focused on the goal of
tackling abusive and highly structured asset deconsolidating deals
that make use of the same operating lease basis. It is our view
this intention should not be fulfilled in a way that prevents an
overwhelming majority of businesses from a valuable and correctly
used fleet management tool. Efforts should be focused on the
enforcement of the existing rule rather than changing it.
Businesses use operating fleet leasing
as an integrated ‘one-stop shopping’ bundle of services which
provides a cost-cutting simplification of their processes. Its
economic relevance is confirmed by the continued high level of
customer demand for this product during the current economic
crisis.
In short, businesses see in services a
substantial and undistinguishable motivation without which they
would not underwrite these contracts. However, the DP states among
its opening assumptions that finance and operating leases are
“similar transactions”.
This statement does not seem to be
based on the objective features of these two modalities but on a
change of concept, from the ‘risk and reward’ approach of the
existing IAS 17 to the criterion of ‘control’ adopted by the
IASB.
Variability ignored
Variability during the life of
contracts is one of the features that lead businesses to see in
fleet operating leasing a financing of usage rather than of
acquisition. Since no one can foresee mileage and duration of cars
with acceptable accuracy, these contracts have been designed from
the beginning to be regularly adjusted in order to reflect
variations in mileage, lease term and detailed configuration of
services.
Unfortunately, the way that on balance
sheet treatment is proposed in the project makes contract
adjustment simply unmanageable for lessees, due to the burden it
would generate for preparers. Who would indeed wish to repeatedly
review their depreciation schedule car by car and on both sides of
the balance sheet when, as is normal, no driver has fulfilled the
contracted mileage?
Therefore, the capacity of adaptation
to contingent but objective mileage variations is an added value of
operating leasing for the economy. It should not be undermined by
accounting rules.
Another key difference is observable
at the end of contracts. The replacement of obsolete vehicles with
new ones is granted without any patrimonial risk. This should be an
objective difference from other forms of funding that leave
residual value risks on the lessee side.
In practice, in the past 12 months,
the drop of used car resale values in Europe by €800-€1,500 per car
on average (on used car prices usually ranging from €6,000-€12,000)
have made this difference more tangible than ever. The right of use
concept does not fit all
The right of use is meant to reflect
the privilege effectively acquired by the user to enjoy an asset.
In modern fleet services, the asset is only a part – identified or
not – of a global mobility service and all subscribed services
contribute to make this use effective.
The impossibility to apply the right
of use to services, as stated in the project, should therefore
imply the exclusion of full service operating lease from the scope
of the project.
Conclusion
The requirement to achieve
transparency for all assets used within a business is well
understood. It is the view of the undersigned that this aim is not
well served where it is overly complex and places too great a
burden on lessees. There is a significant risk that the existing
proposal would result in further financial engineering while
penalising those lessees who current operate correctly and fairly
the existing accounting standard.
The project imposes an extraordinary
level of complexity on all sorts of businesses, contrary to its
intentions of simplification and transparency, without avoiding the
risk that lessees will engage in structuring their leases.
Therefore, ALD Automotive, Arval, and
LeasePlan consider that no further step should be taken on this
project before a thorough cost/benefit review is undertaken, which
the promoters of the project acknowledge not to have carried out at
this stage.
Vahid Daemi, CEO and chairman,
LeasePlan; Gianluca Soma, CEO, ALD International;
Laurent Treca, chairman and CEO, Arval
