The Impact of International Financial Reporting Standards May Not Be That Big a Deal

In the fleet leasing busiFleet Management Vansness, we have heard a lot of talk about the new international accounting reporting standards and how they will affect the balance sheets of businesses that are currently involved in lease arrangements. Folks in the industry are concerned that adoption of the international accounting principles may end up altering the way that fleets need to be accounting for leased vehicles on their books, which likely will be the case. However, we would emphasize that the proposed standards do not need to cause too much difficulty for organizations’ reporting of their fleet operations, and could in fact be an opportunity for lessees to pass along the risk.

About the International Standards

The  (IFRS) is a joint effort by the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to create a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS is issued by the International Accounting Standards Board. The U.S. Securities and Exchange Commission (SEC) is still in the process of determining if the U.S. will join numerous countries in adopting all of the IFRS or some convergence of the U.S.’s current standards, the Generally Accepted Accounting Standards (GAAP), and IFRS. Many large U.S. companies, especially those with international operations, have already started to use the international standards.

International Standards and Fleet Leasing

While it is still unclear whether or when the U.S. will adopt IFRS, the FASB and the IASB are currently working on three convergence projects, including one on leasing standards. These projects are expected to be issued as final standards by the middle of 2013. It’s likely that these standards will change the way fleets need to account for leased vehicles on their ledger books. Of course the standards are something that we in the industry need to be paying attention to because it will mean that assets and liabilities stemming from leases will now need to be on the balance sheet, and it will mean some changes for lessees and lessors. But it doesn’t mean that anyone needs to panic. In fact, now is a great time to think about potentially restructuring your fleet operations as you budget and plan.

Some of the obvious advantages to fleet leasing are that organizations avoid an upfront capital investment and administrative hassles, and it enables a company to budget. Additionally, many organizations want fleet lease contracts to stay off their balance sheets, which keeps their debt-to-equity ratio lower, may improve their credit ratings, and may allow them access to lower borrowing costs.

Currently under the U.S. GAAP, both TRAC and closed-end leases can generally be kept off a company’s balance because they can be accounted for as operating leases.

Under the international standards, the administrative benefits of leasing would remain the same. The leasing company will still handle vehicle acquisition, titling, registration, disposal, etc. The difference comes in financial statement presentation only and does not have an effect on lease services. Under IFRS, a closed-end lease for presentation purposes would no longer be viewed as an operating lease, but rather a finance or capital lease, which will be required to appear on the balance sheet and considered a liability.

It is true that the international accounting standards would change the way a leased asset is accounted for on a balance sheet; but under the new rules, a properly structured    closed-end lease will continue to provide an opportunity for organizations to contractually pass on the financial risk of asset disposal to the fleet management/leasing company.

Please feel free to contact  Capital Lease Group with any questions you may have about your fleet leasing arrangements and the international reporting requirements.

Capital Lease Group is a leading fleet leasing provider in Massachusetts and beyond. We are committed to structuring a lease that that will be designed to fit your business rather than having your business conform to the confines of a standard lease. We will invest the time to understand each customer’s individual needs while offering a full range of leasing services and products that will complement each customer’s goals. Our experienced staff of knowledgeable experts in sales, administration, and service will help you feel comfortable so that your main focus will be on your company’s vision while we handle all of your fleet requirements.