Jack Kazmierski
 

October 26, 2010

The Bottom Line

Balancing the Books
 

Fleet managers should be aware of new accounting standards that might change the way they run their fleets.

The world’s financial minds have been working on new accounting standards that will soon change the business landscape. Although the new rules affect a broad range of industries, fleet managers, as well as every company in the fleet supply chain are sure to be affected by these changes.

“In 2011, lessors in Canada will be presented with two accounting challenges,” says David Powell, president and CEO, Canadian Finance & Leasing Association (CFLA). “First, the January 1, 2011 introduction of IFRS [International Financial Reporting Standards] for public enterprises, followed by the third quarter 2011 target date set by the accounting standards setters to confirm a completely new set of lessee and lessor IFRS GAAP [Generally Accepted Accounting Principles] rules. Once confirmed, it is expected that the new rules will come into effect within the following 24 months or so.”


Although the authorities that determine international accounting standards are still working out details, once the dust settles, “it looks like all leases will have to go on the balance sheets of companies,” explains Tom Simmons, VP Eastern Region, Jim Pattison Lease.
 

The new standards consider “leasing a vehicle tantamount to purchasing
a vehicle, so the lease should be disclosed.”  --  Tom Simmons

As of January 1st, 2011 closed-end leases will still be allowed to remain off the balance sheets in Canada, even under the new rules. “However, open-end leases, if you’re a public company, will have to go on the balance sheet,” Simmons adds, “keeping in mind that the long term objective is that all leases will go on the balance sheet. But that likely won’t come into effect until 2013.”

 

Disclosure

The reason why international accounting boards want all leasing on balance sheets is because they consider “leasing a vehicle tantamount to purchasing a vehicle, so the lease should be disclosed,” explains Simmons. “In fact, all leases - open-end, finance, real estate - everything should go on the balance sheet of a company. That’s the objective of all the accounting boards throughout the world, but when they will implement these new rules we don’t know.”

While public companies will have to put their open-end leases on the balance sheet as of January 1, 2011, private companies will still have the option of treating open-end leases as an operating cost.

However, private companies might choose to, or be obliged to, comply with these new rules for a number of reasons. “If you’re thinking of issuing an IPO at some time in the future, if you’re borrowing public money, or if your bank asks you to do so, you may have to comply with the new rules,” Simmons says.

Fleet managers

With all these changes on the horizon, fleet managers should sit down with their CFOs to determine how their companies will deal with the new rules. “As soon as you put a lease on your balance sheet it can change your balance sheet ratios and that may change your covenants with your bank,” Simmons explains. “If the CFO thinks putting your open-end lease on your balance sheet is going to be a problem, one option: you can go on a closed-end lease where you have no residual risk.”

Whatever you choose to do, now is the time to start thinking about the possibilities and starting a dialogue with all involved in order to come up with the right solution for your organization.

The CFLA is following this issue closely, working with leasing associations in eight countries. Its Accounting Committee is assessing the practical implications of the proposals for the Canadian marketplace.