Majority of lessors believe
changes will lead to downturn in leasing uptake
Lessors have until 17 July to
submit their comments on the International Accounting Standards
Board’s (IASB) discussion paper issued in March this year, which
sets out the board’s proposals on changes to lessee accounting.
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The highlight of the proposals is that
the IASB would like to bring leased assets onto lessees’ balance
sheets, which should paint a more complete picture of companies’
financial position.
However, there is widespread concern
that the proposed changes could harm the leasing industry.
Industry concerns
A key concern at present for the
global leasing industry is that the new rules will apply to all
leasing transactions. Many of its key spokespeople argue that
short-term leases and non-core assets should be exempt from the
lessee capitalisation regime.
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By GlobalDataAlso, at a lease accounting conference
in May, hosted by Leaseurope and the FLA, almost 60 percent of
delegates felt that customers would be less likely to use leasing
as a result of the changes, while the rest felt that there would be
no substantial difference.
Another worry is that the changes are
being introduced in order to help to eradicate tax evasion by big
ticket lessees – not among the small and medium-sized customers
which, in fact, make up the bulk of lessees around the globe.
Summing up the response by many in the
leasing industry to the changes, Robert Peterson, director of
strategy and innovation at Amstel Lease, said: “As leasing is an
important means of funding for investments, the draft proposal,
when come into force, might slow down the economic recovery in the
coming years.”
In addition, there is also some
concern voiced about the impact of the changes on lessees’ balance
sheets, as pointed out by Bill Bosco, an American leasing
consultant.
“Under capitalisation, the lessee’s
profit and loss account will take much heavier charges towards the
front end of the contract,” Bosco said.
“On the balance sheet impact, retail
groups will be among the most heavily affected, but banks will also
be hit as property lessees in their branch networks. As a direct
result, some banks will need more regulatory capital.”
Leasing companies will also be forced
to deal with the reality of lessees who might be more cautious
about leasing assets, once the new rules are introduced.
An opportunity in
disguise
Some leasing companies, however,
rather than regarding this as a problem, see it as an opportunity
to promote the fact that leasing is not just about financing assets
– it is also about provision of services.
“Lessors will just have to push the
traditional selling points of why you go through leasing even
harder,” said Xerox Financial Services’ sales and marketing
manager, Gabriele D’Uva.
His point was echoed by the chairman
of the British Vehicle Rental & Leasing Association, John
Lewis.
He said “While the IASB’s proposals
could, if not corrected at this stage, lead to an additional
reporting burden, they are not intended to damage the fundamental
commercial benefits of leasing.”
Lessees also said that once the
changes are in place it will be important for lessors to focus on
their key selling points that differentiate them from other
lenders.
On this point, Nicolas de Paillerets,
director of group accounting principles at France Telecom Orange,
commented: “The proposals will still leave problems about how to
account for certain deals.
“The critical line will just shift
from the finance – operating lease boundary to the increasingly
important distinction between leases and service contracts.”
Lessor accounting was not
included in the IASB’s discussion paper, and it is still unclear
whether eventual changes for lessors will coincide with the lessee
accounting changes, or be left until later.
It is broadly clear, however, what
sort of changes in lessor accounting would match those proposed for
lessees. Lessors would have to split each asset involved in an
operating lease – reporting the lease receivables as a financial
asset, and the residual value as a fixed asset.
There is widespread recognition in
the industry that serious discrepancies would result from failing
to effect consistent changes for lessors and lessees
simultaneously, potentially hurting the industry at a time when it
needs all the support it can get.
