IFRS 16 standard is shaking up long-term leasing
What is the IFRS 16 international accounting standard?
IFRS 16 is an international accounting standard which comes into effect in 2019. It will impact companies consolidating and presenting their accounts in IFRS, mainly companies and their subsidiaries listed on the stock markets, as well as companies making long-term preparations for stock market listings (IPO).
How will IFRS 16 affect vehicle fleet management?
Large and average vehicle fleets rely heavily on long-term leasing because of the numerous advantages. In comparison with purchase or short-term leasing, long-term leasing conserves cash flow, reduces risks and the cost of resale of vehicles and does not have an impact on the balance sheet. IFRS 16 will abolish one of the advantages of long-term leasing from 01/01/2019.
What is the advantage of long-term leasing being abolished?
Until now, long-term leasing contracts have not been seen as a financial commitment or a debt, as they comprise a simple lease, unlike financial leasing. Therefore, they do not appear in expenses accounts and do not appear on the balance sheet. This advantage makes it possible to reduce the visible financial commitments of the company. With IFRS 16, in the interests of financial transparency, these long-term leasing contracts will now appear on the consolidated balance sheet. They will be considered as a financial commitment, with consequences as you can imagine…!
What are the consequences for companies that have a vehicle fleet under long-term leasing?
This may make long-term leasing less attractive, and certain companies might start to question this method of financing. In fact, this is what is already happening. I have just finished a mission that involved migrating a fleet of 3,000 long-term leasing vehicles to another management method.
What solutions are available for fleets likely to abandon long-term leasing?
Companies with cash assets will be tempted to move towards “ownership” and buying their vehicles. Companies lacking cash assets may decide to free themselves of rigid constraints imposed by long-term leasing (term/mileage agreements, minimum and maximum duration, tariff transparency, return fees etc.) and then switch over to leasing (without, however, resolving the problem of commitments, although at least gaining flexibility and transparency over long-term leasing).
Will this have a significant impact on the company?
Migration is not straightforward, as changing the financing method has an impact on the method of management and the Total Cost of Ownership (TCO). The wider knock-on effects will impact the organisation, the company procedures and the management IT system. It raises the issue of the management and maintenance of the fleet, as well as the resale of vehicles.