New Accounting Changes Could Lead To New Methods Of Financing Cars

Tuesday, 13. February 2018

Hi, Graham Hill here, thank you so much for visiting my blog, I hope you learn a lot and as a result end up driving a great car. In order to do so you can get all the information you need by buying my book, An Insider Guide To Car Finance or use me to finance your next car. Happy driving.

When I read the latest changes to the way that leases would be accounted for in the books of large companies, being introduced by the International Accounting Standards Board (IASB), I started to get Deja Vu! You see when I first came across leasing (contract hire) I was General Manager in a PLC with over 700 vehicles in the fleet that we owned outright.

 

One of the departments that I was responsible for was Transport and the fleet of vehicles. They were costing us a fortune but more than that they were shown as assets on our balance sheet but the outstanding HP finance was shown as a liability. The net effect was negative. OK, technical bit over.

 

At the time, contract hire was only advantageous to large companies with cars that were covering big mileages. For most businesses, the off-balance sheet recording of contract hire has been an advantage because without the assets and liabilities being recorded it presents a stronger picture. It is also easier to simply record a monthly rental cost than applying the writing down process to owned assets.

 

Here’s where it gets interesting. After absolutely donkey’s years of negotiating the IASB has ruled that contract hired vehicles should, in future, be recorded ‘on balance-sheet’. BUT this rule will only apply to companies reporting under IASB rules, mainly those companies quoted on the London Stock Exchange.

 

All other companies operate under the UK Generally Accepted Principles (GAAP) which remains as is so the vast majority of firms will remain unaffected. However, as this situation could affect some of the biggest fleets in the country running thousands of vehicles the daily rental market has pricked its ears up.

 

Whilst January 2019 will see the new IASB rules on leasing come into force another standard, IAS 16 will come into force relating to rental vehicles where the rental period is up to a year. These will remain off-balance sheet for all companies.

 

As a result, the daily rental companies have got themselves excited because they receive massive discounts from manufacturers – up to 50% off the recommended On The Road price. Despite this discount, the reason why their rates are not lower than contract hire rates is utilisation – which can be as low as 40%.

 

This means that cars are sitting around costing money for longer periods than they are actually being hired. This pushes up rentals massively. However, if the cars are rented out on 12-month contracts the utilisation is 100% so they could reduce the monthly cost substantially from their daily rate bringing them closer to contract hire rates.

 

Clearly, if the rental companies brought out such a product specifically for the large fleets, as happened with contract hire, could we see a new product offered, not only to smaller businesses but also to consumers.

 

Plenty of discussion going on in the industry, both for and against, but with the uncertainty of Brexit a 12-month contract, priced sensibly, has some merit.  By Graham Hill

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