New Accounting Standards Will Affect Lease Accounting

Monday, 14. March 2011

Last week I reported on the shambles known as the EU Consumer Credit Directive that would, without doubt, cause widespread confusion amongst consumers and small businesses (who were included in the Consumer Credit Act but not in the CCD). Trying to get the message across to customers in dealerships would result in the blind leading the blind and for once I’m not criticising the dealers as most brokers and lenders seem to be confused.com also. This week I’m onto the accounting standard changes that will affect the way that companies record contract hire (also called operating lease).

Currently finance leases are recorded on the balance sheet whilst operating leases appear off balance sheet. Without getting technical this affects the way that large businesses are viewed by investors and analysts.

Many ratios and conclusions are drawn from the balance sheet and the argument is that if vans that are on finance lease are recorded on balance sheet, even though the contract is considered to be a rental agreement, why should the other form of lease, contract hire, be recorded off balance sheet which in fact improves the strength of the business. But hang on, the contract hire commitments are shown in the notes to the accounts and they show the current year commitments along with the 2-5 year commitments.

So a clever accountant with his slide rule could quite easily asses the strength of any business as long as he has the full set of accounts. So yet another sector of the finance industry that has fallen into disrepute. What is happening? All this time and effort expended when it’s all a load of nonsense.

My advice if you are running a small business is ignore it all, select your finance carefully, don’t over commit and make sure you have selected the right finance product from a trusted provider. Mind you the way the Accounting Standards Boards are arguing with each other it will be a few more years before they come up with a final solution. Are you concerned about the way your accounts will be presented? By Graham Hill