What are the implications of IFRS 16 for Operating Leases?

The international accounting standard IFRS 16 which came into effect 1^st January 2019 now requires that both operating and financial leases are recorded as “on balance sheet” funding.

An historical contributor to the success of Operating Leases, which includes Full Maintenance Leasing (FML), has been their use as “off balance sheet” funding. The view has been expressed by some that IFRS 16 will significantly reduce the future appeal of Operating Leases.

However, before this is accepted the added value provided by the Fleet Management Leasing companies needs to be identified by customers.

The cost of Fleet Management is generally accepted as No 2 or 3 in a company’s expense hierarchy so it should continue to receive strong focus. The services provided by the FM Leasing companies are not restricted to FML and can significantly contribute to cost savings and fleet efficiency.

What are their services and can they be of benefit to you

• Vehicle Procurement – They buy approximately 100,000 vehicles on a 3 year cycle.
• Vehicle Disposal – if you buy 300,000 vehicles you have to sell the same number and maximising the value is a necessity to offset the risks taken on resale values.
• Vehicle Maintenance – They manage in excess of 300,000 vehicles on service and maintenance plans including tyres.
• Fuel Management – Apart from fuel cards, they provide specialised fuel consumption management tools that are proven to significantly reduce wastage
• Accident Management – This specialised service supports self-insured company fleets and again has a record of reducing admin and delivering savings
• Additional services include the management of telematics, insurance, tolls, fines, licensing and reporting.

This list is long and they have been providing these services for in excess of 35 years in South Africa! They are fleet experts; having unique skills and expertise, systems, supplier relationships and operating information that is available to its customers.

Although an operating lease may be seen as their primary service all of the above services are offered as standalone services and are available to complement purchased and leased vehicles.

IFRS 16 does provide that operating leases of less than 12 months can remain off balance sheet. It should be remembered that where a number of 12 month leases are taken consecutively on the same vehicle the first rental will be high to incorporate the high first year depreciation.

Yes IFRS 16 will potentially impact how fleets consider fleet finance methods but the skills and resources of the fleet management and leasing companies will continue to deliver significant cost savings and operational benefits that can positively complement all finance methods.