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UK business recovery could be hit by new accounting rules

UK business recovery could be hit by new accounting rules

Released on 17 August 2010

 

Proposals published today by the International Accounting Standards Board (IASB), could mean that asset finance – the largest source of debt finance for UK businesses – will be more difficult to obtain. The Finance & Leasing Association warned that this would hamper the country’s economic recovery, which depends on strong business investment. 

Under the current rules for reporting operating leases, businesses’ accounts show the actual rent paid for equipment. But under today’s proposals, they would instead have to prepare theoretical estimates of the value and cost of the lease and include these on their balance sheets. 

The leasing industry has highlighted the extra administrative burdens this would create for UK businesses, and the accounting uncertainty to which it would lead. The proposed new rules could also reduce the availability finance for business because the changes are not being coordinated with existing capital requirements regulations. The IASB has not carried out a cost-benefit assessment of its proposals, which is a requirement for new UK regulation.  

Julian Rose, Head of Asset Finance at the Finance and Leasing Association said:  

“The IASB’s proposals involve taking real numbers and replacing them with a mish-mash of accountants’ assumptions, estimates and adjustments. To propose imposing these arcane and costly new regulations on UK businesses so soon after the recession makes no sense. The new rules could reduce the supply of funds available for new lending and contradict the Government’s drive to cut unnecessary regulation. Today’s proposals appear to ignore the IASB’s own discussions on lessor accounting merely to permit convergence with the American accounting regulators.

“UK businesses, their investors and the Government should join us in calling for the IASB to carry out a proper cost-benefit assessment and to drastically simplify its proposals.” 

- ends – 

Note to editors: 

  1. Under the proposals published today, businesses renting equipment using an operating lease would, for the first time, show the value of the lease in their accounts. Currently a simpler version of this information is shown in notes to the accounts. The theoretical estimates of the value of the lease would depend on estimates of how long the equipment is likely to be rented for.
  2. The theoretical estimates of the cost of the lease would be different from the actual rental payments. The estimates would typically be higher than the real rental payments in the first half of a rental period and then lower in second half. 
  3. The IASB sets accounting rules that are automatically applied by the UK’s largest companies. The UK’s accounting regulator, the Accounting Standards Board (ASB), which is an operating body of the Financial Reporting Council (FRC) currently sets the rules for other companies. The ASB is proposing to automatically apply the international rules to all but the smallest UK companies. The FRC’s Plan for 2010/11 states that the FRC will promote increased relevance and reduced complexity of corporate reporting.
  4. The proposed new rules would alter the accounts of banks and other financial institutions providing asset finance. For banks, this could restrict their ability to lend. Banks are obliged by capital requirements regulations to maintain minimum levels of funds in relation to their liabilities.
  5. In 2009 FLA members provided £19.3 billion of finance to businesses and the public sector, representing around a quarter of all fixed capital investment in the UK and the majority of business investment borrowing.
  6. Today’s announcement from the IASB follows a previous consultation in May 2009 on an earlier draft set of rules. The FLA responded to that consultation jointly with the Forum for Private Business (FPB), one of over 300 responses, most of which called for simplification of the rules. The FLA/FPB response can be viewed at: http://www.fla.org.uk/media/130709_new_accountancy_rules.
  7. In 2009 FLA members provided £72.5 billion of new finance to UK businesses and households. Almost £19.3 billion of finance was provided to businesses and the public sector, representing around a quarter of all fixed capital investment in the UK last year. £53.2 billion was in the form of consumer credit, including a third of all unsecured lending in the UK. And £16.5 billion supported the purchase of half of new car registrations in the UK.

For further media information, please contact: 

Helen Saxon, FLA

T: 020 7420 9664 E: helen.saxon@fla.org.uk M: 07918 766 993