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New international accounting proposals surrounding leasing could impact the finance situation of many large firms in the UK.
In an effort to improve lease accounting transparency, the International Accounting Standards Board has issued new proposals that if put into practice will see leases have a greater impact on a business's financial figures.
The proposals could have repercussions, as if a firm has to show the lease (and its risk) on the company balance sheet, it could contravene existing funding agreements.
While international accounting standards are not required by UK-only businesses, they are used by PLCs and many large privately owned companies in the UK.
An IASB spokesman said: "Under existing accounting standards, a majority of leases are not reported on a lessee's balance sheet. The amounts involved can be substantial."
"The existing standards have been criticised for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions," he continued.
"The. approach to lease accounting would require a lessee to recognise assets and liabilities for the rights and obligations created by leases. A lessee would recognise assets and liabilities for leases of more than 12 months."
A BVRLA spokesman said: "This new approach, called the 'right of use' model, differs substantially from the current standard, which doesn't require operating leases to be reported in company accounts.
"Under the model, a lessee (leasing customer) would identify the right to use a leased asset on its balance sheet and incur a corresponding liability for future rental payments."
Veronica Poole, Deloitte UK national head of accounting, said: "The drive to move operating leases to on-balance sheet is based on a rationale that leases are a form of off-balance sheet financing, which creates hidden leverage.
"As a result, it is important that regulators and investors are able to understand the true leverage of a business.
"The potential impact on business is huge and is likely to affect important key performance indicators significantly. If the IASB is to win 'hearts and minds' on this one we need a robust and operational solution that provides necessary information to investors in a manner that can be practically applied by companies."
Meanwhile, the BVRLA believes car and van leasing "will retain their status as essential forms of vehicle finance".
Consultation on the proposals runs until September, and a finalised version is expected by the end of the year.
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