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UK leasing industry views on the IASB’s Leases Exposure Draft
5 November 2010
• Overview of the UK asset finance market
• Why businesses use asset finance
• Winchester Business School findings on use of asset finance by FTSE companies
• Case for change
• Implications of IASB’s proposals
• Is this the best solution?
Finance and Leasing Association
UK Asset Finance Market
• In 2009, £20 billion of investment finance to businesses and public sector
• About a quarter of all fixed capital investment excluding property
• Majority of all debt-financed business investment excluding property
• Market includes banks, independent asset finance companies, captives
• Used by around 750,000 UK businesses
Finance and Leasing Association
Why businesses use asset finance
• Conserve cash
• Align cost of equipment with revenue generation
• Transfer risk in the second-hand value of the equipment
• Transfer administration of equipment including re-selling
• Transfer maintenance of equipment
Finance and Leasing Association
Winchester Business School findings on use of operating leases
by FTSE companies & implications
• £153 billion operating leases in 260 companies
• FLA estimate therefore £220 billion across FTSE companies
• Average £445 million per company property, £18 million non-property (4%)
• 10 companies, not included in averages, have £25 billion of non-property operating
leases: BA, BT, C&W, TUI, Vodafone, Arriva, EasyJet, First Group, Stagecoach, Go Ahead
• Changes not ‘merely a bookkeeping exercise’
Finance and Leasing Association
Case for change
• High value off-balance sheet – but mostly property
• 10 companies accounting for 88% of non-property
• No evidence of deliberate manipulation
• Excluding property, and 10 companies, a very minor problem!
• Technical / theoretical correctness versus pragmatism?
Finance and Leasing Association
Implications of IASB’s proposals
• High preparation costs: Around 75 regulatory steps requiring significant new information
• Dangerous myths: IT panacea, lessor panacea, ‘simple leases’, averages
• Fundamental review of leasing tax
• Fundamental review of public sector capital accounting
• Possible reduced lending due to capital requirements
• (Even) longer notes to accounts
• Would investors prefer the new information?
• Would the new information be remotely predictable? Consequences if not?
Finance and Leasing Association
Summary – is this the right solution?
• Even if it was technically robust (next presentation)….
• More complex financial reporting - preparers and users – conflict with FRC / ICAEW
recommendations and Government’s commitment to reduce regulation
• Risk of lower supply and lower demand – damaging to business investment
• Damage greatest if filters through to SMEs through UK GAAP / IFRS for SMEs
• Entirely disproportionate and damaging for non-property
• Much simpler, more pragmatic alternative needed
Finance and Leasing Association