New Accounting Rules will “add to burden of small firms”
Hundreds of thousands of small companies will face extra administration if proposals to change accountancy rules for leasing are accepted by the UK, the Forum of Private Business (FPB) has warned.
Companies that lease equipment, including cars, commercial vehicles, machinery and PCs, do not have to include them on their balance sheets as assets. Under new rules proposed by the International Accounting Standards Board (IASB), however, leased items would be treated as a purchase, and recorded as an asset.
The rule has been introduced by the IASB to stop larger businesses using leasing to buy equipment without recording it as an asset. According to the FPB, up to 400,000 UK small businesses that use leasing to control cashflow will be unfairly and disproportionately affected by the new rule.
“Rules and regulations must exist to facilitate best practice and productivity, and not unjustifiably add to the bureaucratic burden faced by entrepreneurs”
said FPB chief executive, Phil Orford.
“Leasing is often an effective method of controlling costs, so it would be disappointing if complying with the new rules were made more time-consuming and expensive.”
The Association of Chartered Certified Accountants’ (ACCA’s) head of financial reporting, Richard Martin, blamed bigger businesses for the prospective rule change.
“There has been some abuse by larger companies to reduce their assets and their borrowings on paper by just not including leased items that they plan to acquire on their balance sheet.”
“Small firms tend to use short-term property leases – for example, five years occupying a building – rather than leasing expensive equipment that they eventually own and can sell.”
“The proposed changes would mean that the accounting for the two different types of leasing would be the same, whether you were purchasing the asset by the leasing deal or acquiring the use of an asset over a short period. The changes won’t have any benefit to small businesses or to the people looking at their accounts, but it will make their accounting more difficult.”
The Finance and Leasing Association (FLA) – which claims 400,000 small firms lease equipment – said the rules should make an exception for small firms. FLA general director, Stephen Sklaroff, commented:
“Surely we should differentiate between large corporates with millions of pounds of leased equipment and small businesses that rent a fax machine and a photocopier.”
EU members do not have to follow the new rule, but the UK is expected to adopt it by 2012. The change is part of a shift from the UK accountancy system, UK Gaap, to the International Financial Reporting Standards.