When the IASB published IFRS 16 Leases, I doubt they imagined the huge debate that would ensue over something as seemingly simple as a company car. It’s pretty easy to imagine writing pages about whether a contract meets the definition of a lease or whether a lease term should include the renewal or termination option, but the lease of a company car?
It turns out that, essentially, all the fuss surrounds an argument of scope vs. definition.
Defendant number 1: IAS 19
On the one hand, we have people advocating that this is clearly a debate about the scope of the two standards.
These proponents cite IAS 19, which covers employee benefits and more specifically the treatment of short-term employee benefits, or essentially all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment.
It may seem obvious, then, that cars given as part of the employment package as a fringe benefit would fall into the category of “all forms”. And if you were still in doubt, IAS 19 is nice enough to list cars as an example of other short-term employee benefits in IAS19.5(a)(iv).
Defendant number 2: IFRS 16
Those on the IFRS 16 bench, meanwhile, advocate for ownership of company cars based on the scope of IFRS 16, which says that the standard applies to all leases (with limited exceptions as per IFRS 16.3).
They would go further to say that behind the arrangement of a company car for employee use is the lessee–lessor relationship established by the employer, who is in fact leasing the car from a provider in order to be able to provide said car to the employee.
IFRS 16 does require the additional step of considering whether this contract is, or contains, a lease. This aspect alone may warrant a separate blog post but, in short, the focus of the assessment should be on whether the company has the right to direct “how and for what purpose the asset is used” and whether it is getting, substantially, all the economic benefit from the asset.
Why does it matter?
The accounting treatment under the two standards differs greatly. If you apply IAS 19, you would recognize an expense and a liability based on a simple fringe benefit calculation. Applying IFRS 16, however, would entail bringing the car onto the books in the form of a right-of-use asset with a corresponding lease liability, the calculations of which are significantly more complex than the calculations that would be necessary under IAS 19.
What’s the verdict?
Unfortunately the jury is still out on this one. The point I want to make is that, currently, either party can be right, depending on the facts and circumstances of the specific case. Thus, careful consideration should be given to both standards until more conclusive guidance has been issued.