CONSEQUENCES OF A CHANGE IN THE ACCOUNTING RULES CONCERNING LEASE CONTRACTS IN EUROPE

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CONSEQUENCES OF A CHANGE IN THE ACCOUNTING RULES CONCERNING LEASE CONTRACTS IN EUROPE

— OPINIONS AND PREDICTIONS —

1 Introduction ... 11

2 Harmonisation procedure ... 11

2.1 Harmonisation in Europe ... 11

2.2 World-wide harmonisation... 12

3 Purpose of the study and its procedure ... 14

4 Results of the Interviews ... 15

4.1 Situation of the countries taking part in the interviews ... 15

4.2 Impact of accounting regulations and consequences of a change thereto ... 16

5 General remarks ... 17

6 Summaries of the interviews with representatives of the national associations ... 18

6.1 VERBAND ÖSTERREICHISCHER LEASING-GESELLSCHAFTEN (VÖL) Association of Austrian Leasing Companies... 18

6.1.1 Accounting for lease contracts and possible effects of a change to accounting regulations ... 18

6.1.1.1 Description of the situation ... 18

6.1.1.2 Consequences of a change in accounting regulations ... 18

6.1.1.3. Future developments... 19

6.1.2 Economic situation and circumstances of leasing... 19

6.1.3 General remarks ... 20

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6.2 L’ASSOCIATION BELGE DES ENTREPRISES DE LEASING (ABEL) BELGISCHE VERENIGING VAN LEASINGONDERNEMINGEN (BVLO)

Belgian Association of Leasing Companies ... 21

6.2.1 Accounting of lease contracts and possible effects of a change to accounting regulations... 21

6.2.1.3 Future developments... 22

6.2.2 Economic situation and circumstances of leasing ... 22

6.3 VERBAND SCHWEIZERISCHER LEASING-GESELLSCHAFTEN Swiss Association of Leasing Companies... 23

6.3.1 Accounting of lease contracts and possible effects of a change to accounting regulations... 23

6.4 BUNDESVERBAND DEUTSCHER LEASING-GESELLSCHAFTEN (BDL) German Association of Leasing Companies ... 25

6.4.1 Accounting for lease contracts and possible effects of changes to accounting regulations... 25

6.5 DANSKE FINANSIERINGSSELSKABERS FORENING Association of Danish Finance Houses... 28

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6.6 ASOCIACIÓN ESPAÑOLA DE LEASING (AEL)

Spanish Leasing Association ... 31

6.6.1 Accounting for lease contracts and possible effects of changes to accounting regulations ... 31

6.6.2 Economic situation and the leasing industry ... 32

6.7 L'ASSOCIATION FRANCAISE DES SOCIETIES FINANCIERES (ASF) French Association of Finance Companies ... 34

6.8 SUOMEN RAHOITUSYHTIÖIDEN YHDISTYS RY Finnish Finance Houses Association... 36

6.9 FINANCE AND LEASING ASSOCIATION (FLA) Finance and Leasing Association of Great Britain ... 39

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6.10 ASSOCIAZIONE ITALIANA LEASING (ASSILEA)

Italian Association of Leasing Companies ... 42

6.11 ASSOCIATION LUXEMBOURGEOISE DES SOCIETES DE LEASING Association of Leasing Companies in Luxembourg ... 44

6.12 FINANSIERINGSSELSKAPENES FORENING Association of Norwegian Finance Houses ... 47

6.13 NEDERLANDSE VERENIGING VAN LEASEMAATSCHAPPIJEN (NVL) Dutch Association of Leasing Companies ... 50

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6.14 L'ASSOCIACAO PORTUGESA DE EMPRESAS DE LEASING

(APELEASE); Portuguese Association of Leasing Companies... 53

6.14.1.1 Description of the situation... 53

6.14.1.2 Consequences of a change in accounting regulations... 53

6.14.1.3 Future developments ... 53

6.15 ASSOCIATIONS OF SWEDISH FINANCE HOUSES (AFINA) ... 55

6.15.1.1 Description of the situation... 55

6.15.1.2 Consequences of a change in accounting regulations... 55

6.15.1.3 Future developments ... 56

7 Summaries... 58

7.1 Summary in English... 58

7.2 Résumé en français ... 59

7.3 Zusammenfassung in Deutsch ... 60

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1 Introduction

The European leasing industry is highly concerned by recent developments in the accounting of lease contracts.

LEASEUROPE fears that a profound change to the principles governing the accounting of lease contracts would have serious consequences for the industry in continental Europe. The Federation is concerned that new regulations are being introduced in a hasty and inappropriate manner. LEASEUROPE looks upon leasing as a specific product which allows small and medium sized enterprises to acquire the goods necessary to conduct their business. The « leasing » product, developed in all LEASEUROPE member countries, exhibits significant differences from one country to the next but also points in common. From the civil law angle, the lessor is considered to be the owner of the leased asset. In bankruptcy he, as a rule, is entitled to retrieve his assets. Fiscally speaking, it is clear that the lessor depreciates the assets and that the leasing payments are counted as operating expenses which are in most cases 100% deductible from taxable income.

Leasing is a specific product governed by legal, fiscal and accounting provisions which are unique to each member country of LEASEUROPE. The accounting legislation prevailing in the various countries is satisfactory and there is no major reason to justify disturbing the regulations in this area.

2 Harmonisation procedure

There have already been several attempts to harmonise accounting. LEASEUROPE supports all proposals to this end, both on a European and world-wide scale, in so far as these are justified.

2.1 Harmonisation in Europe

Attempts to harmonise accounting regimes have been made on several occasions. Within this context, the 4th and 7th Directives introduced a requirement whereby those financial commitments not appearing in the balance sheet must be mentioned in the notes to the accounts, to the extent that this is useful for assessing the financial situation of the company (Article 43 N°. 7 of the 4th Directive).

LEASEUROPE took part in the discussions of the European Commission’s Accounting Advisory Forum on the accounting of lease contracts. This Forum’s conclusions found that no preferential method can be recommended in Europe (European Commission:

Accounting Advisory Forum’s paper on the accounting for lease contracts, page 7.) In Europe two main concepts applicable to the accounting of lease contracts exist. In the

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majority of continental European countries the concept of legal ownership prevails. This is where the leased asset is capitalised in the lessor’s accounts. The other concept is that of economic ownership. Generally speaking, in this case a distinction is made between operating leasing and finance leasing. In finance leasing the lessee is the economic owner of the asset and he capitalises the asset in his balance sheet. The Accounting Advisory Forum’s paper on the accounting of lease contracts, thus, proposed measures to promote the comparability of balance sheets, allowing States to choose the method best suited to their legal and fiscal environment. The Forum paper represents a statement on the accounting of lease contracts in which all European Union member countries have found a compromise. LEASEUROPE vigorously defended the position of the industry in the Forum, and succeeded in having its main arguments included in the Paper. For the LEASEUROPE members this Paper represents a basis for achieving comparability in the accounting of lease contracts internationally. The European Commission is now changing its strategy to concentrate more on harmonisation at the world-wide level (COM 95 (508)) in respect of multinational companies.

2.2 World-wide harmonisation

The International Accounting Standards Committee (IASC) is the major player in world- wide harmonisation. The IASC is a private organisation of chartered accountants founded in 1973 and which at present consists of 105 professional organisations from 79 countries. From the outset the role of the IASC has been to contribute toward the development and adoption of accounting principles which are relevant, balanced and comparable internationally, and to encourage their application in the presentation of financial statements. As there is frequently a link between accounting and taxation, the IASC is attempting both to standardise the rules on consolidated accounts in those countries which already have a regime in place and also to propose its rules in countries whose accounting regimes are in the process of being set up. Nonetheless, the IASC’s goal is to develop one regulation governing both individual and consolidated accounts which would have world-wide scope. Initially the IASC was an organisation which was more well-known amongst university circles than practising chartered accountants. Times have changed, nonetheless, and more and more international companies wish to be admitted onto the various stock exchanges throughout the world, in particular that of New York. In several countries the possibility of applying international accounting standards to the consolidated accounts already exists. In others, certain companies try to treat their consolidated accounts in accordance with local standards, while at the same time rendering them true to international standards. In doing so they hope to qualify for quotation on the different stock exchanges, amongst which New York. This is far from

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being current practice, however. At present the IASC is the key organisation in the harmonisation process and in the development of international accounting principles and regulations. In a July 1995 statement the IASC and IOSCO (International Organisation of Securities Commissions) expressed the desire to cooperate in the hope to have IAS standards recognised by stock exchanges world-wide. It is for this reason that IASC is currently revising a number of standards, one of which is IAS 17. The purpose of this work is to define the principal standards which companies must respect if they wish to be admitted onto all stock exchanges represented within the International Organisation of Securities Commissions. This procedure is explained by the fact that it is politically difficult to impose the US-GAAP regime (speech by Mr. J. MOGG, Director General of DG XV of the EU Commission, December 1994 page 6). It has to be acknowledged, however, that the American accounting system exerts a strong influence on the work of the IASC. This is particularly due to the fact that the American capital market is the largest and most interesting in the world. Furthermore, the work in question is often carried out by countries with Anglo-Saxon accounting regimes. The weak position of continental European members vis-à-vis the IASC (and consequently vis-à-vis IAS standards) makes obtaining an unanimous opinion difficult. Moreover, the European Commission does not have the power to influence this private organisation on behalf of its Member States. In 1982 the IASC published International Accounting Standard (IAS) 17 with a view to harmonising the accounting of lease contracts throughout the world.

Accounting standard IAS 17 is very similar to the regime existing in the United States. In 1994 it was revised but not modified in content. At the time of the European Commission’s Accounting Advisory Forum’s work, the German and French Associations instructed the auditing firms KPMG Deutsche Treuhand Gesellschaft Germany and Arthur Andersen France to conduct a study. KPMG, which stressed the American influence in IAS 17 (KPMG Deutsche Treuhand Gesellschaft: Leasing im Jahresabschluß, Eine gutachterliche Stellungnahme vor dem Hintergrund der Harmonisierung der Europäischen Rechnungslegung, page 65), believes that « IAS 17, referring exclusively to the Anglo-Saxon accounting regime, does not take sufficient account of the accounting principles existing in continental Europe, attempts at the harmonisation of which are thus being thwarted in basic areas ». In addition, KPMG notes that « where the leased asset is capitalised by the lessee, the criterion setting the cash value (Barwert) of leasing payments at at least 90% of the fair value of the leased asset is based exclusively on calculations and consequently is not suitable for determining if the economic substance of the leased asset is transferred or not » (page 70). KPMG finally draws the following conclusion : « to take IAS 17 as the binding principle in the accounting of leasing operations does not seem advisable » (page 71). KPMG recommends that more information is given in the notes to the accounts, the aim of this being comparability of

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balance sheets (page 114). According to the Arthur Andersen study (Guy Barbier &

Associés: Etude sur les conséquences d’une introduction des normes comptables internationales en matière de crédit-bail mobilier), the introduction of the Anglo-Saxon system would require a revision of civil law (pages 56/57) and fiscal law in particular (pages 97/98).

The aim to harmonise accounting by defining one single regulation applicable in all countries does not take into account the consequences which such a change would lead to in other areas, particularly in civil and fiscal law. According to LEASEUROPE, the discussion on the application of IAS 17 in Europe is focused on large multinational companies whereas leasing is, generally speaking, intended for small and medium sized businesses. Consequently the question must be raised of the appropriateness of complicating the situation of SMEs and of imposing the same rules on them as on multinationals for which the balance sheet has a different function. Japan, for example, which is aware of this problem has finalised an accounting regime for lease contracts which conforms with IAS but makes provision for exemptions in favour of SMEs, the typical clientele of leasing companies.

3 Purpose of the study and its procedure

The evolution of the situation has proven, however, that the industry’s concerns are justified. In accordance with proposals made during the Annual Working Meetings held in 1994 in Vienna and in 1995 in Amsterdam, LEASEUROPE highlighted the impact of accounting regulations on the leasing business. It was, furthermore, decided that the Federation could give support to its arguments by conducting a qualitative (and non- quantitative) study, the purpose of which would be to obtain the opinions and predictions of professionals in the leasing industry regarding the consequences of a change in the accounting rules for lease contracts in Europe. The aim of this study was to predict the consequences of a shift in these approaches (legal and economic) towards another type of economic approach in application in the Anglo-Saxon accounting system.

LEASEUROPE selected several European countries (France, Germany, Great Britain, Italy, Portugal, Spain, Switzerland, Austria, Luxembourg, Belgium, Netherlands, Denmark, Sweden, Norway and Finland), the National Associations of which nominated personalities with wide professional experience and in-depth knowledge of the subject, most often general managers or high level executives from very large leasing companies.

The interviews, based on a questionnaire, led to a valuable exchange of views. Country summaries were subsequently drawn up and submitted for approval to those interviewed.

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All the interviews took place between the end of September 1995 and the beginning of January 1996.

4 Results of the Interviews

4.1 Situation of the countries taking part in the interviews

Generally speaking, accounting in continental Europe is based on the legal approach (France, Italy, Switzerland, Finland, Denmark, Sweden, Norway, Finland). Germany, Austria and Luxembourg are exceptions in that they apply a specific kind of economic approach to the accounting of lease contracts. Under this latter approach economic ownership is not transferred to the lessee. As a result the lessor depreciates the asset in his balance sheet (as is the case in countries applying the principle of legal ownership).

The definition of economic ownership is strongly influenced by tax regulations, a close correlation existing between the fiscal and commercial balance sheets in these three countries. In Great Britain, Belgium and the Netherlands the accounting of lease contracts is based on the economic approach. Portugal, Spain, Sweden and Norway have adopted or are in the process of adopting this type of accounting but are as yet not obliged to apply it. In each country leasing is subject to a particular legal, accounting and taxation framework. Changes to any one of these fields will have repercussions in the other areas. This is one of the reasons why any change to the accounting rules may be expected to have a negative impact on the leasing business. These repercussions have not yet been formally discussed and it is noted that in countries which have modified their accounting regime the changes have not been translated into their civil or fiscal legislation. For example, in Great Britain commercial accounting does not determine fiscal accounting. In countries such as Portugal, Spain, and Belgium the introduction of the economic approach has had no impact on the correlation between commercial accounting and fiscal accounting. In these countries commercial accounting forms the basis for fiscal treatment. Generally speaking, however, leasing in continental Europe is not a tax driven product. The areas of business in which leasing companies are allowed practise also differ from one country to the next. Despite these differences, a number of common points can be identified as far as the major structure and function of leasing are concerned. These points may be summarised as follows : leasing is a special and essential way of financing small and medium sized enterprises (SMEs). The advantages of leasing (100% financing, flexibility, rapidity, standardisation, preservation of liquidity, pay as you earn, long term fixed rates and assets as guarantees) are particularly appropriate for meeting the needs of these companies.

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4.2 Impact of accounting regulations and consequences of a change thereto The interviews revealed that the accounting of lease contracts is a very important issue for the leasing industry in each country, independent of the accounting system in application. Generally speaking, the importance of this issue is growing with the volume of contracts. The accounting aspect is particularly important for the financing of equipment and real estate of small and medium sized businesses. The interview partners from continental Europe predicted a potential fall of up to 70% in terms of contract volume and up to 20%, perhaps even 50% in the number of the contracts were the accounting rules to change. It should also be noted, however, that in countries which follow the Anglo-Saxon concept of economic ownership for their accounting there has also been a move towards contracts which are not classified as finance leases (for accounting reasons). The interview partners were also convinced that a high percentage of investment financed by leasing could not be replaced by an alternative method of financing. Small and medium sized businesses would be denied a vital way of financing their investments. Take the example of Portugal, where on 1st January 1994 a change in the accounting regulations took place and as a result the fall in contract volume was between 20% and 30% and likewise the number of contracts declined by 10%. Also in Spain where accounting has moved towards the Anglo Saxon system, investments financed by leasing fell from 9% to 6%. In Belgium where the economic approach has been in operation for some period of time now, the share of investment financed by leasing is below the European advantage. The example of these four countries also reveals that the introduction of a new accounting system is not necessarily accompanied by changes in fiscal treatment. The former accounting system allowed leasing payments to be treated as operating costs; now leasing is virtually classed as a credit. An exception is Great Britain which has the highest percentage of investment financed by leasing in Europe (more than 30%) and where there is no correlation between the fiscal and commercial treatment. In this country, leasing is often the cheapest method of financing.

Although the situation in Portugal and Spain shows the effects of a change in these particular countries, due to the different legal, accounting and taxation frameworks and varying economic circumstances existing throughout Europe it cannot be directly concluded that leasing would also decline to the same extent in other countries.

Nevertheless, from the predictions of those interviewed, dramatic losses higher than those stated for Portugal can be expected in other countries as well. Only those countries, like Switzerland and Denmark, where the influence of accounting is not very great would be less affected. Different accounting systems are already in operation there and the relation between accounting treatment and fiscal treatment is less strict. In the Nordic countries (Sweden, Finland and Norway) there have been wide discussions on the introduction of

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the system of economic ownership. In these countries leasing has not developed on its own as in other countries -leasing companies have always offered traditional finance in parallel. Nonetheless, Norway which is currently introducing the economic approach, is looking into the possibilities of exempting SMEs which represent some 85% to 90% of companies.

5 General remarks

The interviews also demonstrated that national discussions on accounting rules are in different stages but that in each country these discussions form part of a larger debate on the harmonisation of accounting world wide as supported by the large auditing firms and multinational companies. In France and Italy for example, to facilitate the participation of multinational companies on the international capital market the accounting of lease contracts in the consolidated accounts may be carried out in accordance with the economic approach; meanwhile application of the legal approach for individual accounts is fundamental for business. Since this debate on world wide accounting is in turn influencing national discussions, the leasing business as a whole and typical clients of leasing companies are in fact being indirectly affected.

The interviews illustrated that the leasing product is changing and the service aspect becoming more and more important for clients of leasing companies. Where allowed, a slow trend is emerging whereby leasing companies are assuming part of the economic risk on the leased asset. In countries where leasing companies are prohibited from doing so, other companies which are authorised to offer such contracts to clients of leasing companies are emerging on the market.

The following pages are summaries of the interviews and give more specific details on the situation of countries which took part in the interview.

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6 Summaries of the interviews with representatives of the national associations

6.1 VERBAND ÖSTERREICHISCHER LEASING-GESELLSCHAFTEN (VÖL); Association of Austrian Leasing Companies

6.1.1 Accounting for lease contracts and possible effects of a change to accounting regulations

6.1.1.1 Description of the situation

In Austrian fiscal law assets are allocated by charging them as property. Lease contracts are drafted according to the fiscal requirements, i.e. with property remaining in the possession of the leasing companies. Only in exceptional circumstances is this system deviated from. Thus, for instance, if certain state aid is linked to a condition where the recipient of the aid is the economic owner and sole proprietor. In such cases rental contracts are used, and the rental payments are represented on the balance sheet of the renter for taxation purposes. Hire purchase contracts should be differentiated from lease contracts and at most account for a twentieth of the investment volume of lease contracts. On account of the different leasing regulations in neighbouring states, it is possible that lease contracts receive varying balance sheet treatment in cross-border transactions. In investment decision-making, balance sheet treatment of lease contracts plays an important role. In Austria, balance sheet treatment is carried out in accordance with fiscal regulations. In Austria the definitive principle is valid, i.e.

the balance sheet is definitive as far as calculation of tax is concerned. For the purposes of commercial law, leased assets remain the property of the lessor. With regard to this obligation to capitalise assets, the same rules apply in principle both to individual and to corporate agreements.

6.1.1.2 Consequences of a change in accounting regulations

The effects of any change in reporting regulations such that leased assets were to be capitalised by the lessee are very difficult to estimate. It is certain that the leasing business would in no way benefit, indeed a fall in lease contracts of up to 20% could be reckoned with.

The investment volume could fall off to an even greater extent (up to 30-40%). The reasons for a falling off of the volume of lease contracts can be deduced, among others, from the fact that the treatment of the lease contract in commercial law cannot be separated from its treatment in fiscal law. If the treatment in commercial law were to be altered it would only be possible to avoid negative effects if the fiscal and other legal framework were adapted accordingly.

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6.1.1.3. Future developments

At present there is no concrete plan to change the existing treatment of lease contracts in Austria. However the influence of the discussion of the balance sheet treatment of lease contracts is being felt at international and European level. Current capitalisation rules have in practice proved effective. Should reporting requirements be extended however, then it will suffice to include additional data in the notes to the accounts.

6.1.2 Economic situation and circumstances of leasing

Leasing transactions are as a rule only undertaken by companies specialising in the field. In the area of vehicle finance there are specialised banks which carry out leasing business alongside normal loan business. The fiscal advantages of leasing with regard to corporation tax and capital levies have disappeared in the last few years. In Austria the propensity to invest at the moment is extremely low, with the result that the banks have large liquid reserves at their disposal, so that loan financing by banks is creating heavy competition for leasing products.

Leasing's share of total investment was over 17% and has fallen off in the past few years to 13-14%. The market appears currently to be saturated. Leasing products are increasingly characterised by the development of services, which clothe the financing function (fleet management, business and technical construction management). A tendency to do more and more business with dealers in support of the distribution of various products (e.g. office machines) can be seen. These partnerships with dealers is however linked to specific credit rating problems with the lessees. Overall it is apparent that leasing in the areas of vehicles and real estate is showing signs of developing, whereas in the classical area of asset leasing (machines etc.) it is difficult to sell the product to small and medium-sized companies. This is also a function of the general economic difficulties affecting this client segment. Further to this, leasing has to a certain extent a poor public image in Austria, as time and again certain leasing companies or their latest competitors are conspicuous by their aggressive distribution methods, high profit margins and unrealistic residual values, all of which contribute to the annoyance of the customer. Furthermore, leasing is of great importance to Austrian companies due to cross-border transactions and to newly founded subsidiaries and branches in the central and East European countries. The costs are not to be considered a weakness in comparison to other forms of finance. The decision as to whether leasing represents the most efficient financing method for the lessee must be taken on the basis of the circumstances of each individual case.

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6.1.3 General remarks

The interviewees were Mr Franz Hagen, Magister, Managing Director of Raiffeisen Leasing GesmbH and Mr Thomas Kolm, Magister, Marketing Department Manager of CA-Leasing.

The interviews were held in the 49th week of the year 1995. The summary has been drafted from their statements during the interviews. Individual statements in the summary do not however necessarily represent the common opinion of the interviewees. The interviews were held in the German language.

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6.2 L’ASSOCIATION BELGE DES ENTREPRISES DE LEASING (ABEL) BELGISCHE VERENIGING VAN LEASINGONDERNEMINGEN (BVLO); Belgian Association of Leasing Companies

6.2.1 Accounting of lease contracts and possible effects of a change to accounting regulations

Since the Royal Decree of 8th October 1976, the accounting of leased assets in Belgium has been based on the principle of economic ownership. Recently the Royal Decree of 3rd December 1993 set out a new accounting qualification for leasing. From now on any operation concerning equipment goods - for which the sum of the leasing payments fully restores the capital invested by the lessor, independent of whether there is a purchase option or not (the latter no longer being a decisive element in the qualification), - or for which the amount of the purchase option, if one exists, represents a maximum 15% of the invested capital plus interest and charges, is termed to be finance leasing. Real estate leasing is governed by other provisions but the principle of economic ownership also applies. It only represents 6% of total leasing operations in Belgium. The Belgians speak about finance leasing when the sum of the leasing payments due in accordance with the contract restores the capital invested by the lessor in full. At the accounting level, the lessor enters a claim in his balance sheet and the lessee enters the asset and a debt in his accounts. In the case of operational leasing or rental, the lessor capitalises the assets and the payments appear in the profit and loss account. Some 25% of leasing company operations are operational leasing or rental agreements. This share may be higher for some companies. Furthermore, specialised rental companies are not included in the statistics. In the majority of cases leased assets (financial or operational) are either capitalised by the lessor or the lessee, but it can also happen that the asset is capitalised by neither. Generally speaking, these structures imply the existence of a third party in the contract assuming some of the risk. As a rule, there are no differences in the treatment of individual accounts and consolidated accounts. Additionally, commercial accounting determines the fiscal treatment, except as otherwise provided in fiscal law.

The introduction of the principle of economic ownership to the accounting of leasing operations in 1976 was not supported by the industry in Belgium. The decline in contracts, both in terms of number and volume, has nonetheless remained below expectations as companies prepared themselves for the situation by developing their rental business. Furthermore, the change to the system took place during a period of

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strong economic growth which allowed companies to adapt more easily. Nowadays they are making do with what they have. Nevertheless, if new changes were to be introduced and if the accounting of all lease contracts (operational or finance) was to take place in the same way as that for finance leasing today, the product would be greatly affected. It could even disappear from the market.

6.2.1.3 Future developments

There are no plans to change the accounting system in the short or medium term.

Nonetheless, the influence of American accounting and more particularly of FSAB 13 should grow in the future. This in turn is bound to provoke problems for the legal and fiscal framework of leasing in Belgium.

In Belgium leasing is only practised by specialised companies. These often belong to banks or manufacturers. Very few are independent. Bank-controlled companies are subject to prudential supervision. Investments financed by leasing have never enjoyed major fiscal advantages in Belgium. In terms of cost, credit is slightly more advantageous than leasing. Nevertheless, the latter has strong points in its favour: 100% financing,

« pay as you earn », flexibility, adaptability, simplicity, rapid conclusion of contracts, small fiscal advantages. The percentage of investment financed by leasing is lower than that of other European countries. This is due to the fact that leasing does not offer major fiscal advantages and it has never enjoyed measures favouring it above other techniques for financing the investments of small and medium sized enterprise (SME). Nonetheless, if the fiscal, legal and accounting frameworks remain unchanged leasing has good future prospects. To be noted, however, that competition between leasing companies is brisk.

Messrs. Ronnie Richardson, Managing Director of EUROLEASE, Ronny Rosiers, Head of the Leasing Department at FIDISCO, and Alain E.VERVAET, General Manager and Director of GROUPE LOCABEL took part in the discussions. Views were exchanged during the 2nd week of 1996. This document is a summary and does not necessarily reflect the views of the persons participating in the discussion as a whole. Discussions were held in French and German.

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6.3 VERBAND SCHWEIZERISCHER LEASING-GESELLSCHAFTEN Swiss Association of Leasing Companies

6.3.1 Accounting of lease contracts and possible effects of a change to accounting regulations

In Switzerland the accounting of lease contracts in the individual accounts generally follows the principle of legal ownership, although accounting based on economic ownership is not ruled out. In principle the leasing company capitalises the leased asset in its balance sheet. In this case capitalisation of the leased asset in the lessee’s balance sheet is not excluded and its capitalisation in both the balance sheets of the lessor and lessee is possible. Although there are no statistics available on accounting procedures, the share of leased assets capitalised in the lessee’s balance sheet could lie somewhere in the region of 15%. This, however, only holds true for the individual accounts. For the consolidated accounts the accounting authorities have stipulated that the lessee’s accounting of financial lease contracts must be based on the principles of economic ownership. The law on stock companies includes a rule stating that leasing obligations must be reported in the notes to the accounts. In this connection it should be noted that in Switzerland the most frequently chosen form of finance company is the joint stock company. Commercial accounting has no influence on the tax treatment of leasing. Lease payments can be deducted as operating expenses, whereas the leasing company carries out depreciation for wear and tear of the leased asset. The amount and duration of the depreciation is in many cases regulated by the Cantons. As a result there are numerous different rules. In Switzerland the leasing product is not a tax-driven product. Likewise the importance of the commercial accounting method for lease contracts is falling. As a rule, the arguments concerning cost and flexibility of lease financing are the determining factors in the conclusion of lease contracts.

The accounting of financial lease contracts based on economic ownership in the consolidated accounts, the existing practice for the accounting of lease contracts in the individual accounts, plus other experiences in the leasing business show that even today commercial accounting plays a role which, although important in isolated cases, is by no means decisive. Were the accounting of lease contracts to be based on Anglo-Saxon principles, this would in principle have no negative repercussions for the leasing business.

The fall in leasing operations would be marginal.

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There is currently no known concrete plan to alter the accounting rules for lease contracts. Nevertheless, it should be noted that the evolution of Swiss accounting is in the direction of general international and European trends which, as far as the accounting of lease contracts is concerned, favour capitalisation of the leased asset by the lessee. The argument here is that this type of accounting entails greater balance sheet clarity and improved transparency.

Generally speaking the leasing business is run by legal independent companies. The capital goods market is controlled by bank-owned leasing companies. In the car leasing market bank-owned and manufacturer-owned companies predominate. The trend is to involve leasing companies in the activities of the parent company to a greater extent than before. In recent years the leasing industry has suffered greatly from economic developments. From 1990 to 1994 the volume of capital goods leasing fell by circa 50%.

The classic market domain of leasing as an instrument for financing the movable economic goods of small and medium sized enterprises is struggling against great difficulties. The development of car leasing has been more favourable.

In the context of an unchanged legal and tax framework, the forecast for future market development in the medium term is slightly positive. Development is to a large extent dependent on the broader economic parameters. It is marked by greater customer orientation in product design. Good chances of development are seen if, when arranging contracts, increasingly « tailor-made constructions » can be offered to the client. It is in this, as well as in its basically high flexibility, that the strengths of the product are to be found. In comparison to the competing products of bank credit and supplier credit financing, the lessee’s fixed long term obligation to the lease contract is occasionally seen as a weakness.

The Association’s Executive Committee discussed the question of a change to the accounting regulations for lease contracts in the near future as well as possible qualitative and quantitative effects. The Association’s view was explained in an interview with Mr.

Hanspeter HÖGGER, Chairman of the Swiss Association of Leasing Companies. The interview was conducted in German in the 49th calendar week of 1995.

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6.4 BUNDESVERBAND DEUTSCHER LEASING-GESELLSCHAFTEN (BDL); German Association of Leasing Companies

6.4.1 Accounting for lease contracts and possible effects of changes to accounting regulations

According to German fiscal law, economic goods are assigned to the economic owner.

Only when the leasing company is the economic owner is the leasing object assigned to the accounting of the lessor. Owing to orders by the Minister of Finance it is to be determined under what conditions it can be assumed that the leasing company is the economic owner. The proportion of order-conforming lease contracts, accounted at the leasing company is almost 100 %. Only in exceptions or in the case of cross- border leasing activities are situations conceivable where the leased object is neither assigned to the lease holder or leasing company. Commercial legal accounting is highly important with respect to conclusion of lease contracts. Normally, the importance of commercial legal accounting grows proportionally with the size of the leasing business. In Germany, the importance principle applies according to which commercial accounting is the basis for tax accounting and thus influences taxation. Individual and consolidated lease contracts are treated equally.

If leased objects are to be assigned to the accounts of lease holders, highly significant and dramatic effects are expected. Lease contracts with small volumes would be effected the least because in such cases financing plays the predominant role. Leasing would become much less attractive. If accounting regulations are changed, 20 to 50 % less lease contracts would be concluded. If the volume is assigned, the effects will be even more drastic. In this case, 40 to 75 % less contracts can be expected because accounting is often decisive. Moreover, it must be taken into account that when a lease contract is concluded, the lease holder considers it a rental relationship. Accounting of lease contracts according to credit standpoints contradicts this. The leasing product would lose an essential part of its product identity.

In Germany, attempts are being made to change the accounting regulations for lease contracts within concern accounting i.e. to adapt these to IAS 17. Justifications for these changes are related to demands of the international capital market for more transparency and general harmonisation efforts. Exactly what changes will be made and when these

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will become effective could depend on the planned sale of German Telekom shares. If information obligation is increased via lease contracts, the leasing sector wants this additional information to be included in the accounting of the leasing company and given by the lease holder in notes to the accounts.

In Germany, leasing is the done almost solely by specialist companies. These companies are not involved in loan activities or sales activities. When leasing companies belong to concerns, this business activity is effected by other companies outside of the concern.

Over the last decade, leasing has developed into an independent product which differs from all other financing instruments of investment in the commercial area. The future development of leasing is considered stagnating to positive over the middle term. The condition is that civil, commercial and tax laws are not changed. The development of leasing products is generally characterised by the fact that the service part gains importance (automobile or real estate leasing are special examples for this). Leasing companies behave differently with respect to the selection, maintenance, planning and use of leased objects. Moreover, it must be noted that large project leasing is becoming a more and more pure financing business. Over the middle term, it seems that leasing companies are becoming increasingly involved in the economic risks of the leasing business, especially with respect to small and middle sized contract volumes. Financing with individual capital or loans competes with leasing. The leasing sector reacts to this competition by emphasising its strengths. But there are only a small number of specialist institutes for object financing which do not represent strong competition. The strengths of leasing are seen as flexibility, creativity, service components (everything from the same institute, advice during selection, insurance), tax-related optimisation effects (trade capital tax), pay as you earn considerations (no intermediate financing), positive effects on cash flow, fixed calculated prices, simplicity for the lease holder, improvement of accounting picture. Weaknesses of leasing products include unsatisfactory profit margins due to the competitive situation and the type of re-financing. Moreover, tax laws and civil laws on leasing are very complicated. Costs for lease holders is not a weakness of leasing.

Therefore, leasing can compete with all forms of outside financing.

The following persons were interview partners: Dipl. Kf. Klaus Feinen, Speaker for the Management of Deutsche Immobilien Leasing GmbH, Dipl. Kfm. Horst Figge, Speaker for the Board of Directors of Deutsche Leasing AG and Horst-Günther Schulz, member of management at KG Allgemeine Leasing. The interviews took place in the 37th

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calender week of 1995. The summary was prepared from statements made by interview partners. However, individual statements in the summary do not necessarily reflect the shared view of the interview partner. The interviews took place in German.

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6.5 DANSKE FINANSIERINGSSELSKABERS FORENING Association of Danish Finance Houses

Accounting principles in Denmark are governed by the Annual Accounts Act. This does not contain a special regulation on leasing, however. In general the leasing industry follows the principle of legal ownership. Consequently the leasing company capitalises the asset in its balance sheet. Generally speaking the lessee does not capitalise the lease contract, but is free to do so if he wishes. As time goes by more and more lessees are tending to do so, especially foreign companies which are owned by US or UK parent companies or stock listed companies. Official statistics do not exist, but estimates put the figure at some 16% of lessees capitalising the lease in their balance sheet. This figure compares to 2% to 3% four years ago. The lessee’s capitalisation of the asset does not exclude its capitalisation by the lessor. In Denmark there is a slow but nonetheless growing trend towards operating leasing. Here dealers or manufacturers are often involved since it can be difficult to find a party other than the lessee willing to assume a part of the economic risk of the lease contract. It should be noted that at present only a small percentage of lease contracts can actually be categorised as operating lease contracts. Accounting in Denmark has no influence on the taxation and leasing is not an especially tax-driven product. In general no difference exists between the annual accounts and the consolidated accounts. In their accounting companies can choose whether to follow the principle of economic ownership or that of legal ownership. On the other hand it is not possible to apply one principle to the individual accounts and another to the consolidated accounts. The strengths of leasing are ease of management for the client (fixed rate and lease payments deductible as company expenses), flexibility and improved liquidity. The weaknesses of the leasing product are that it is not well known and is not sufficiently recognised as a product that differs to credit. In Denmark the use of leasing as a method for financing investment is below the European average. If it turns out that more information has to be given, the industry feels that this should be provided in the notes to the accounts.

Any change whereby lease contracts would be capitalised in the lessee’s balance sheet would have a negative impact on the product. Small and medium sized enterprises (SMEs) would have more difficulties in concluding lease contracts. As the accounting

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issue is often not the main reason for concluding a lease contract, it is difficult to know what type of decrease could be expected were the accounting rules to change. It is estimated, however, that the fall could be between 10% - 20%. Some of leasing’s market share would be taken over by loan financing.

There is currently no known plan to change the accounting rules in Denmark. At present the parties to lease contracts can apply the accounting principle which is convenient for them. A trend emerging in current accounting practice is to apply regulations which are, if not already identical to, very similar to International Accounting Standards (IAS). IAS are sometimes used by companies listed on the stock exchange and this in turn influences the accounting practice of SMEs.

Bank-owned companies dominate the leasing market in Denmark. These companies often offer both leasing and loans and the part involving loans traditionally represents a significant share of the business (10-50%). The three largest leasing companies hold about 80% of the leasing market. Leasing companies are not supervised by the state, unless they are owned by a bank or another financial institution. Leasing has a positive future in Denmark. The development of the leasing product is healthy. When leasing began in the mid-70s high risk and high margins were common; in the early 80s leasing offered important tax advantages; since the 90s leasing has been a much used product for financing SMEs. The product’s earlier history sometimes constitutes an obstacle to its sale today. Denmark still has a lower share of investment made by way of leasing (7.15%) compared to the rest of Europe. Competitors include specialised equipment finance companies offering medium term finance. In recent times leasing has increasingly been used to sell products like cars and office equipment. These companies are often owned by manufacturers or dealers. It should also be noted that these companies have begun to provide additional services to their customers, such as fleet management or maintenance.

Leasing companies are increasingly offering leasing in such a way that it represents more than just a method for financing investment.

Interview partners were Messrs. Jan Lindberg, Managing Director Nordania Leasing Bankaktieselskab, Londorf, Director Nordania Leasing, Hugo Martinussen, Managing Director, A/S Jysk Leasing/Jysk Diskontering, Palle. O. Nielsen, Managing Director Unileasing A/S. The interviews were held in the 50th and 52nd calendar week. This

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document is only a summary and does not necessarily reflect the opinion of the interviewees as a whole. The interviews were conducted in English.

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6.6 ASOCIACIÓN ESPAÑOLA DE LEASING (AEL) Spanish Leasing Association

Prior to December 31, 1990, the accounting regulations of mandatory application in Spain stipulated that the recording of lease transactions had to be based on the principle of legal ownership. Under this principle, the lessee recorded the total amount of the lease payments paid as a period expense, and the leased asset could not be depreciated until exercise, if any, of the purchase option, in which case the capitalisable and depreciable value were equal to the price paid for exercise of the purchase option. This accounting treatment of lease transactions was the same as the tax treatment and, since the taxation and accounting did not differ, leasing was an instrument easily managed by SMEs, which were the main users of this investment financing instrument.

However, since January 1, 1991, the accounting system has combined the principle of legal ownership with that of economic ownership. Under this system, the lessee must record an (intangible) asset for the cash value of the leased asset if, based on the economic conditions of the contract, it can be concluded that the purchase option will foreseeably be exercised. The capitalised amount must be amortised by the lessee at rates based on the estimated useful life of the leased asset (irrespective of the contract term).

However, the previous accounting system based on the principle of legal ownership (non capitalisation of the leased asset by the lessee and expensing of the lease payments paid) can be used if the lessee will foreseeably not ultimately exercise the purchase option.

In practice, the conditions of most lease contracts in Spain require application of the accounting system based on economic ownership of the leased asset. There, the accounting treatment of the lease differs from the tax treatment and SMEs are faced with extremely complex contract management.

In 1990 (the last year of application of the previous accounting system), investment financed by leasing amounted to Ptas. 1.1 trillion (9% of total investment in Spain).

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Two years later in 1992, investment financed by leasing scarcely exceeded Ptas. 800 billion (6% of total investment in Spain). This downward trend continued in 1993 and 1994. Although it is difficult to determine exactly what portion of the fall in investment financed by leasing is attributable to the change in accounting regulations and how much is due to other factors (e.g. economic crises, changes in tax regulations, etc.), there is widespread agreement in the industry that a significant portion of the fall in leasing is due to change in accounting treatment of lease transactions. Notable in this connection is the complexity of the new accounting system (largely due to the differences between the income for accounting purposes and the income for tax purposes), which makes small companies reluctant to use this instrument.

No changes in the accounting treatment of lease transactions are expected in the medium term.

However, the Spanish Leasing Association (Asociación Española de Leasing) is lobbying for SMEs to be able to use a simpler, easier to manage accounting system (based more on the principle of legal, rather than economic, ownership). However, there are many obstacles to be surmounted before final approval of this proposal.

6.6.2 Economic situation and the leasing industry

In recent years the volume of leased assets in Spain has decreased considerably for a variety of reasons, including:

•The economic crisis.

•The aforementioned change in the accounting treatment of leasing.

•Various regulatory (e.g. the high provisions required) and tax (e.g. the treatment of leasing for VAT purposes) matters, which make the cost of leasing higher than that of other investment financing instruments.

However, this year there has been a positive trend towards higher investment financed by leasing and a general improvement in the income reported by lease entities. Contributing to this improvement was the stronger economic growth of the Spanish economy and better risk management by lease entities. Although this positive trend is expected to consolidate in the future, it is also true that there are some uncertainties, particularly due to the planned reform of the treatment of leasing for corporate income tax purposes (which might reduce the corporate income tax benefits available to lessees).

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The above description is the official opinion of the Spanish Association based on the questionnaire and developments in their country. The original language used for the purposes of this survey was English.

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6.7 L'ASSOCIATION FRANCAISE DES SOCIETIES FINANCIERES (ASF) French Association of Finance Companies

In France, posting of property rests, as in the majority of European countries, on the principle of legal ownership. The property given in leasing is always posted in the balance sheet of the lessor, who depreciates it. Double posting systems are possible for cross border leasing transactions, but they do not apply to "normal" leasing nor to the profession in general. The posting of leasing contracts in the commercial balance sheet is the determining factor for the tax treatment of these transactions. In France, it is observed that for leasing, tax law, civil law, and accountancy are closely linked. This country is very attached to this system to which a possible modification would have a direct influence on the conclusion of contracts. The real estate sector is more particularly concerned to the extent that the modification of the legislation has brought a reduction in the tax advantages - also for the lessee - for operation done by « SICOMI ». In France, there exists for consolidated accounts the possibility of applying the international accounting standards (economic method). This option is used by large companies that operate on international markets and therefore have no choice but to comply with these standards.

For leasing, which has experienced very difficult years and has certainly suffered, a modification of accounting standards would have extremely serious even catastrophic consequences. Even if it is difficult to evaluate the decline in the number and volume of leasing contracts, it can be estimated that the real estate leasing business would register a decrease of between 30% and 50%. In property leasing, some markets could fall very sharply or even disappear.

At present there is no firm project for modification of accounting standards. The National Accountancy Council, (Le Conseil National de la Comptabilité), consultative body for accountancy regulation and which comprises government representatives, economists and auditors, is not considering this problem at present. But it has to be recognised that the large audit firms exercise pressure in favour of an accounting system closer to that of international standards, which would imply fundamental changes for the posting of leasing transactions.

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In France leasing is only practised by specialised companies. As credit institutions, the leasing companies are subject to the 1984 Banking Law. The legislation regulates the profession. It should be noted that France is one of the few countries which have a leasing regulation (moveable property and real estate). On the other hand, leasing without a purchase option is not regulated.

The leasing product is characterised by the specific laws which govern it. Moreover, a trend to extend the range of services is observed. Therefore, leasing no longer appears to be a purely financial product. The client situation is analysed in detail to offer him the form of financing best suited to his situation. At the same time, the possibilities of property management are diversified. As a result this leads to the appearance of specialist companies, belonging to leasing companies. In moveable property leasing, services are equally developed implying for the leasing companies taking risks that are no longer only financial but equally economic. The large leasing companies form their own rental companies. However, this is only feasible for some products for which the markets are significant. The competition to leasing is mainly self financing and not bank credit. The strong points of leasing are the flexibility, adaptability, medium or long term financing (real estate property), up to 100% financing, offsetting tax advantages, should the case arise, a very slight gross cost difference and accounting simplicity for the lessees.

M. François Dambrine, Chairman of UFB LOCABAIL, M. François Le Barbier, Associate Director of UFB LOCABAIL, Mr. Richard Odent, General Manager of FINABAIL and of U.I.S. were interviewed. The interviews took place in week 39 of the year. The present document is a summary and does not necessarily express an opinion shared by all the people questioned. The interviews were held in French.

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6.8 SUOMEN RAHOITUSYHTIÖIDEN YHDISTYS RY Finnish Finance Houses Association

In Finland accounting is regulated by law. The auditors are obliged to apply these regulations and although a certain degree of interpretation is permitted, the fundamental basis of accounting may not be changed. The accounting of lease contracts follows the principle of legal ownership. The leased asset is entered in the lessor’s balance sheet and the lessor is entitled to depreciate it. The lessee records the lease payments in his profit and loss account. In cross border transactions application of a different kind of accounting is possible, but these transactions are few in number and the typical clients of leasing companies such as small and mediums sized enterprises (SMEs) rarely engage in these. The lessee can deduct lease payments in full as operating expenses. In certain cases the lessee can deduct the turnover tax included in the lease payments. Leasing in Finland is not a typical tax-driven product. Nevertheless a number of tax advantages still remain in respect of company tax and stamp duty. There is a close relationship between depreciation in the fiscal accounts and in the commercial accounts. Generally there is no difference in the treatment of individual accounts and consolidated accounts. Where there are sales losses on the leased asset, however, these are shown as loan losses in the consolidated accounts while in the individual company accounts they are shown as net income from leasing operations. Due to the lack of clear tax advantages the accounting of the lease contract is very important for the leasing business. The accounting of lease contracts represents one of the product’s characteristics.

If the accounting rules were to change in Finland, this would have enormous consequences for leasing. It is difficult to estimate in terms of actual figures, but a clear drop is certain and could amount to 50% of leasing volumes. If changes to the accounting regulations do in fact turn out to be necessary, the leasing business as a whole would recommend that more information is given in the notes to the accounts (both by the lessee and lessor). The negative impact of a change in the accounting rules would be magnified through its detrimental effect on taxation.

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The general opinion of the leasing industry in Finland has been that there will be no

« national solutions » i.e. changes to accounting rules similar to IAS 17, independent of international harmonisation trends. That was the opinion until some advance information was obtained on the report of the state committee appointed to amend the Bookkeeping Act. In this report, neither published nor available to the public yet, the committee suggests that a change to a regulation similar to IAS 17 would seem to be appropriate.

This committee will present its report in March 1996 and no details will be available prior to this. It is still too early to say whether this proposal represents the government’s reply to an ongoing discussion initiated in Finland by the international auditing companies. The argument used in favour of change is that the new regulations would mean that the true and fair view principle would have to be applied to the balance sheet. Those in favour also argue that change is necessary if Finland is to correctly apply European regulations.

The idea of creating another committee which would have dealt with the depreciation of assets in such a way that it would have been unfavourable to the leasing industry has been put back.

The largest share of the leasing business in Finland is handled by leasing companies, which are recognised as financial institutions. Ordinarily they offer leasing and other traditional kinds of financial instruments to clients. Leasing companies are themselves only involved in selling businesses when clients are in economic difficulties, such as bankruptcy. In Finland some manufacturer owned leasing companies exist which form part of the distribution chain for the companies’ manufactured products. In contrast there is not much evidence of leasing companies becoming involved in the distribution of vendor products. SMEs use leasing especially. Leasing is not a tax-driven product in Finland and is generally speaking no cheaper but neither more expensive than the traditional instruments for financing investments. The strengths of leasing are its flexibility, 100% financing and small tax advantages such as those mentioned above.

Leasing represents an easy option for SMEs. The weakness is the lack of awareness on the part of the people about the product’s advantages. Traditionally many people prefer to buy and own assets rather than lease them. This is one reason explaining why the share of investment made via leasing is below the European average. If the legal, fiscal and accounting framework does not change, the future evolution of leasing will probably be very positive. Pointing towards this prediction are the recent leasing statistics.

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The Finnish Finance Houses Association has discussed the developments and the importance of the accounting of lease contracts for the leasing business. Their conclusions were reported by Messrs. Lennart Ahlblad, Director PSP-Finance Ltd and Juuso Jokela, Secretary General Suomen Rahoitusyhtiöiden Yhdistys Ry. The interviews were held in the 48th calendar week. The present document is a summary made by LEASEUROPE and does not necessarily reflect the opinions of the above people who reported on the conclusions of the Finnish Association’s discussions.

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6.9 FINANCE AND LEASING ASSOCIATION (FLA) Finance and Leasing Association of Great Britain

Commercial accounting in the UK follows the principle of economic ownership. Finance leases are thus capitalised by the lessee and operating leases by the lessor. Under certain circumstances in the UK accounting system the leased asset may end up being capitalised neither by the lessee nor by the lessor. This situation does not occur very often, but is not impossible. The commercial balance sheet is not used as a basis for the fiscal treatment of lease contracts. The fiscal authorities apply the principle of legal ownership for tax purposes. The accounting of lease contracts plays an important, often a fundamental role in the client’s decision to use leasing, and especially which kind of lease contract is to be used to finance his assets. The importance of this role increases proportionally with the contract volume and the significance of the contract for the company. For small ticket operations accounting is less important. An excemption to this are lease contracts concluded with certain public institutions, where for budgetary reasons off balance-sheet financing represents the best solution. In general English leasing companies pay close attention to coming up with proposals which best suit the client’s needs. These proposals take account of the client’s wishes regarding the accounting of contracts amongst other things. Finding the best way to satisfy a client’s needs forms part of the leasing company’s strategy and varies from one company to the next. The ratio between finance and operating leasing is difficult to estimate. Generally speaking companies which are typically active in the big ticket market have only a small number of operating leases. In other companies up to 20% of volume may consist of operating leases. Operating leasing is tending to increase, slowly but surely in all markets. Generally there is no difference between the treatment of individual and consolidated accounts.

In the UK the quota of investment financed by leasing is high. A dramatic change to this situation is not expected in the near future.

At present no fundamental changes are planned for the accounting of lease contracts. The changes which have recently taken place are intended to provide analysts and share holders with more information on companies and lease contracts, which is not always in