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Category Archives: Policies

Imminent IFRS16 Accounting Standards Will Impact Car Fleets: Make Them Work to Your Advantage

Imminent IFRS16 Accounting Standards Will Impact Car Fleets: Make Them Work to Your Advantage

The new IFRS16 accounting standard is effective from 1Jan 2019 and will affect publicly listed companies that operate a leased company car fleet. It is broad reaching legislation that fundamentally changes the way organisations report their leases, forcing them to be recognised under an on balance sheet accounting model.

Currently such leases are classified as Operating leases and are kept off balance sheet. These Operating leases’ will now only apply to leases which are 12 months or less or where there is a ‘low value’, which is generally accepted as less than $5k.

Consequently, companies who use a lease funding model to procure their car fleet are now obliged to report this information in a different, more sophisticated manner. Currently the leasing contracts can be reported on the P&L account, meaning there is no need to have such a detailed insight into the data held within each contract.

And here is the rub.

By moving the reporting to the balance sheet, companies must now have a far more robust leasing information system.

Many of our clients are working with their accountancy partners to establish a robust means of recording data on all leases throughout their business.

Our clients have the substantial challenge of understanding what specific values they need to capture in the first instance and thereafter what may change, all proving fundamental to the design and build of their ‘lease information systems’.

Discipline issues

What has taken many by surprise, is the huge variation of lease structures and reporting practices around EMEA, limiting the granularity of reporting in some cases to the lowest common denominator. It is not unusual in some less developed markets just to receive a single monthly rental figure which includes all services whereas, in others, finance and services are itemised to a granular level.

Also, what is evident, is that most businesses up to this point, have lacked discipline and structure when it comes to recording their vehicle lease contract arrangements with their suppliers.

At best, these are dispersed across the region and, at worst, contract documentation cannot be located at all.

And the retrieval of this data from across the EMEA region is perhaps the most challenging aspect of all. Communicating with sometimes more than 80 suppliers from 30 plus countries, and attempting to extract the required data in a standardised format, is no mean feat.

The idiosyncracies of vehicle leasing also add complexity to the recording and reporting process. Unlike equipment or building leases, where the rental and term remains static, vehicle rentals and end dates can change due to mileage variations. So, not only do the supply chain need to be engaged once to collect the initial data, they also need to be kept engaged so changes in rental or terms can be accurately reported.

Collecting lease data accurately and timely will be critical to the successful adoption of IFRS16 reporting. The challenge however, as we have found, is that a complex supply structure creates a complex array of data formats. And where corporates often have centralised structures with scant resource, it is very difficult to maintain dozens of supplier relationships at the right level to retrieve and manipulate the information to the right standard.

This ability to accurately collate and manage lease data is where Fleetworx clients have a substantial head start on their peers. As part of our “Fleet Category” management services, Fleetworx holds relationships with all the fleet supply chain on ours clients’ behalf. Which means we remove the pain of collecting critical contractual data and monitoring any contractual changes due to mileage variations or otherwise. Crucially, this data is also validated, cleansed if necessary and stored in Fleetworx Centrax database.

The value for our clients comes from the single report we produce which consolidates their lease data from across the EMEA region: helping them manage their “lease information systems” more closely, more accurately and less painfully.

We consider the introduction of IFRS16 an ideal opportunity for fleet owners to align their reporting systems, develop closer relationships with the fleet supply chain and gain a more thorough understanding of the fleet category cost. By its nature this then provides an excellent opportunity to deliver best practice and savings.

With support from a professional category management partner like Fleetworx, the task of developing a birds-eye view of the fleet category can be hugely simplified, whilst the rewards can be significant.

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Are you getting the best possible value from your car fleet? (part 2) – 5 more essential questions

Are you getting the best possible value from your car fleet? (part 2) – 5 more essential questions

As we learnt from part 1 in this mini-series, knowledge imbalance is a common by-product of outsourcing a company car fleet. When a company removes the internal fleet specialist and moves the responsibility to generalist stakeholders, this creates a power shift to the supply chain. As the generalists usually don’t have the benefit of previous fleet experience, the supply chain now knows more about the provision of car fleet than the company they supply. In order to redress that imbalance there are a number of questions that should be asked of the supply chain to ensure they are delivering best value. Part 1 dealt with the issue of transparency and cost control. Part 2 covers the subject of policy and best practice/value.

Remember these are all questions that you are perfectly entitled to ask.

  1. What areas of our policy would not be considered best practice?

It is important to ensure your company car benefit design is kept reflective of current market requirements. It also needs to be benchmarked to ensure it is providing a competitive framework within which to operate. Your supplier should be completely abreast of market needs and understand the compliance issues at stake. Requesting them to analyse your policies will focus attention on those areas that are potentially compromising the efficacy of the design.  

  1. Considering the mileage covered by our drivers, is our replacement strategy delivering the best value?

Many organisations operating a company car fleet do so with a replacement cycle of 3 years. This has been the norm for many years and is usually the expectation of the employee. The opportunity does exist, however, to realise some extra value from the investment in the company car fleet by reviewing the replacement cycle. Under a 3-year replacement cycle a driver with an average mileage of 20,000 miles per annum would be expected to have covered only around 60,000 miles, if not fewer, before they would change their vehicle. Indeed the average number of miles covered by business users is falling year on year, as factors such as the relative expense of travel, challenging traffic conditions and technological advances such as video conferencing all discourage travel. This reduction in the amount of miles travelled makes increasing the replacement cycle to 4 years much more attractive: less miles means less wear and tear on the vehicle. A 4-year replacement cycle is becoming increasingly popular within the UK and can deliver quite significant cost savings. Alternatively, this cost saving could be re-invested in the fleet to deliver a higher value car at the same base cost: a useful reward and retention tool in an increasingly competitive employment market. For example changing the replacement cycle from 3 to 4 years could upgrade a BMW 318i SE 4Dr Auto to a 320i SE 4Dr Auto for the same cost. This ebook is a great guide to the smart policies which can build on a replacement cycle change and deliver some real incremental change in the cars you can offer.

  1. Are the cars we are offering our employees appropriate for our industry, how do they compare with our peers and are they set at the right value?

This is a question to your suppliers that you should be asking regularly. Understanding your company car benefit in the context of your peer group is essential to developing a competitive employment proposition. Sectors such as Technology, Pharmaceuticals and Healthcare can all experience rapid growth and an increasingly competitive employment landscape. Niche providers in these sectors are known to pursue aggressive recruitment and retention models, and use company cars as an important ingredient in differentiating their position. Their company car offer will often sit in the higher percentile of the industry, making it very difficult for mid-market businesses to compete for key talent when their company car benefit is only of an average value. Therefore, knowing what you are competing against will give you the intelligence required to develop a company car benefit programme that is of value but can also act as a differentiator in an aggressive employment market. 

4.Are we using the best selection methodology to ensure that we are delivering a consistent benefit level whilst containing costs.

There are several selection methods for allocating company cars. It is very important that the chosen selection method reflects the objectives of the business and delivers vehicles which are right for your fleet. A common approach is using rental bands. These can be based on basic rental or effective rental, which includes non-recoverable VAT. Some companies also use a benchmarking approach, where a benchmark vehicle is chosen for each band and others cars within that band need to be similar. Although these allow a basic comparison of the vehicle cost and help create vehicle bands, they do not accurately illustrate the total costs of running that vehicle. An increasingly popular approach for vehicle selection is the Total Cost of Ownership (TCO) method. TCO ensures that all fixed and variable costs associated with that vehicle are considered when making the selection. Costs such as fuel, insurance ,non-recoverable VAT and employers NI are added to the rental costs to determine the total cost of running each vehicle. The addition of fuel to the calculation means TCO takes into account the fuel efficiency of the vehicle. Whilst the CO2 emissions drive the corporate and benefit-in-kind tax efficiency of the vehicle, making more fuel efficient cars an attractive option for both the company and the employee.

The nature of the TCO selection method, means the least costly vehicle choice is much easier to illustrate. This helps a company manage their fleet costs much more closely. It can also highlight fuel-efficient premium models as having a lower cost than averagely efficient volume models: allowing a more attractive company car policy at a lower cost to the company. 

  1. Is the car selection policy appropriate to brand image, whilst still allowing suitable reallocation?

Company car allocation policy can be varied, ranging from free choice to no choice. The most popular policy is usually somewhere in the middle ground, the offer of choice from a designated range. The benefit of this is that the cost can be controlled much more tightly and the TCO of each vehicle can be budgeted more effectively. A broad range can usually satisfy the aspirations of an employee, but offering a range that is too broad can lead to fewer manufacturer discounts, and consequently a more expensive program. It can also lead to re-allocation challenges when a free-choice vehicle or a vehicle chosen from the margins of a broad selection policy needs to be re-distributed among the team. Not everyone would be comfortable in a 2-seater sports vehicle, running 25mpg!

Correct policy construction is an essential part of negotiating an appropriate supply structure. Whilst challenging your supply chain may be necessary to ensure the policies are working to the advantage of you and your drivers. The next and final part of this mini-series will look at management information and how this helps with strategic choice.

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Electric cars in company car fleets – questions you need to ask.

Electric cars in company car fleets – questions you need to ask.

Recent news emerged from Denmark that sales of EV were down 60% against Q1 2016. Denmark is the only EU country that has experienced a drop in EV sales, indeed data from the European Automobile Manufacturers Association (ACEA) shows that sales of electric vehicles rose by 30% across the European Union and by as much as 80% in Germany and Sweden. So, why such a significant drop in Denmark? Well, it appears that Denmark has decided to phase-out the tax-breaks for electric cars and plug-in hybrids, seemingly making electric far less appealing to drivers when faced with the full price tag.

This does bring into sharp focus the actual market appeal of driving an electric vehicle. What is the market saying about the desirability of the product if sales drop so rapidly once a financial incentive is removed? Is the product actually delivering the driving experience that drivers desire, and how does this driving experience translate to the practicalities of driving for work?

The introduction to a car fleet of electric and hybrid cars needs to be a considered strategic choice. To ensure that it is right for your business it is important to consider the following

Company Objectives
It is important to consider how the fleet strategy complements the corporate objectives of the business. If the business has a robust Corporate Social Responsibility program, and a commitment to managing carbon footprint, then clearly the appetite for ultra low emissions vehicles will be strong. If the business is not particularly carbon intense then the benefits of operating a low carbon car fleet may not be as appealing.

Tax Position
Currently, the UK government offers grants of up to £4,500 for pure electric vehicles such as BMW i3, Ford Focus Electric and Mercedes-Benz B-Class Electric Drive, and up to £2,500 for low emitting hybrid vehicles such as BMW225xe, Mitsubishi Outlander and Toyota Prius Plug-in. These are powerful incentives and produce attractive options for fleet drivers, however, how long will these fiscal incentives be in play? Is the Danish example the thin edge of the wedge toward a looser attitude toward the value of electric and/or hybrid vehicles?

Technology
In early adoption markets such as EV, technology changes at a pace. It will be prudent to consider the impact of rapidly advancing technologies and the pace with which early models become obsolete. This uncertainty can have an impact on the re-marketing opportunities, as lack of knowledge in the marketplace and swift technological advances can impact the residual value; which needs to be considered when calculating the TCO.

Driver Behaviour
Like it or not, people can be lazy and will often take the route of least possible resistance (no pun intended!). Unfortunately, this means the frequent charge of an electric/hybrid vehicle will often be considered a resistance and be side-stepped. Although this is not very productive for a pure electric vehicle, a hybrid can run on fossil fuel alone, so side-stepping the charge does not cause the driver any real issues. Indeed, experience tells of charging cables remaining in their plastic wrap for the life-cycle of the car. However, depending on the fuel strategy of the business, the failure to charge the vehicle will have implications. If a driver is less than enthusiastic about recharging the battery of a hybrid vehicle then it will operate the petrol engine on all journies. As is known, this is not as effective as a conventional diesel engine. If a company covers all fuel costs (personal and business) then poor charging discipline will result in increased fuel costs, whilst a company with generous mileage rates of 45p per mile can work in the favour of a committed electric vehicle user who may cover many of their business miles at no cost to them. Introducing electric vehicles to fleet also carry substantial infrastructure investment in work-place charging points, so to generate an ROI on an electric strategy, driver charging discipline is a must.

It may be prudent to consider an electric/plug-in mileage rate that reflects the actual cost of running the vehicle. This will reduce the temptation for drivers to consider the mileage rate as an additional income and can also help offset the capital investment in charging infrastructure.

Health and Safety
Introducing an electric option to the car fleet list will require some planning around charging provision, especially at home. Not all homes are suited to safe and practical charging. If a car has on-street parking then this poses a risk and safe cabling must be considered. The company must also consider the suitability of the charging solution being used to ensure it does not damage their asset.

Range
One of the challenges to all users of electric vehicles is range anxiety. Although great inroads have been made around improving range, the newest EV’s still only provide a real-world range of 125-150 miles, which although is commute-sufficient, does not inspire confidence that a round trip to a client meeting or a day in the field would be completed before the need to sit out for 30 mins or so whilst the battery recharged.  The benefit of a hybrid, however, is the removal of range anxiety and the ability to operate electric for part of a journey which does help drive down emissions down, producing better CO figures.

Image
One characteristic is the positive halo effect the use of electric vehicles emits to the business brand. If the business is known for its green credentials and has strong market messages based on this position, then the inclusion to a fleet of electric vehicles has obvious positive connotations.

Future proofing
We recently wrote about the impact of recent diesel regulations on fleet. Noting particularly how shorter inner-city journeys may be compromised should the diesel regs be extended to inner-city bans, as is the case in 4 major global cities. Manufacturers have responded to this by introducing electric light commercial vehicles as alternatives for inner-city driving; this tactic of moving to electric also has obvious benefits for car fleets with exposure to inner-city driving.

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