Finance and Leasing Association 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