Accounting for salary sacrifice cars - IFRS 16.
UK company law recognises two financial reporting frameworks; International Financial Reporting Standards (referred to as IFRS) and UK Generally Accepted Accounting Practice (referred to as UK GAAP). This guide relates to IFRS, with IFRS 16 being the applicable accounting standard used for salary sacrifice cars. Please see our separate guide for UK GAAP.
IFRS 16
Whilst listed companies, including AIM companies, their subsidiaries and public sector organisations are required to use IFRS in the consolidated accounts they prepare for the group they may choose between IFRS and UK GAAP for their individual company accounts. Almost all other entities have a choice between preparing their accounts under IFRS or UK GAAP, with Section 20 of Financial Reporting Standard 102 applying to leased assets.
What is it
IFRS 16 represented a significant change to lease accounting, when it came into effect in January 2019, having a material impact on the financial statements of lessees of property and high-value equipment such as vehicles, because it requires the adoption of a fundamentally different approach to accounting for leases; the ‘right-of-use’ model.
Under IFRS 16, where an entity has control over, or the right to use, an asset it is hiring, it is classified as a lease for accounting purposes, with the lease payments being recognised as a liability on the balance sheet, alongside a corresponding, and usually equal, asset representing the right-of-use of the leased asset.
IFRS 16 therefore prevents significant financial liabilities being held off-balance sheet, to ensure that entities report information for all of their leased assets in a standardised way in order to bring transparency and consistency to accounting for their leased assets and liabilities.
Balance sheet
As the value of the right-of-use asset is the same as the value of the liability to future lease payments at the outset of the lease, the asset and liability initially recognised within the balance sheet should be the same, so there should be no immediate impact on net assets.
The value recognised is the present value of the total rentals over the term; a discounted cash flow calculation must therefore be undertaken, using either the implicit interest rate in the lease, or if that can't be determined, the entity’s incremental borrowing rate.
Lessees must show their right-of-use asset as a fixed asset, with total payments due within the next 12 months included within current liabilities and the remaining lease payments shown as creditors due after more than 1 year.
What is it
IFRS 16 represented a significant change to lease accounting, when it came into effect in January 2019, having a material impact on the financial statements of lessees of property and high-value equipment such as vehicles, because it requires the adoption of a fundamentally different approach to accounting for leases; the ‘right-of-use’ model.
Under IFRS 16, where an entity has control over, or the right to use, an asset it is hiring, it is classified as a lease for accounting purposes, with the lease payments being recognised as a liability on the balance sheet, alongside a corresponding, and usually equal, asset representing the right-of-use of the leased asset.
IFRS 16 therefore prevents significant financial liabilities being held off-balance sheet, to ensure that entities report information for all of their leased assets in a standardised way in order to bring transparency and consistency to accounting for their leased assets and liabilities.
How should it be applied by businesses for financial reporting?
For salary sacrifice, IFRS 16 works in a similar way to the reporting of other non-financial assets (such as property, plant and equipment) and financial liabilities:
As with other changes to accounting standards, entities adopting IFRS 16 for the first time will need to produce a set of comparative accounts for the prior year.
What’s Included?
Scheme design
Using a high-level fact find, a detailed policy questionnaire and our market leading experience we can help you design your scheme and support your customers as they implement salary sacrifice.
Marketing
Our factsheets and sample quotes will help you demonstrate the benefits of salary sacrifice and promote the savings in a simple, yet compelling way.
Documentation
Our legally reviewed salary sacrifice agreement, comprehensive set of frequently asked questions and detailed payroll guide will reassure your customers they’ve made the right choice.
Technical support
Our technical support, based on our longstanding tax and accounting experience, will help you to set up your customer’s schemes quickly and efficiently.
Calculations
Select our spreadsheet based solution or our sophisticated online quotation platform we’ll help you prepare salary sacrifice quotations for employees and employers reflecting the latest tax legislation.
Motor / ET insurance
We will guide you through the options available and, working with specialist partners, enable your customers can make informed choices to underpin their scheme.
The benefits
What’s in it for you?
Entry to a fast-moving, growing market with a fully fledged salary sacrifice offering.
Comprehensive staff training backed up by our technical support giving you the confidence to deliver.
Diversification of your business in a difficult economic climate and protect relationships with customers.
Benefits for your clients
Enhanced staff retention at no extra cost, with an opportunity for you to save money.
NIC savings of up to 14% on each salary sacrifice car, lower fuel costs, increased fleet reliability and reduced grey fleet risk.
Enhanced green credentials and a lower carbon footprint.
Savings for the drivers
Between 30% to 60%, income tax and NIC savings available on the salary sacrifice.
Additional VAT savings compared with a personal lease.
A brand new plug-in hybrid or electric car, with no residual value or credit risk, paid for monthly via payroll with no deposit required.
We’re ready to talk...
Contact us to find out how we can help you and your team to deliver salary sacrifice successfully.
Running Gensen Salary Sacrifice software will require an exported ratebook.
Customisations and integrations with APIs are available.
Our Gensen licence includes CAP data and Imagin Studio images.
For full specification and guidance, contact us today.