An update to the accounting standards is designed to bring more transparency, but a bigger change awaits
In February of this year, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) intended to improve financial reporting about leasing transactions. The ASU will affect all companies that engage in leasing activity, including those in transportation. It requires companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by lease contracts.
Today, a leased asset and lease liability are off-balance sheets. When the Update comes into effect, the company will have to record any leased asset or obligation with a greater term than 12 months. It hopes to clarify accounting and give a more accurate picture of the long-term financial obligations.
PWC highlighted the key areas where this could impact your business. First is losing the benefit of off-balance-sheet financing for operating leases. Second, all outstanding leases will now come on the balance sheet, and third, the new assets recognized for operating leases will change companies’ book/tax difference computations. The full detailed report is available on PWC’s website.
Digitalisation of accounting methods is immature compared to other industries where technology has caused extensive disruption. One of the main reasons for this is the level of high regulation validity and integrity in accounting practices. As a result, it remains a heavily labor-intensive process, however, blockchain could hold the answer.
Blockchain allows consumers and suppliers to connect directly, removing the need for a third party. Using cryptography to keep exchanges secure, blockchain provides a decentralized database, or digital ledger, of transactions that every user in the network can see.
Trust, Transparency, Security, and Speed are Key Advantages
A key benefit of a blockchain network is that it establishes a shared, secure record of information where each piece of information can be verified, offering a highly integrated data chain:
- Trust. It allows users to verify transactions without the need of a third party, in turn, this will reduce transaction costs overall.
- Greater transparency. The distributed ledger gives you complete autonomy over the information and transaction history with any changes are tracked and can be seen by all users.
- Security. The digitally shared ledger is updated and validated with each transaction, resulting in a secure, permanently recorded exchange
- Speed. Unlike before when you had to wait a number of days for a transaction to be verified by a third party, it can be done almost simultaneously.
Blockchain as a Smart Instrument
Smart contracts are arguably the most valuable feature of blockchain technology, with the potential to digitize a number of the processes for contracted agreements.
A recent pilot program between DocuSign and Visa used blockchain to introduce greater speed and automation to the car-leasing process. Ron Hirson, head of product at DocuSign, tells RTInsights: “With smart contracts, we are able to create self-executing contractual states, stored on the blockchain as a public ledger, which can act based on information or events from other systems, while keeping the data durable and reliable. The shared ledger can record signatures and agreements that can be validated on the blockchain. Smart contracts like this could be used in financial services, the public sector, healthcare, or legal proceedings”
Given the characteristics of blockchain, it is likely that new practices will emerge as a result. Take, for example, innovative collaborations where blockchain is being used to track and share information, IBM has teamed up with large food suppliers to track contaminants in the global supply chain. Such applications also apply to the freight industry; business transactions surrounding the shipment of freight are likely to become automated using blockchain-based technology.
Smart leases are another emerging entry. Deloitte’s new report lays focus on the use of blockchain in the real estate industry and, in particular, how the use of blockchain will revolutionize the leasing market. The report explains a number of key opportunities with blockchain technology. To drive efficiency and accuracy in the due diligence process, enable easier, transparent, and efficient management of property and cash flows, enhance data quality and also enable real-time recording and retrieval.
Blockchain offers a number of opportunities within freight management, likely to drive efficiency and move toward more efficient cash management. Pay per mile insurance coverage is a new concept that has gained attention (See Metromile); when it comes to fleet management, benefits from the accuracy of pay per mile structures could emerge.
Take, for example, OEMs leasing vehicles out to fleets and charging them on a per mile basis rather than capturing the full brunt of the up-front cost. This would stabilize the earnings of the fleet because it wouldn’t be paying for assets that are not generating revenue. Furthermore, fleet operators may be encouraged to compete on a per mile basis, increasing transparency of the competition.
It could transform the way fleets and leasing companies capture the real-time value of capital resulting in more efficient resource use for all.
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