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Important Comments
I. Request concerning the proposed new standard in general
1.1

The lessee accounting proposed in the discussion paper is extremely complicated. As
such, the introduction of the new standard as currently proposed would sharply decrease
the use of leases by enterprises and have a significant impact on the economic growth of
all countries. Achieving the objective of the lease accounting project would lose its
relevance unless lease transactions continue to be used worldwide. The JLA strongly
requests the IASB and the FASB (hereinafter referred to as the “boards”) to focus theirefforts on resolving issues surrounding the off-balance accounting for operating leases
and to develop a simpler new standard that takes into consideration the administrative
cost borne by the preparers of financial statements.

II. Scope of the new standard and definitions (Chapter 2)
2.1

Leases to which accounting for the right-of-use asset is applied include a number ofleases with characteristics that are distinctly different from those of “leases that are in
substance purchases,” and there are among them certain leases with strong service
characteristics. As assets under “leases that are in substance purchases” are notright-of-use assets, it is advisable to define “leases that are in substance purchases” tomake a distinction between such leases and leases other than such leases (refer toComment 3).

2.2

In order to clarify that the proposed accounting for the right-of-use asset and theobligation to pay rentals is not applied to leases whose non-cancelable period is notprescribed under the lease contract, but is applied only to “lease transactions whose
non-cancelable period is prescribed under the lease contract,” i.e. non-cancelable leases,
the definition of “non-cancelable lease” should be provided. In addition, as theaccounting for leases other than non-cancelable leases (i.e. cancelable lease) is not
explicitly prescribed, the accounting treatment that is currently applied to operatingleases should be prescribed for such leases (refer to Comment 4).

2.3

As assets under non-core asset leases and short-term leases are often insignificant assets
to the lessee, the accounting treatment that is currently applied to operating leases should
also be applied to such leases (refer to Comments 5 and 6).

III. Approach to lessee accounting, initial measurement, and subsequent measurement(Chapters 3, 4, and 5)
3.1

The JLA agrees with the proposed approach to lessee accounting that would require thelessee to recognize a right-of-use asset and a liability for its obligation to pay rentals withrespect to non-cancelable leases. However, the approach to initial and subsequent
measurement proposal by the boards is nearly the same as the accounting model
currently applied to finance leases. As such, it is not appropriate to apply it to all leases.
The JLA contends that uniform and mandatory application of such approach to all typesof leases would rather cause new problems (refer to Comments 8 and 10).

3.2

It is the view of the JLA that the acquisition of a right-of-use asset is not the acquisitionof a physical asset and there are certain leases with strong service characteristics among1

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those leases that are currently classified as operating leases (e.g. a lease whose term isshorter than the economic life of the leased asset) and that it is appropriate to recognize aright-of-use asset for such leases with strong service characteristics at the sum of thelease payments payable by the lessee over the lease term. The JLA therefore believes that,similar to the existing standards, the new standard should provide criteria to make a
distinction between leases with strong service characteristics and others and, with respect
to the former, permit the lessee to initially recognize a right-of-use asset and a liability
for its obligation to pay rentals at the sum of the lease payments.
Furthermore, the JLA believes that the new standard should permit the lessee to initiallyrecognize a right-of-use asset and a liability for its obligation to pay rentals at the sum of
the lease payments also with respect to core asset leases, in consideration of theadministrative cost borne by the lessee, if, for example, the ratio of the leased assets
under such leases to the total property, plant and equipment and intangible fixed assets ofthe company is small (refer to Comment 11).
3.3

If the lessee is permitted to initially recognize a right-of-use asset and a liability for its
obligation to pay rentals at the sum of the lease payments with respect to leases withstrong service characteristics, the lessee should amortize the right-of-use asset by theamount of the lease payments over the lease term and reduce the corresponding liabilityby the amount corresponding to the satisfaction of the obligation to pay rentals (i.e. theamount of lease payments). Consequently, the lessee would recognize the amount oflease payments as amortization of the right-of-asset and reduction of the corresponding
liability (refer to Comment 12).

3.4

Although the JLA agrees with the linked approach proposed by some board members inthat under such approach the amount of expenses to be recognized in the income
statement would be the same as under the approach proposed by the JLA, given theadministrative cost borne by the lessee, the JLA expects that the simpler accounting
model proposed by the JLA would be more readily accepted by the lessee than the linked
approach (refer to Comment 18).

3.5

Although it is acknowledged by the boards in their proposal regarding amortization that
there is a difference in the amortization period between the asset under “leases that are in
substance purchases” and the right-of-use asset, the amortization method is not clearlyaddressed. As it is appropriate to account for the asset under “leases that are in substancepurchases” as a purchase of a physical asset rather than a purchase of right to use an
asset, the boards should clearly prescribe, by applying the existing standards, that thelessee should amortize the leased asset under “leases that are in substance purchases”
over its economic life based on the same amortization method as is applied to fixed
assets owned by the lessee (refer to Comment 14).

IV. Options, contingent rentals, and residual value guarantee (Chapters 6 and 7)
4.1

The JLA believes that uncertain factors such as options should not be considered in therecognition of assets and liabilities and the lessee should initially measure an obligation
to pay rentals and a right-of-use asset based on the contractual lease term unless, as
proposed by some board members, the option is priced to provide a significant incentive2

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to exercise the option (the “bargain purchase option” prescribed by the existing standards
would be an example of such option). Therefore, the JLA believes that the lessee should
not be required to reassess the lease term at each reporting date (refer to Comments 19,
20, and 21).
4.2

Neither of the proposals by the IASB and the FASB on recognition of contingent rentals
can be implemented in actual practice. As already argued in relation to options, uncertain
factors such as contingent rentals should not be considered in the recognition of assets
and liabilities. Therefore, the JLA believes that unless the amount of the contingent
rentals can be reasonably determined, contingent rentals should not be included in theinitial measurement of an obligation to pay rentals and remeasurement of the obligation
to pay rentals should also not be required (refer to Comment 22).

4.3

Neither of the proposals by the IASB and the FASB on recognition of residual value
guarantee can be implemented in actual practice. As already argued in relation to options,
uncertain factors such as residual value guarantee should not be considered in therecognition of assets and liabilities. Therefore, the amount of residual value guarantee
should not be included in the initial measurement of an obligation to pay rentals. If an
approach that includes the amount of residual value guarantee in the initial measurement
is adopted, the only approach that can be implemented in actual practice would be theone that includes in the initial measurement the maximum amount guaranteed underresidual value guarantee (refer to Comments 23 and 24).

V. Presentation (Chapter 8)
5.1

With regard to the presentation of right-of-use assets, assets under “leases that are in
substance purchases” should be presented in accordance with the nature of theunderlying leased properties and other right-of-use assets should be presented as aseparate line-item “leased assets” within the Property, Plant and Equipment section or
the Intangible Fixed Asset section (refer to Comment 26).

VI. Lessor accounting (Chapter 10)
6.1

The JLA strongly suggests that when a new standard is issued, both lessee accounting
and lessor accounting should be included. If the accounting standard for lessee
accounting is issued prior to the issuance of the accounting standard for lessor
accounting, not only there will be problems surrounding subleases, but also there could
be a situation in which further revisions to lessee accounting are required as thedevelopment of lessor accounting progresses. Consequently, confusion and concerns
would arise not only among the lessors, but also among the lessees. If enterprises thatwill adopt IFRS for the first time during or after 2011 are to be considered, the effective
date of the new standard should be determined after careful consideration only when a
new accounting standard encompassing both lessee accounting and lessor accounting isready for issuance. As the boards are developing a new standard under a definitive policy
aimed at improving the lease accounting standard, they should not permit inconsistentaccounting treatments even for a limited period (refer to Comment 29).

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Responses to questions
Chapter 2: Scope of lease accounting standard
Response to Question 1
1.

The JLA agrees with the tentative decision by the boards to base the scope of the
proposed new lease accounting standard on the scope of the existing lease accounting
standards. However, the JLA also proposes the following:

2.

With regard to the definition of lease contract, the criteria for determining whether thecontract contains a lease should be further clarified.

3.

Leases to which accounting for the right-of-use asset is applied include a number ofleases with characteristics that are distinctly different from those of “leases that are in
substance purchases,” and there are among them certain leases with strong service
characteristics. As assets under “leases that are in substance purchases” are not right-of-use
assets, the JLA believes that, at least for purposes of subsequent measurement orpresentation, “leases that are in substance purchases” and leases other than “leases that arein substance purchases” should be distinguished (refer to Comments 14 and 26). Therefore,
it is advisable that the new standard provide the definition of “leases that are in substancepurchases” to make a distinction between such leases and leases other than such leases.
“Leases that are in substance purchases” refer to leases that clearly transfer the ownershipof the leased asset to the lessee as indicated by their defining characteristics listed in thefollowing (a) through (c) (i.e. those leases satisfying paragraph 10(a), (b), and (e) of theexisting IAS 17). As such, leases whose term extends over most of the economic life of theleased asset (those leases satisfying paragraph 10(c) of the existing IAS 17) should not be
included in “leases that are in substance purchases” unless it is apparent that the ownershipof the asset will be transferred to the lessee.
(a) The terms of the lease contract require that ownership of the leased asset will betransferred to the lessee at the expiration of, or during, the lease term;(b) The terms of the lease contract grant the lessee a right to purchase the leased asset, atthe expiration of, or during, the lease term, for a payment of a nominal amount, or an
amount that is substantially lower than the expected fair value of the leased asset at thetime of exercising the right (hereinafter collectively referred to as a “bargain purchase
option”), and there is a reasonable expectation at the inception of the lease that theexercise of the right is certain; and(c) It is apparent that the lessee alone can use the leased asset for the entirety of its useful
economic life due to the fact that the asset is custom-made or custom-built to suit the
specific

needs

of

the

lessee,

such

as

the

purpose

of

the

usage

(custom-made/custom-build leased asset), and consequently the lessor is unlikely to beable to sell or lease the asset to any other party if it were to be returned to the lessor.
4.

In order to clarify that the proposed accounting for the right-of-use asset and theobligation to pay rentals is not applied to leases whose non-cancelable period is notprescribed under the lease contract, but is applied only to “lease transactions whose
non-cancelable period is prescribed under the lease contract,” i.e. non-cancelable leases, the4

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definition of “non-cancelable lease” should be provided.
“Non-cancelable lease” can be defined as a lease that cannot be cancelled by either of theparties to the lease contract during the whole or part of the lease term.
In addition, as the accounting for leases other than non-cancelable leases (i.e. cancelable
lease) is not explicitly prescribed, the accounting treatment that is currently applied tooperating leases should be prescribed for such leases.
Response to Question 2
5.

Based on the understanding that assets under non-core asset leases and short-term leases
that are non-cancelable are insignificant assets to the lessee, the accounting treatment that iscurrently applied to operating leases should also be applied to such leases.

6.

The JLA understands that non-core assets are assets that are insignificant to the lessee inview of the business operations of the lessee. Whether an asset is deemed to be a core asset
or a non-core asset depends on the business operations of the company. Therefore, it isnecessary to prescribe a provision that permits the accounting treatment that is currently
applied to operating lease to be applied to leased assets that are judged to be insignificant by
the company.
As the cost for the recognition and measurement of rights and obligations arising fromshort-term leases whose term is equal to or less than one year generally exceeds thecorresponding benefit, and the assets under such leases are often insignificant assets to thelessee, it is also necessary to prescribe a provision that permits the accounting treatment thatis currently applied to operating lease to be applied to leases equal to or less than one year.
Unless there is a bright line criterion such as the one discussed above, the accounting
requiring the recognition of a right-of-use asset and an obligation to pay rentals would beapplied, for example, to non-cancelable leases whose lease term is extremely short (e.g. a
few days), which would make the practical application of the standard extremely difficult.

Chapter 3: Approach to lessee accounting
Response to Question 3
7.

The JLA agrees with the boards’ analysis of the rights and obligations, and assets andliabilities arising in a simple lease contract.

Response to Question 4
8.

The JLA agrees with the proposed approach to lessee accounting that would require thelessee to recognize a right-of-use asset and an obligation to pay rentals. However, a uniform
application of the same accounting requirements to all types of leases would create
problems and there are certain leases for which accounting based on the sum of the lease
payments would be more appropriate. Therefore, the JLA proposes a different approach tomeasurement (refer to Comments 10, 11, and 12).

Response to Question 5
9.

The JLA does not support the approach proposed by the boards. It is not appropriate to5

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record an amount that includes an uncertain amount as an asset or liability, as it could leadto misleading presentation of the financial condition of the company. Furthermore, although
the proposed approach appears, at first glance, to be simple enough for the lessee to
implement, as the boards require reassessment of the lease term and the obligation to pay
rentals, it would create an excessive burden for the lessee (refer to Comments 19 through24).
Chapter 4: Initial measurement, Chapter 5: Subsequent measurement
Response to Question 6 to 8
10.

The approach to initial and subsequent measurements of the right-of-use asset andobligation to pay rentals proposal by the boards is nearly the same as the accounting
currently applied to finance leases. As such, it is not appropriate to apply it to all leases.
The JLA believes that the accounting currently applied to finance leases should bemaintained and a new accounting that requires the sum of the lease payments to berecognized should be prescribed by the new standard from the perspective of recognition of
the right-of-use asset or reduction in the administrative cost borne by the lessee.
Granted that a new lease accounting standard is being developed based on a new conceptthat is different from the existing standards, the underlying difference in the leasecharacteristics between leases that transfer substantially all of the risks and rewards
associated with the lease to the lessee and leases other than such leases should not bedisregarded. The JLA contends that uniform and mandatory application of the approach
proposed by the boards to all types of leases would rather cause new problems. The
accounting model currently applied to finance leases is based on the similarity between theacquisition of a physical asset and the finance lease. If an accounting model, which isessentially the accounting model currently applied to finance leases, is required to be
applied under the new accounting standard to all leases encompassing various forms ofleases, the intent of such uniform application should be clearly explained.

11.

It is the view of the JLA that the acquisition of a right-of-use asset is not the acquisitionof a physical asset and there are certain leases with strong service characteristics among
those leases that are currently classified as operating leases (e.g. a lease whose term isshorter than the economic life of the leased asset) and that it is appropriate to recognize aright-of-use asset for such leases with strong service characteristics at the sum of the lease
payments payable by the lessee over the lease term.
The JLA therefore believes that, similar to the existing standards, the new standard should
provide criteria to make a distinction between leases with strong service characteristics andothers and, with respect to the former, permit the lessee to initially recognize a right-of-use
asset and a liability for its obligation to pay rentals at the sum of the lease payments.
Furthermore, the JLA believes that the new standard should permit the lessee to initiallyrecognize a right-of-use asset and a liability for its obligation to pay rentals at the sum of thelease payments also with respect to core asset leases, in consideration of the administrative
cost borne by the lessee, if, for example, the ratio of the leased assets under such leases tothe total property, plant and equipment and intangible fixed assets of the company is small.
Although the boards propose to require the lessee to distinguish payments for services

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from payments for the right to use an asset, it would often be extremely difficult for thelessee in actual practice to separate payments for services from the total lease payments andcalculate the present value of the lease payments for the right to use an asset. Therefore, also
from the practical perspective, it is desirable to initially measure the right-of-use asset andobligation to pay rentals at the sum of the lease payments.
12.

If the lessee is permitted to initially recognize a right-of-use asset and a liability for its
obligation to pay rentals at the sum of the lease payments with respect to leases with strong
service characteristics, the lessee should amortize the right-of-use asset by the amount of thelease payments over the lease term and reduce the corresponding liability by the amountcorresponding to the satisfaction of the obligation to pay rentals (i.e. the amount of lease
payments). Consequently, the lessee would recognize the amount of lease payments asamortization of the right-of-asset and reduction of the corresponding liability.
If a lessee has multiple lease contracts, the lessee may apply the accounting model
proposed by the boards to all the leases. Alternatively, the lessee may choose to apply thesimplified accounting model proposed by the JLA to all the leases if the lease term of all theleases is shorter than the economic life of the leased assets. If there are different types ofleases, the lessee may also choose to apply the most suitable accounting model dependingon the type of lease. The JLA considers that all of the above are appropriate accounting
practice and would not create any special problems in terms of the comparability,transparency, or reliability of the financial statements.

13.

The boards are proposing to initially measure the lessee’s obligation to pay rentals at thepresent value of the lease payments discounted using the lessee’s incremental borrowing rate.
However, under leases that transfer substantially all of the risks and rewards associated withthe lease to the lessee, such as the financing lease under the existing accounting standards,
the acquisition cost of the leased asset is sometimes lower than the present value of the lease
payments. Therefore, the boards should provide an accounting option that permits the lessee
to recognize a right-of-use asset and a liability for its obligation at the acquisition cost of theleased asset in such cases provided that the acquisition cost of the leased assets to the lessor
is known to the lessee.

14.

Although it is acknowledged by the boards in their proposal regarding amortization that
there is a difference in the amortization period between the asset under “leases that are in
substance purchases” and the right-of-use asset, the amortization method is not clearlyaddressed. As it is appropriate to account for the asset under “leases that are in substancepurchases” (refer to Comment 3) as a purchase of a physical asset rather than a purchase ofright to use an asset, the boards should clearly prescribe, by applying the existing standards,
that the lessee should amortize the leased asset under “leases that are in substancepurchases” over its economic life based on the same amortization method as is applied to
fixed assets owned by the lessee.

Response to Question 915.

As the boards pointed out (DP 5.19), the disadvantages of requiring subsequent
measurement of the obligation to pay rentals at fair value outweigh the potential benefits tousers. Furthermore, as the lease payments do not generally change during the lease term
except for certain contingent rental arrangements and contractual lease payments are not7

Copyright2009 Japan Leasing Associationaffected by market conditions and other factors, it is difficult to directly observe the fairvalue of an obligation to pay rentals. Therefore, a new lease accounting standard should not
permit a lessee to elect to measure its obligation to pay rentals at fair value.
Response to Question 10
16.

Given the basic principle that the subsequent measurement is based on the amortized cost,
it is unnecessary to require the lessee to make an adjustment to its obligation to pay rentals
to reflect changes in its incremental borrowing rate. Such requirement would be an
excessive burden to the lessee and the lessee should not be required to make adjustmentsthat do not have significant implications.

Response to Question 11
17.

The JLA agrees with the decision by the boards.

Response to Question 12
18.

Although the JLA agrees with the linked approach proposed by some board members inthat under such approach the amount of expenses to be recognized in the income statement
would be the same as under the approach proposed by the JLA, given the administrative
cost borne by the lessee, the JLA expects that the simpler accounting proposed by the JLA
would be more readily accepted by the lessee than the linked approach .

Chapter 6: Leases with options
Response to Question 13 to 15
19.

The JLA does not support any of the proposals by the boards described in Question 13
and Question 14. It would be impossible to derive the most likely lease term based on“non-contractual financial factors” and “business factors” indicated in DP 6.39. Furthermore,
given the existence of other factors such as the usage status of the leased assets during thelease term (i.e. physical and economic obsolescence), financial performance of the lessee,and the economic environment that are to be considered, initial measurement based on theestimation of the likelihood of the exercise of options is inherently inappropriate. Even in asituation where there is no change in the factors discussed above during the lease term, it
would be practically impossible to determine the most likely lease term, for example, a8-year lease contract (without an option to extend) that permits cancellation any time after 5
years. If such estimation is forced, the comparability of the financial statements may beseriously impaired.

20.

Therefore, such uncertain factors should not be considered in the recognition of assets
and liabilities and the lessee should initially measure an obligation to pay rentals and aright-of-use asset based on the contractual lease term unless, as proposed by some board
members, the option is priced to provide a significant incentive to exercise the option (the“bargain purchase option” prescribed by the current standard would be an example of such
option). Consequently, The JLA believes that the lessee should initially measure an

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obligation to pay rentals and a right-of-use asset based on the contractual lease term and thatthe lessee would be able to account for such leases more appropriately if the new accounting
standard clearly and specifically prescribes the accounting treatment to be applied when theoption to extend, the option to terminate, or the option to purchase is exercised, instead ofrequiring the lessee to include the uncertain factors in the recognition of assets andliabilities.
21.

For all these reasons, the JLA does not support the approach that requires reassessment of
the lease term at each reporting date with respect to leases with options. To begin with,requiring such reassessment seems to contradict the decision by the boards to adopt anamortized cost-based approach rather than a fair value-based approach for purposes ofsubsequent measurement.

Chapter 7: Contingent rentals and residual value guarantees
Response to Question 16 to 20
22.

Neither of the proposals by the IASB and the FASB on recognition of contingent rentals
can be implemented in actual practice. As already argued in relation to options, uncertain
factors such as contingent rentals should not be considered in the recognition of assets andliabilities. Therefore, the JLA believes that unless the amount of the contingent rentals canbe reasonably determined, contingent rentals should not be included in the initial
measurement of an obligation to pay rentals. Contingent rentals can be reasonably
determined if, for lease contracts under which the lease rentals are contingent on changes ina price or other index, it is possible to calculate the total lease payments based on the priceor other index at the inception of the lease.
On these grounds, the JLA believes that remeasurement of the obligation to pay rentals
should not be required and any changes in the obligation to pay rentals under contingent
rental arrangements should be reflected in the profit and loss calculation for the period inwhich they arise.

Response to Question 21
23. As noted in DP 4.12, the lessee may have little knowledge of the residual value of the leased
asset at the end of the lease. Therefore, under either of the methods proposed by the IASB
and the FASB, it is impossible at the beginning of the lease term to estimate the amount ofresidual value guarantee at the end of the lease term. Even if such amount is estimated, it is
impossible to judge whether the estimate is appropriate.
Therefore, as already argued in relation to options, such uncertain factors should not be
considered in the recognition of assets and liabilities and the amount of residual value
guarantee should not be included in the initial measurement of an obligation to pay rentals.
If an approach that includes the amount of residual value guarantee in the initial
measurement is adopted, the only approach that can be implemented in actual practicewould be the one that includes in the initial measurement the maximum amount guaranteed
under residual value guarantee, as prescribed by the existing standards.
24.

Furthermore, requiring the lessee to recognize changes in the estimated amount ofresidual value guarantees and to remeasure the obligation to pay rentals would be an

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excessive burden for the lessee. It would also be difficult to validate the amount of changes
estimated based on certain contributing factors. As such, the JLA does not consider suchinformation to be appropriate for the users of financial statements. Therefore, reassessmentof residual value guarantees should not be required and it suffices to prescribe theaccounting treatment to be applied when a residual value guarantee is performed.
Chapter 8: Presentation
Response to Question 22 to 23
25.

The JLA supports the tentative decision by the FASB to require the obligation to pay
rentals to be presented separately. It is the view of the JLA that the right-of-use asset should
be presented separately (refer to Comment 26), and therefore the JLA believes that thecorresponding obligation to pay rentals should also be presented separately to provide more
useful information to the users of financial statements. However, in cases where the ratio of
the obligation to pay rentals to the total liabilities of the company is insignificant, including
it in other financial liabilities for presentation purposes should cause no problem.

26.

Presenting assets under “leases that are in substance purchases” (refer to Comment 3) inaccordance with the nature of the underlying leased properties rather than separating themfrom the assets owned by the lessee would not cause any special problem. However,right-of-use assets under other non-cancelable leases should be presented separately fromthe assets owned by the lessee as the underlying leased properties will be returned to thelessor. Separate presentation of such assets would also provide more useful information to
the users of financial statements.
Accordingly, it is the view of the JLA that, assets under “leases that are in substancepurchases” should be presented in accordance with the nature of the underlying leased
properties and other right-of-use assets should be presented as a separate line-item “leased
assets” within the Property, Plant and Equipment section or the Intangible Fixed Assetsection. However, in cases where the ratio of the leased assets to the total assets of thecompany is insignificant, including them in assets owned by the company for presentation
purposes should cause no problem.
Therefore, the JLA does not support any of the three proposed approaches. By requiring
separately presentation of leased assets, additional disclosure requirements can be
minimized and the administrative cost borne by the lessee can be reduced.

Chapter 9: Other lessee issues
Response to Question 24
27.

As already pointed out in Comment 10, as the discussion paper fails to provide theexplanation of the intent for requiring uniform application of a single accounting model,
which is essentially an accounting model currently applied to finance leases, to all leases
under the new accounting standard and of the relevance of a uniform and mandatory
application of a single accounting model to all types of leases, a clear explanation should be
provided.

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Chapter 10: Lessor accounting
Response to Question 25 to 29
28.

The description of lessor accounting provided in Chapter 10 is insufficient for the JLA to
make any comments. Therefore, the JLA requests a separate opportunity to provide
comments when a discussion paper on lessor accounting is issued at a later stage at whichfurther details are available.

29.

The JLA strongly suggests that when a new standard is issued, both lessee accounting andlessor accounting should be included. The boards should first issue a discussion paper on
lessor accounting to follow the current discussion paper on lessee accounting. Then, basedon the comments received for both discussion papers, the boards should issue a new
discussion paper including both lessee accounting and lessor accounting before they issue
an exposure draft and finally the new accounting standard.
Although the discussion paper states that the application of new lessee accounting aheadof the application of new lessor accounting would benefit a large number of users (DP
1.21(b)), many constituents should find this idea difficult to understand. There are many
lessors as well as lessees within countries that will adopt IFRS for the first time. If, withrespect to a single lease transaction, completely different accounting models are applied to
the lessor and the lessee during a certain period until the new standard for lessor accounting
is developed, not only there will be problems surrounding subleases that are pointed out in
Chapter 10, but also there could well be a situation in which the consistency with the newstandard for lessee accounting that has already been issued is compromised as thedevelopment of the new standard for lessor accounting progresses. Consequently, further
revisions to lessee accounting may become necessary. The JLA expects that the applicationof new lessee accounting ahead of the application of new lessor accounting will raise
confusion and concerns not only among the lessors, but also among the lessees.
It is unthinkable that a lessee in a country that will adopt IFRS for the first time will
intentionally arrange a lease designed to avoid the on-balance treatment of a finance leaseby applying the existing IAS 17 during the period until the new accounting standard isdeveloped.
If it is difficult to issue a new standard for lessor accounting before 2011 due tointeraction with other ongoing projects, such as revenue recognition and derecognition, andthe boards are concerned with the burden for the preparers created by changing the leaseaccounting standard shortly after the first-time adoption of IFRS scheduled during and after
2011 in many countries, the effective date of the new standard should be determined after
careful consideration only when a new accounting standard encompassing both lessee
accounting and lessor accounting is ready for issuance.
As the boards are developing a new standard under a definitive policy aimed at improving
the lease accounting standard, they should not permit inconsistent accounting treatmentseven for a limited period.

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