Japan Leasing Association’s Proposal on the Lease Accounting

Japan Leasing Association (JLA) has a deep respect for analyses and efforts International AccountingStandards Board (IASB) and Financial Accounting Standards Board (FASB) have ever made in order toimprove the current lease accounting.
It has taken a lot of time for IASB and FASB (the boards) to re-deliberate the lease accounting since thepublication of the Exposure Draft. This implies that applying a single accounting model for various leases
makes economics of some leases inappropriately reflected on financial statements and it is difficult tosolve this concern. As a result, the boards changed the fundamental concept of applying a single
accounting approach for all leases.

JLA has ever made many proposals to the boards from the standpoint of both rationale and practicality. In
the JLA’s previous proposals, JLA was supportive of applying the right of use model to some leases that
include non-cancelable term (including some leases currently classified as operating leases), and also
required some practical expedients to the proposed accounting model from a practicability perspective. In
addition, JLA was also supportive of the tentative decision in April 2011 that there were two types oflease (i.e. finance leases and other-than-finance leases) because that tentative decision was the mostacceptable proposal by the boards.

However, In JLA’s view, the latest tentative decision is inappropriate from the standpoint of concept andpracticability. According to the decision, a lessee and a lessor should distinguish between two different
types of lease on the basis of whether the lessee acquires and consumes more than an insignificant portionof the underlying asset over the lease term, by using a practical expedient based on whether theunderlying asset is property or not. JLA would like to emphasize again what JLA has already insisted onin the comment letter “Japan Leasing Association (JLA)’s Proposal on the Tentative Decision on theDistinction between Different Types of Lease” dated as July 25th 2012.

<Concerns>a.

There are various types of lease. The proposal made by the boards would not reflect thecharacteristics and nature of the main types of lease (i.e. finance leases and other than financeleases), and would not reflect differences between those leases.

b.

According to the proposed criterion for a lease of assets other than a property, a lessee would not beable to apply the single lease expense (SLE) approach to the majority of current operating leases ofassets other than a property (where a lessor prices those leases in order to be able to generate returnon the whole underlying asset such as an automobile or a measuring instrument by leasing out the1underlying asset to multiple lessees, which is similar to a lease of a property), because the lessee
would be forced to determine that the lessee acquires and consumes more than an insignificant
portion of the underlying asset over the lease term. If the underlying asset is leased out to several
lessees, the remaining economic life of the underlying asset would be likely to be significantlycovered by the lease term. In addition, the fair value of that underlying asset would be likely to besignificantly covered by the present value of lease payments. Therefore, a lessee would be forced toapply the interest and amortization (I&A) approach to leases of assets other than a property.
There can be many operating leases of assets other than a property which are economically similar
to a lease of a property. However, the boards have not yet clarified the reason why a lessee should
apply to a lease of assets other than property an accounting approach different from the one applied
to a lease of a property.
c.

The proposed criterion for a lease of a property is similar to the one in IAS 17 Leases to classify alease into either a finance lease or operating lease, while the criterion for a lease of assets other thana property is hardly understandable and it would be also difficult to add a detailed and rationalguideline. Therefore, this means that it would be difficult to practically apply the proposed criterion
from practicability and audit perspectives. Furthermore, there is a concern about subjectivity indetermining which expense recognition pattern should be applied. As a result, there could be aproblem associated with comparability. If the boards develop a detailed and complex guideline inorder to solve these concerns, costs associated with applying the new standard would significantly
excess benefits arising from revising the current standard.

JLA’s basic view is that several accounting models should be appropriately applied to various types oflease. In the comment letter dated as 25th July 2012, JLA commented that the criterion in IAS 17 Leases
should be adopted as an indicator to distinguish between two different types of lease. The latest proposal
made by the boards includes concerns written above. If the boards publish the re-exposure draft including
concerns pointed out above, the proposal would not be an improvement over the current standard, which
is widely prevalent. This is why the proposal would not achieve the main objective to appropriatelyreflect various economics of leases that range from those similar to a service to those similar to apurchase by using two approaches.

In addition, there has been no rational discussion about differences between executory contracts(off-balance sheet treatment) and leases that are required to be recognized on lessee’s balance sheet. Itwould not be an improvement over the current standard that a lessee is required to recognize only leases
on its balance sheet without clearly discussing why only leases should be recognized on a lessee’s balance
sheet, and that the receivable and residual approach, which has some concerns, should be applied instead2

of the current lessor’s accounting that has not been criticized.

In Japan, there are tens of listed companies which apply the US GAAP. However, there are a handful oflisted companies which have already applied IFRS at this moment. If the proposal in the forthcoming
re-exposure draft were to be finalized, it could make negative impact on adoption of IFRS in Japan andthe number of companies which would apply IFRS.

Therefore, the tentative decision including concerns pointed out above would not be an improvement overthe current standard. Instead of the tentative decision, adding some improvements to the current standard
should be more reasonable and understandable among constituents including users of financial statements,
considering practicability and comparative analysis related to cost-benefit. For instance, it is one ofpractical solutions to add items in disclosure which will meet needs of users of financial statements for aright and liability that meet the definitions of an asset and liability.

JLA believes that the boards would not finalize the new lease accounting standard without addressing
concerns of practicability and cost-benefit analysis related to the proposal by the boards, neglecting themain aim of improving the current lease accounting standard.

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