15 December 2010
Sir David Tweedie
International Accounting Standards Board
30 Cannon StreetLondon EC4M 6XH
United Kingdom
Dear Sir David:

re: Comments on Exposure Draft“Leases”
The Corporate Accounting Committee (CAC) of the Securities Analysts Associationof Japan (SAAJ) is pleased to comment on the exposure draft Leases put out by theInternational Accounting Standards Board (the Board). The SAAJ is a not-for-profit
organization providing investment education and examination programs for securities
analysts. Its certified members number 24,000. The CAC is a standing committee of theSAAJ composed of 14 members, most of whom are users including equity and credit
analysts, and portfolio managers, while a few others are academicians and publicaccountants. Before drafting this comment letter, the SAAJ sponsored a study session
on the discussion paper, inviting two ASBJ (the Accounting Standards Board of Japan)
staff as lecturers. Some 107 of our certified members participated. A questionnaire wassubsequently sent to each participant and 68 responded, making for a 64% response
rate. This comment letter fully takes into account the views expressed in thequestionnaire replies as well as discussion among CAC members. The survey results
are attached as an Appendix.

General Remarks
The CAC welcomes the exposure draft’s proposal regarding lessee accounting andviews it as an improvement. Based upon the right-of-use approach, the exposure draft
proposes putting all lease assets and liabilities on the balance sheet. The CAC regards
this as a more realistic reflection of corporate activities in financial statements and thus
supports the direction of the exposure draft. On the other hand, the CAC’s opinions aredivided on some important issues in lessor accounting. The opinions of the Board and
Financial Accounting Standards Board are also divided in some respects. The CAC
respectfully asks both boards to deliberate further and to then put forward improved1

proposals.

Question 1(a)Do you agree that a lessee should recognize a right-of-use asset and a liability to make lease
payments?
The CAC agrees. In our survey, 79% of respondents answered “Yes” to Question 2“The exposure draft proposes the ‘right-of-use model’ which will recognize all leased

assets and lease payment liabilities on the balance sheet of a lessee. Do you think thisapproach offers useful information for corporate analysis?’”Putting operating lease assets and liabilities, which are currently shown in the notes,
on the balance sheet with the same approach applied to financial leases would lead toaccurate and easy corporate analysis. Further, disguising a financial lease as an
operating lease to avoid balance sheet disclosure would no longer be possible. Thebalance sheet would thus more precisely depict the reality of a com pany.

Question 1(b)Do you agree that a lessee should recognize amortization of the right-of-use asset and intereston the liability to make lease payments?
The CAC agrees. In our survey, 79% of respondents answered “Yes” to Question 2 “At

the inception of a lease, a lessee will measure the lease payment liability as the present
value of expected future payments. Do you think this approach offers useful information
for corporate analysis?’”The CAC thinks the proposed lease liability calculation well represents lease
payments that will most likely occur in the future.

Question 2(a)Do you agree that a lessor should apply (i) the performance obligation approach if the lessor
retains exposure to significant risks or benefits associated with the underlying asset during or
after the expected lease term, and (ii) the derecognition approach otherwise?
The CAC agrees. A single approach is desirable for a lessee to put all assets used for business on
the balance sheet. On the other hand, a lessor’s business is so broad, including anything from ashort-term rental to long-term finance, that it would be too approximate to apply a single approach.
The CAC’s opinion above is not supported by the survey results.
Question 5 of the survey was “ The performance obligation approach or the derecognition

approach should be applied to a lessor depending on the retainment of exposure to
significant risks or benefits associated with the underlying asset during or after theexpected lease term. Do you think this would provide useful information for corporate2

analysis?’”In answering the above question, 69% voiced concern that a similar lease would beaccounted for differently. As to the use of the two approaches for a lessor (Question 6),
only 36% said “Two approaches should be allowed as proposed’”, while 53% answered“Only the performance obligation model should be used”.
In the comments to the survey, some mentioned that Examples 1 to 5 of the exposure
draft did not offer clear criteria for choosing either one of the approaches. The survey
respondents apparently felt that appropriate application of the approaches was difficult
based on guidance given in B22 to B27 of the exposure draft, and that profit
manipulation through arbitrarily choosing one of the approaches could be induced. TheCAC asks the Board to provide further guidance and examples in this regard.

Question 3(a)At the date of inception of a lease, a lessee that has a short-term lease may elect on alease-by-lease basis to measure, both at initial measurement and subsequently, (i) the liability tomake lease payments at the undiscounted amount of the lease payments and (ii) the right-of-use
asset at the undiscounted amount of lease payments plus initial direct costs. Such lessees would
recognize lease payments in profit or loss over the lease term.
The CAC agrees. The CAC thinks short-term leases should not be an exception to theprinciple of applying a single approach to all leases. However, except for periods ofexceptionally high interest rates, the impact of interest rates on short-term leaseobligation measurement should be limited, making discounted present value calculation
not very relevant. Also, in view of the cost to preparers, the proposed method of putting
short-term leases on the balance sheet is rational. The CAC applauds the Board for thispractical proposal.

Question 6Do you agree with either (the IASB or the FASB) approach to accounting for leases that
contain service and lease components?
The IASB and the FASB approaches are the same for lessee accounting with respect
to which the CAC agrees. In our survey, the majority (56%) answered “Yes” to Question
4 “The exposure draft proposes applying the proposals in Revenue from Contracts withCustomers when a service component is distinct in a contract that contains both service
and lease components. It also proposes that a lessee should apply the lease accounting
requirements when the service component is not distinct. Do you think this approach
offers useful information for corporate analysis?’’3

Theoretically, it is desirable to separate service and lease components. However,practically, the two components are often hard to distinguish, making application oflease accounting to a combined contract acceptable.
The CAC supports the IASB approach of lessor accounting. In the derecognition
approach, the right-of-use sales gain is recognized at the inception of a lease. However,as the service is provided throughout the life of a lease, it is rational to apply revenue
recognition accounting to recognize the service component throughout the life of a lease.
In the performance recognition approach, as lease income (amortization of performanceobligation) is recognized throughout the lease term, separation of the service and thelease components will not result in material differences.
The CAC thinks service component distinction guidance shown in paragraph B7 isinadequate for practical application and that further detailed guidance is necessary.

Question 8
Do you agree that a lessee or a lessor should determine the lease term as the longest possible
term that is more likely than not to occur taking into account the effect of any options to extend orterminate the lease?
The CAC has divided opinions. In the survey, opinions were also divided. Only 34%of the respondents supported the proposal, while 25% supported “Should use the termthat has more than 50% probability of occurrence”’, and another 41% opined “Should nottake into account the extension or termination option”’. (Question 3)
In the first place, an objective estimate of possible lease term would be so difficultthat practical application would not be workable. This concern over arbitrary estimation
results in a preference for “Should use the term that has more than 50% probability ofoccurrence”. In the CAC’s deliberations, some opined extension/cancellation options
should not be considered at all because of possible arbitrary application, while others
asserted that leased assets and liabilities might be intentionally less estimated if
extension/cancellation options were fully neglected.
To recognize a lease, the exposure draft focuses on the asset side using theright-of-use concept. To measure a lease, the draft focuses on the liability side andapplies measured liabilities as the value of right-of-use. The CAC thinks this isunnatural and inconsistent. According to the assertion of the exposure draft, theextension ‘option’ should be considered as the extension of right-of-use (i.e. asset side)rather than extended lease payments (i.e. liability side). The proposed focus on theliability side in measurement significantly widened the traditional concept of liability.
Such a proposal should only be made after thorough debate of assets and liabilities in a4

conceptual framework project.

Question 9Do you agree that contingent rentals and expected payments under term option penalties andresidual value guarantees that are specified in the lease should be included in the measurement ofassets and liabilities arising from a lease using an expected outcome technique?
The CAC’s opinions are again divided, although there is a consensus that estimating
variable lease payments is extremely difficult. Those members who supported theproposal cited a concern that no recognition of variable lease payments would result in alease contract with intentionally small fixed lease payments for balance sheet cosmetics.
On the other hand, those who are against the proposal mentioned that the (i) lessor andlessee use different assumptions resulting in incomparable financial statements or (ii)the proposal might result in excessive liabilities on the lessee’s balance sheet.
As in our comment to Question 8 above, the CAC thinks the inconsistency inrecognition and measurement of lease assets and liabilities causes a problem here too.
If you have any questions or need further elaboration, please do not hesitate tocontact Sei-Ichi Kaneko, Executive Vice President, SAAJ (s-kaneko@saa.or.jp).

Sincerely yours,Keiko Kitamura
ChairCorporate Accounting Committee

5

APPENDIX
Results of SAAJ Survey on“Leases”
Background and methodology
The Securities Analysts Association of Japan (SAAJ) sponsored a study session on
IASB’s exposure draft Leases, inviting two lecturers from the Accounting Standards
Board of Japan (ASBJ). Some 107 of our certified members participated in the session
held on 19 November. A questionnaire was subsequently sent to each participant and 68
responded, making for a 64% response rate. The respondents were also invited to makecomments. The survey, although small in size, focused on a cohort with the samebackground (certified members of the SAAJ) and same knowledge level (participation in
the study session). This focus and very high response rate gives credibility to thereliability of the survey.
Survey questions and answers
Q1: The exposure draft proposes the ‘right-of-use model’ which will recognize all leased
assets and lease payment liabilities on the balance sheet of a lessee. Do you think thisapproach offers useful information for corporate analysis?
A1:
Yes .

78.8%

No.

7.6%

Cannot judge at this moment.

13.6%

Q2: At the inception of a lease, a lessee will measure the lease payment liability as thepresent value of expected future payments. Do you think this approach offers useful
information for corporate analysis?
A2:
Yes .

78.5%

No.

10.8%

Cannot judge at this moment.

10.8%

6

Q3: In calculating lease payment liability, a lessee will assume the longest possible termthat is more likely than not to occur, taking into account the effect of any options toextend or terminate the lease. What do you think of this treatment of lease term?
A3:Seems appropriate.

35.5%

Should use the term that has more than 50% probability

17.8%

of occurrence.
Should not take into account extension or termination

46.7%

option.
Q4: The exposure draft proposes applying the proposals in Revenue from Contracts with

Customers when a service component is distinct in a contract that contains both service
and lease components. It also proposes that a lessee should apply lease accounting
requirements when the service component is not distinct. Do you think this approach
offers useful information for corporate analysis?
A4:
Yes.

56.1%

No.

7.6%

Cannot judge at this moment.

36.4%

Q5: The performance obligation approach or the derecognition approach should beapplied to a lessor depending on the retainment of exposure to significant risks or
benefits associated with the underlying asset during or after the expected lease term.
Do you think this would provide useful information for corporate analysis?
A5:
Two approaches will be appropriately applied.

16.4%

Similar leases will be accounted differently.

68.7%

Cannot judge at this moment.

14.9%

Q6: What do you think of the opinion that lessor accounting should be limited to either
the performance obligation approach or the derecognition approach?

7

A6:
Two approaches should be allowed as proposed.

36.4%

Only the performance obligation approach should be

53.0%

used.
Only the derecognition approach should be used.

10.6%8