10 September 2013
Hans Hoogervorst
International Accounting Standards Board
30 Cannon StreetLondon EC4M 6XH
United Kingdom
Dear Mr. Hoogervorst:
re: Comments on Exposure Draft“Leases”
The Corporate Accounting Committee (CAC) of the Securities Analysts Associationof Japan (SAAJ) is pleased to comment on Exposure Draft “Leases” put out by theInternational Accounting Standards Board (IASB). The SAAJ is a not-for-profit
organization providing investment education and examination programs for securities
analysts. Its certified members number 25,000. The CAC is a standing committee of theSAAJ composed of 15 members, most of whom are users including equity and credit
analysts, and portfolio managers, while a few others are academicians and publicaccountants. The CAC writes comment letters to global standard setters, including theIASB and Accounting Standards Board of Japan (ASBJ), and exchanges opinions withorganizations including the ASBJ and Financial Services Agency.
Before drafting this comment letter, the SAAJ sponsored a study session on theexposure draft, inviting an ASBJ staff member as a lecturer. Some 53 of our certified
members participated. A questionnaire was subsequently sent to each and 29 responded,making for a 55% response rate. This comment letter fully takes into account the views
expressed in the questionnaire replies as well as discussion among CAC members. The
survey results are attached as an Appendix.
General Comments (Survey Question 1)
In comments on the previous exposure draft issued in August 2010, the CAC said it“welcomes the exposure draft’s proposal regarding lessee accounting and views it as animprovement”. This reflects the CAC’s consistent belief that putting all lease assets andliabilities on the balance sheet will better reflect corporate activities. In a survey following

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a study session conducted in November 2010, 79% of the respondents said recognizing alllease assets and liabilities would offer useful information for corporate analysis.
We asked the same question in the latest survey. Again, 76% answered “Yes”. When
all lease assets and liabilities are on the balance sheet of a lessee, financial statement users
do not need to make cumbersome adjustment to put operating leases on the balance sheet
for calculating such ratios like ROA, ROI, and leverages. There is no doubt thatcomparability between companies that heavily use leases and those that do not will beenhanced.
The CAC firmly believes that all lease assets and liabilities should be put on alessee’s balance sheet and highly regards the IASB’s long-standing efforts to realize thislong-held dream of financial statement users.
Question 2: Lessee Accounting (Survey Question 2)
In regard to lessee accounting, the IASB has changed the single-type model
proposed in the 2010 exposure draft to a two-type model where different accounting
treatments are required for Type A and Type B leases. From the viewpoint that every leasecontains a financing element, it could be claimed that the single-type model should be used.
However, the CAC thinks the proposed change to the two-type model is more reasonable
to better reflect the economic reality of diverse leases. To the question “Comparing the twomodels, which one do you think better, the 2010 single-type model or the revised exposure
draft’s two-type model?”(Question 2), 69% of respondents supported the two-type model.
One thing that the CAC asks the IASB to reconsider is paragraph 5 of the exposure
draft which specifies “A lease need not apply this [draft] Standard to intangible assets”.
The CAC thinks it appropriate to require mandatory application of the standard to software
leases because such leases are heavily used in certain jurisdictions, including our own.
A CAC member pointed out during discussions that increasing depreciation expenses
in Type B leases is not consistent with other accounting standards. Many members agreed
with this observation.
Question 4 Classification of Leases (Survey Question 3)
The CAC thinks the proposed Type A and Type B classification is better than thecurrent finance lease and operating lease classification. Survey Question 3 asked“Assuming a two-type model is being adopted, it could be the proposed Type A-Type B
model or a finance lease-operating lease model (lessees are assumed to be required torecognize lease assets and liabilities except short-term ones). Comparing the two models,
which one do you think is better?” The majority (59%) of survey respondents supported2

the Type A-Type B model.
Although the Type A-Type B model is based on whether the underlying asset is realestate or not, it is hard to classify leases by the definition provided in paragraphs 29-30 and
the illustrative examples. The CAC asks the IASB to clarify the difference between the twotypes by improving the definition and providing more articulate examples. Further, theCAC expects the IASB to develop nomenclature that better represents the nature of leases
rather than “Type A-Type B”.
The exposure draft seems to assume that most real estate leases will be classified asType B. In countries like ours where the economic life of buildings is relatively short andland prices very high, many real estate leases can be classified as Type A when the present
value of the lease payments accounts for only an insignificant portion of fair value but thelease term is slightly longer than “the major part” threshold of the remaining economic lifeof the underlying asset, thus hindering international comparability of financial statements.
The CAC respectfully asks the IASB to change the requirement to be classified as a Type A
lease in paragraph 30 from “one of the following two criteria” to “both of the following
two criteria”.
Question 1 Identifying a lease (Survey Question 4)
The CAC thinks it will be practically difficult to identify a lease according to thestipulations in paragraphs 6 to 19. In the survey, less than half of the respondents (44.8%)
thought that the stipulations would be sufficient while almost the same number ofrespondents said “Cannot judge at this moment”.
The CAC is concerned that “the right to use an asset (the underlying asset)” inparagraph 6 may induce widely different interpretations when applied under regionallydifferent legal requirements. Some members opined that the concepts of “an identifiedasset” and “the right to control the use of the identified asset”, which are the basis ofidentification, are vague and difficult to implement. Others mentioned that the cases
explained in Examples 1 to 4 are too specific and lack the universality needed in practicalapplication.
Further, the exposure draft does not provide Examples for the shipping industry.
Some members are greatly concerned that the stipulations in paragraphs 6 to 19 are notsufficient to judge whether a time charter contract for a vessel, widely used by shipping
companies, is a lease or not. Application of the exposure draft may induce significantly
different accounting treatments amongst shipping companies around the world, hindering
comparability of such companies.
The CAC requests the IASB to further clarify the identification of leases by refining3the language in paragraphs 6 to 19 and by adding easy-to-understand Examples.
Question 3 Lessor Accounting (Survey Question 5)
For lessor accounting, the exposure draft proposes a model similar to thederecognition model proposed in the 2010 exposure draft (for Type A leases) and a model
similar to the current operating lease (for Type B leases). In responses to Survey Question
5 regarding this proposal, the majority of respondents (59%) thought it appropriate. Overall,the CAC thinks the proposal reasonably reflects the economic reality of lessors. Someraised concern that Type A accounting is different from current accounting standards andthat practical application may be difficult, suggesting there is a room for furtherimprovement.
Question 5 Lease Term (Survey Question 6)
The exposure draft’s proposal of lease term, with “a significant economic incentive”
requirement of optional extension, is a notable improvement over the 2010 exposure draft
which contains the controversial “more likely than not to occur” requirement. In answering
Survey Question 6, 72% of respondents supported the lease term proposal.
In order to help judge the existence of a significant economic incentive in terms ofcontract-based, asset-based, market-based, and entity-based factors, and to prevent
arbitrary application of the significance threshold, the CAC proposes the expansion andenrichment of Application Guidance (B5).
Question 8 Disclosure (Survey Question 7)
The CAC highly regards both lessee disclosure (paragraphs 58 to 67) and lessor
disclosure (paragraph 98 to 109) requirements as an improvement to provide useful
information to financial statement users. 59% of survey respondents shared this view
(Survey Question 7).
Specifically, a lessee’s maturity analysis of lease liability (paragraph 67) will be
useful for liquidity risk analysis and a lessor’s maturity analysis of the lease receivable(paragraph 106) will be useful to forecast future cash flow. Further, reconciliation ofright-of-use assets (paragraph 61) and lease liabilities (paragraph 64) will provide abreakdown of changes in the right-of-use assets and lease liabilities which is valuable
information to evaluate the relevant balance sheet items.
The proposed disclosure requirements may include items which are costly andburdensome for companies to prepare. The CAC thinks that when the principle ofmateriality is applied properly, certain disclosure items with insignificant amounts will be4

omitted, reducing the possible burden on preparers.
Finally, the CAC reiterates its assertion that putting all lease assets and liabilities on thebalance sheet will better represent the economic reality of companies. The CAC hopes theexposure draft will be refined taking into account the suggestions mentioned above andthat the day will soon come when we can see all lease assets and liabilities on the balancesheet.
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
Chair
Corporate 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 a lecturer from the Accounting Standards Boardof Japan (ASBJ). Some 53 of our certified members participated in the session held on 2August. A questionnaire was subsequently sent to each participant and 29 responded,making for a 55% response rate. The respondents were also invited to make comments.
The survey, although small in size, focused on a cohort with the same background(certified members of the SAAJ) and same knowledge level (participation in the study
session). This focus and very high response rate gives credibility to the reliability of thesurvey.

Survey questions and answers
Q1: The current standard for leases (IAS 17) requires lessees to recognize assets andliabilities arising from finance leases but does not require the same for operating leases.
The exposure draft requires recognizing assets and liabilities arising from all leases (except
short-term ones). Do you think this will be an improvement to the current standard?
A1(a) Yes.

75.9%(b) No.

13.8%(c) Cannot judge at this moment.

10.3%

Total

100.0%

Q2: The 2010 exposure draft proposed a single-type model where the lessee is required torecognize a right-of-use asset and lease liability. The current exposure draft proposes atwo-type model where Type A is similar to the one proposed in the 2010 exposure draft and6

Type B requires recognizing a fixed amount lease expense on a straight line basis.
Comparing the two models, which one do you think is better, the 2010 single-typemodel or the revised exposure draft’s two-type model?
A2(a) Single type.

13.8%(b) Two type.

69.0%(c) Cannot judge at this moment.

17.2%

Total

100.0%

Q3: Based on the amount of consumption of the underlying asset principle, the revised
exposure draft proposes dividing leases into two types, Type A (mostly plant andequipment) and Type B (mostly real estate), and to apply different accounting treatments.
Assuming a two-type model is being adopted, it could be the proposed Type A–Type B
model or a finance lease–operating lease model (lessees are assumed to be required torecognize lease assets and liabilities except short-term ones).
Comparing the two models, which one do you think is better?
A3(a) Type A–Type B model.

58.6%(b) Finance lease–operating leasemodel.

13.8 %(c) Cannot judge at this moment.

27.6%

Total

100.0%

Q4: Based upon the right-of-use model, the revised exposure draft proposes identifying alease based upon the following two criteria:(a) fulfillment of the contract depends on the use of an identified asset; and(b) the contract conveys the right to control the use of the identified asset for aperiod of time in exchange for consideration.
Do you think the above definition of a lease and the proposed requirements inparagraphs 6-19 of the revised exposure draft are sufficient to determine whether a contractcontains a lease or not?

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A4(a) Yes.

44.8%(b) No.

13.8%(c) Cannot judge at this moment.

41.4%

Total

100.0%

Q5: For lessor accounting, the revised exposure draft proposes a model similar to thederecognition approach in the 2010 exposure draft (for Type A leases) and a model similar
to the current operating lease (for Type B leases). Do you think this proposal isappropriate?
A5(a) Yes.

58.6%(b) No.

17.2%(c) Cannot judge at this moment.

24.1%

Total

100.0%

Q6: The revised exposure draft proposes determining a lease term as the non-cancellable
period, together with both of the following:(a) periods covered by an option to extend the lease if the lessee has a significant
economic incentive to exercise that option; and(b) periods covered by an option to terminate the lease if the lessee has asignificant economic incentive not to exercise that option.
Do you think this lease term definition appropriate?
A6(a) Yes.

72.4%(b) No.

17.2%(c) Cannot judge at this moment.

10.3%

Total

100.0%

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Q7: The exposure draft proposes detailed presentation and disclosure requirements forlessees and lessors, separately for Type A leases and Type B leases. Do you think this will
provide useful information?
A7(a) Yes.

58.6%(b) No.

13.8%(c) Cannot judge at this moment.

27.6%

Total

100.0%*In Questions 5 and 6, (a)~(c) do not add up to 100.0 because of rounding.

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