JLA Comments on the Project on Lease Accounting
1. Due process
1.1 Nearly all of the comments on the Discussion Paper, Leases: Preliminary Views (hereinafterreferred to as the “Lessee DP”) published by the International Accounting Standards Board(IASB) and the Financial Accounting Standards Board (FASB) (hereinafter collectively referred
to as the “boards”) were against postponing the consideration of lessor accounting and argued
that lease accounting should be examined simultaneously from both the perspectives of thelessor and the lessee. They also strongly urged the boards to publish a separate Discussion Paperon lessor accounting (hereinafter referred to as the “Lessor DP”) before the issuance of an
Exposure Draft (IASB/FASB meetings in September 2009: IASB Agenda Reference 6A, para.
13 and 16).
1.2 The JLA contended that in setting a new accounting standard on lease accounting, both lessee
accounting and lessor accounting should be included. Therefore, the boards should first issue a
Lessor DP to follow the Lessee DP and subsequently, based on the comments received for both
discussion papers, the boards should issue a new Discussion Paper including both lessee
accounting and lessor accounting before issuing an Exposure Draft, which is to be followed by
the issuance of the final accounting standard (JLA Comments on Lessee DP, 6.1 and 29).
1.3 Meanwhile, milestone targets on the lease project (timing of issuance of Exposure Draft and thefinal standard for lease accounting by the lessee and the lessor) were indicated in “Appendix A
Pathway to Completion of MoU Projects” of FASB and IASB Reaffirm Commitment toMemorandum of Understanding - A Joint Statement of the FASB and IASB, November 5, 2009.
1.4 The Lessee DP, reflecting the boards’ priority on the development of the lessee accounting model,
only introduced two approaches to lessor accounting without providing detailed discussion on
the lessor accounting model. As the description of lessor accounting provided in Chapter 10 of
the Lessee DP is insufficient for the JLA to make any comments on the question concerning
lessor accounting, the JLA refrained from making any comments on lessor accounting at thatstage (JLA Comments on Lessee DP, 28).
1.5 Subsequently, the boards tentatively decided to adopt a “performance obligation approach” after
considering the lessor accounting model. However, this approach is not only entirely different
from the currently practiced lessor accounting, but also has a number of problems in terms ofconsistency with lessee accounting and the uniform application of such accounting to all leases(refer to the “2. Lessor Accounting” section below).
1.6 For the development of a lessor accounting model, the JLA naturally expected that a Lessor DP
would be published before the issuance of an Exposure Draft. If an Exposure Draft
encompassing both lessee and lessor accounting were to be issued directly without publishing a1

Lessor DP, such standard setting process would not be considered appropriate. From theperspective of developing a new lease accounting standard to be applied by most of the world
replacing the current lease accounting standard, the JLA strongly urges the boards to follow a
due process including preparation and publication of a Lessor DP for public comments, and after
making careful and sufficient consideration based on the comments, to publish another
Discussion Paper which ensures the consistency between lessee accounting and lessor
accounting before issuing an Exposure Draft.

2. Lessor Accounting
2.1 Problems of the Performance Obligation Approach
The boards tentatively decided to adopt a “performance obligation approach” to lessor
accounting. However, this approach has the following problems.
(a) Problem associated with the creation of a new obligation
One of the rationales for adopting a lessee right-of-use model (which requires recognition ofa right-of-use asset and a liability for obligation to pay rentals) is the understanding that thelessor’s obligation has been performed upon the delivery of the leased item. This is also
apparent from the conclusion of the Lessee DP that the lessee has an unconditional
obligation to pay rentals (which denies an argument that unless the lessor provides the lessee
with the leased item and permits its use, the lessee has no obligation to pay rentals) (theLessee DP, para. 3.18 and 3.19).
Furthermore, in the description of the derecognition approach, it is also stated that the lessor
is not considered to have a liability to permit the lessee to use the leased asset (IASB/FASB
meetings in May 2009: IASB Agenda Paper 11, para. 22 and 23).
Although the JLA does not necessarily consider that the lessor’s performance obligation has
been fulfilled upon the delivery of the leased item, it notes that inconsistency exists between
the explanation of the performance obligation approach that “the lessor is committed toallowing the lessee to use the leased item over the lease term” (para. 32 of the same paper)and the adoption of the lessee right-of-use model on the ground that the lessee has an
unconditional obligation to pay rentals. Therefore, the boards should solicit public comments
before issuing an Exposure Draft on the inconsistency that nonperformance of obligation
under a lease contract is denied for lessee accounting, but is sustained for lessor accounting.
(b) Problem associated with the creation of a new right
It is considered that the lessor’s right to receive rental payments from the lessee, by nature,should not vary depending on the approaches taken (IASB/FASB meetings in May 2009:IASB Agenda Paper 11, para. 14 and 15).
However, the lessor’s right to receive rental payments is regarded as being exchanged for thelessor’s right to use the leased item under the derecognition approach (para. 18 of the same
paper), while it is regarded as a new right created with a corresponding liability (an2unconditional obligation to permit use of the leased item to the lessee under the performanceobligation approach (para. 35 of the same paper).
Such notion of the creation of a new right may be supportable if the lessor’s unconditional
obligation to permit use of the leased item to the lessee is considered to have a characteristicthat it remains over the lease term.
If so, however, as noted in (a) above, the boards should solicit public comments before
issuing an Exposure Draft on the appropriateness of the notion that the lessor has an
unconditional obligation to permit use of the leased item to the lessee over the lease term andthe obligation is performed over the lease term as the rental payments are collected by thelessor.
(c) Problem associated with the recognition of both leased asset and lease receivable
It is stated that under the performance obligation approach the leased item is treated as thelessor’s economic resource and the lessor does not lose control of the leased property for thelease term and thus continues to recognize the leased item (IASB/FASB meetings in May
2009: IASB Agenda Paper 11, para. 32).
Although the definition of the “control” mentioned above has not been clearly indicated in
the papers on the meetings through November 2009, the staff recommended using a control
principle to determine whether a lease contract is in fact a purchase or sale of the underlying
asset, i.e., if a contract transfers control of the underlying asset, it is in fact a purchase or saleand should be excluded from the scope of the leases guidance (IASB/FASB meetings inDecember 2009: IASB Agenda Reference 4D, para. 15).
The boards should explain more clearly the relationship between the abovementioned“control” as used in the context of the lessor’s not losing the control of the leased property
and the statement that the lessor has an unconditional right to receive rental payments fromthe lessee, i.e., the relationship between the leased asset and the right to receive rental
payments over the lease term as well as the appropriateness of recognizing both of theseassets at the same time. Such explanation is also expected to be related to the consideration
under the revenue recognition project.
Although the presentation will be considered going forward, given the need to ensure
consistency with the revenue recognition project, it is expected that the lease receivable andthe associated performance obligation will be required to be presented net.
However, under the current situation in which a tentative decision has not been made onwhether the net or gross presentation should be used, for leases such as finance leases under
the current standard, for example, the assets will be recorded for an amount far exceeding the
inflow of economic benefits and the associated risks (put simply, the amount of the assets
will be twice as much).
It is questionable for what purpose such information on the assets is provided to users offinancial statements. If both the leased asset and the lease receivable are recognized,
financial indicators such as capital ratio and ROA, which are important to investment and3other decisions, will be significantly impacted through the increase in the total assets. As aresult, the comparability between companies that engage in the leasing business andcompanies that do not will be lost. Consequently, investors and other users of financial
statements will be forced to make adjustments to statements of financial position in order tomaintain comparability, which may also cause misunderstanding. Therefore, it is necessary
to hear opinions of the constituents on the performance obligation approach also from thepresentation perspective as discussed above. For all the lessor constituents including the JLA,
the gross presentation is unacceptable.
Furthermore, the intermediate lessor in sublease transactions has a problem of recognizing
both the right-of-use asset and the lease receivable, which also requires sufficientconsideration.
2.2 Appropriateness of the approach encompassing the lessee accounting model
In the comments on the Lessee DP, the JLA argued that requiring the application of the sameaccounting treatment as applied to finance leases under the current standard to all leases isinappropriate and would lead to new problems; for leases with strong service characteristics, it
was appropriate to recognize a right-of-use asset at the sum of the lease payments payable by thelessee over the lease term; and therefore 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 (JLA
Comments on Lessee DP, 3.1, 3.2, 8, 10, and 11).
To decide on an approach for lessors to apply the right-of-use model, the boards considered thederecognition approach, the operating lease approach, and the dual model approach, in addition
to the performance obligation approach (IASB/FASB meetings in October 2009: IASB Agenda
Reference 10C).
The boards should clearly explain that the performance obligation approach will be adopted andother approaches will not in a Lessor DP published for public comments before issuing an
Exposure Draft.
The problems of the performance obligation approach have already been pointed out in 2.1
above. The JLA also believes that requiring the application of the derecognition approach to allleases is impractical as lessors who enter into a vast number of leases in a wide variety of forms
will find it extremely difficult to conform with such requirement in practice.
Given the existence of a wide variety of lease contract forms and in consideration of the actual
practice and the cost/benefit on the part of the preparers consisting of both the lessee and thelessor as well as the needs of the users of financial statements, uniform application of a single
accounting treatment is not necessarily considered desirable.
From these perspectives, the boards should, in consideration of consistency between lessee
accounting and lessor accounting, consider the applicability of different approaches, namely theprinciple of the right-of-use model, the approach proposed by the JLA, and the operating lease4

approach for lessee accounting; and the derecognition approach, the performance obligation
approach, or the operating lease approach for lessor accounting.

3. Other important issues
3.1 Accounting for cancelable leases
In the comments on the Lessee DP, which also relate to the comment under 2.2 above, the JLA
argued that the right-of-use model should be applied only to non-cancelable leases and that theaccounting treatment that is currently applied to operating leases should be prescribed for leases
other than non-cancelable leases (i.e., cancelable lease) (JLA Comments on Lessee DP, 2.2 and
4). Although the Lessee DP does not clearly address whether the right-of-use asset or the
obligation to pay rentals in relation to a cancelable lease should meet the definition of an asset ora liability, the JLA believes that the operating lease approach is naturally applicable to cancelable
leases.
3.2 Lease terms initially established at initial recognition
With respect to the treatment of options, the boards tentatively decided that both the lessee andthe lessor should use the longest possible term that is more likely than not to occur as therecognition criteria after considering all the relevant factors (IASB/FASB meetings in November
2009: IASB Agenda Reference 5D, para. 37 and 41; IASB Agenda Reference 5G, 5, para. 28,
and 33).
With respect to the treatment of options, sufficient consideration has not been given to whether aliability should be recognized by the lessee and whether an asset should be recognized by thelessor in relation to a lease option, not to mention the problems of practical application.
The JLA argued 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 the option is priced toprovide a significant incentive to exercise the option (the “bargain purchase option” prescribedby the current standard would be an example of such option) (refer to JLA Comments on Lessee
DP, 4.1, 19, and 20).
The appropriateness of a liability for the possibility of rental payments for a cancelable term
recognized by the lessee as of the reporting date is also questionable.
The JLA’s view on the treatment of options by the lessor is similar. The JLA believes that it iseven more impractical for the lessor (who typically enters into a vast number of lease contracts)
to estimate the longest possible term that is more likely than not to occur for each contract and torecognize receivables based on such estimates than for the lessee. The JLA also questions theappropriateness of recognizing such assets.
Therefore, lease terms initially established at initial recognition should be limited to the“contractual non-cancelable lease term,” which can be used consistently by both the lessee andthe lessor.

53.3 Scope exclusion for non-core asset leases
The boards discussed the scope of the application in the meetings held in December. The staff
thought that short-term leases should be defined as a lease with an expected term of one
reporting period or less and proposed that they should be excluded from the proposed new
guidance for lessees, while the staff proposed that leases of non-core assets should be within thescope of the proposed new leases guidance (IASB/FASB meetings in December 2009: IASB
Agenda Reference 4F, para. 35, 36, and 48).
The boards did not make a tentative decision on the treatment of short-term leases in the
December meeting, but tentatively decided to agree with the staff proposal on leases of non-core
assets.
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 the lessee,
the JLA argued that the accounting treatment that is currently applied to operating lease should
be applied to the leases whose lease terms are equal to or less than one year (JLA Comments on
Lessee DP, 5 and 6).
The JLA also argued that non-core assets are assets that are insignificant to the lessee in view ofthe business operations of the lessee and that if the lessee determines that a given leased asset isinsignificant, the accounting treatment that is currently applied to operating lease should beapplied to it (JLA Comments on Lessee DP, 5 and 6).
Although the Lessee DP noted the difficulty in defining non-core assets and the possible
reduction of comparability for users of financial statements (Lessee DP, para. 2.17), it did notprovide sufficient cost-benefit analysis for the application of new leases guidance. Therefore, theboards should perform such analysis and clearly indicate the result of the analysis in a
Discussion Paper encompassing both lessee accounting and lessor accounting and publish it for
public comments on the views of the boards before issuing an Exposure Draft.

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