Survey on Lease Accounting Standard

March 2010

Japan Leasing Association

IndexI. The summary of this survey
II. The findings of this survey（1）How many lessees are aware of the exposure draft leases（2）How many lessees are aware of the detailed accounting requirements in the exposure
draft leases（3）The proposals for on-balance treatment for the current operating leases（4）The proposals for options to extend/terminate the lease in the exposure draft leases（5）The accounting requirements to estimate probabilities of options to extend/terminate thelease in the exposure draft leases（6）Other view on the new lease accounting standard, adoption of IFRSs, and Japan GAAP
etc.

（Reference）Numerical data

I.

The summary of this survey<Purpose of this survey>•

The purpose of this survey is to obtain feedback from lessees in Japan on the exposure draft leases (theLeases ED) and to prepare background materials in publishing JLA’s view to interested parties.

<Researched entities and method to conduct survey>•

Researched entities (lessees) are 171 companies, which have transactions with JLA members. They areclassified as a listed company, an unlisted company that is subject to the Financial Instruments andExchange Act, or a large company defined by the Companies Act that is not subject to the Financial
Instruments and Exchange Act. <Refer to the table below.>•

JLA members have directly visited the entities to obtain their feedback.

<Period>•

From September 2010 to February 2011

<Main points of this survey>（1） How many lessees are aware of the Leases ED; 90% are aware of the Leases ED.
（2） How many lessees are aware of the detailed accounting requirements in the Leases ED; 89% are awareof the requirements.

（3） The proposals for on-balance treatment for operating leases; 67% view it as inappropriate.
（4） The proposals for options to extend/terminate the lease; 90% view them as inappropriate.
（5） The accounting requirements to estimate probabilities of options to extend/terminate the lease; 94%view them as difficult.

Classification of researched entities(n=171)＊

Unlisted Co.
Large Co.
subject to FI & E not subject to FI &
Act
E Act
11.1%
21.6%

Listed Co.
67.3%

0%

20%

40%

60%

80%

100%

※Refer to page 11-13 in terms of business types and their ratio.
＊“n” in the table means the number of researched entities.

II. Findings of this survey（1） How many lessees are aware of the Leases ED
About 90% of the researched lessees (90.1%) are aware of the Leases ED, while a minority of lessees (9.9%) are
unaware of the Leases ED. Therefore, the Leases ED is well known to lessees.
Almost all the lessees that are unaware of the Leases ED are listed companies, some of them are utilizing

1many lease transactions.

Table 1: How many lessees are aware of the Leases ED(n= 171)

Aware of ED
90.1%

0%

20%

40%

Unaware of ED
9.9%

60%

80%

100%

（2） How many lessees are aware of the detailed accounting requirements in the Leases ED
Nearly 90% of the researched lessees (88.9%) are aware of the detailed accounting requirements in the
Leases ED that would abolish the bright line between a finance lease and an operating lease and apply asingle accounting model to all the leases, including leases of real estates such as an office building and a shortterm rental transaction. Consequently, the ratio (11.1%) of lessees that are unaware of the detailed
requirements is small.
Through face to face interviews, however, it has become clear that some lessees are unaware of the factthat they would be required to estimate a lease term for a lease of a real estate such as an office space orfactory site and to recognize the asset and liability on the balance sheet. In addition, they have not clearlyrecognized that they would be required to apportion lease payments between interest expense and principal
for a lease of an office building.

Table 2: How many lessees are aware of the detailed requirements under the Leases ED

Unaware of
the detail
11.1%

Aware of the detail
88.9%

0%

20%

40%

(n=171)

60%

80%

100%

（3） The proposals for on-balance treatment for the current operating leases
Although the Lease ED requires all the leases to be capitalized on the balance sheet similarly to therequirements for the current finance lease, many lessees (67.1%) think that it would be appropriate to accountfor current operating leases in accordance with the operating lease model, and on-balance treatment would
not be suitable to operating leases based on the reasons, such as a concern with overstatement, unreasonable
presentation to capitalize an operating lease, and practical difficulty to do so.

2Secondly, some lessees (28.7%) think that it would be unwillingly acceptable to capitalize a contractually
non-cancelable operating lease. Many of them think that it would be rational from the standpoint ofaccounting theory. Other lessees note that it would not be too much burdensome to do so because they arepreparing data and information for non-cancelable operating leases in footnote in accordance with thecurrent Japan GAAP.
On the other hand, there are few lessees that agree with capitalizing both non-cancelable and cancelable
operating lease (4.2%).

Table3: On-balance treatment for the current operating leases
Appropriate to account for O/L in accordancewith O/L model, and on-balance treatment
would not be suitable to O/L.

(n=167)

Unwillingly acceptable to capitalize acontractually non-cancelable O/L.

67.1%

0%

10%

20%

30%

Agree with capitalizing both
non-cancelable and cancelable
O/L.

28.7%

40%

50%

60%

70%

80%

4.2%

90%

100%

< Reasons many lessees view it as appropriate to account for current operating leases in accordance with theoperating lease model, and on-balance treatment would not be suitable to operating leases (examples) >Capitalizing operating leases would lead to overstatement of F/S.
¾

Unlike in the case of finance leases, capitalizing operating leases would result in capitalizing valuable rightsthat are different from estimated economic benefits acquired by an entity where the entity owns theunderlying asset. The nature of operating leases might not be reflected in F/S because of much morefactors to be considered in estimating lease terms (a listed company/transportation).

¾

Especially, in a short-tem operating lease, the nature of the transaction would not be appropriatelyreflected in F/S (a listed company/information and communication).

Capitalizing operating leases would seem unreasonable.
¾

An operating lease is the lease that does not transfer the title to the underlying asset to the lessee and theunderlying asset is not the one that the lessee owns. Therefore, the lessee is viewed as neither owning nor
controlling the leased asset. This is why capitalizing operating leases would seem unreasonable (a listedcompany/wholesale and retail etc.).

¾

It would be easily understood to coordinate a legal owner of the underlying asset with accounting
requirements. In addition, there is no problem arising from the current operating model that allows a lessee3

to recognize lease payments as expense in accordance with the usage by the lessee (a large
company*/wholesale etc.).

Operating lease model is suitable to the current operating lease.
¾

We enter into a contract with a customer to deliver the products to the customer over the period (e.g. for 5
years) shorter than the useful life of the facility. Therefore, we use a manufacturing facility through an
operating lease. The operating lease model enables us to recognize expenses evenly and to easily
calculate expenses that will arise. This is very important and beneficial from the standpoint of management(a listed company/ pharmaceutical).

¾The operating lease model is suitable to operating leases because operating leases are cancelable at any
time. On-balance treatment is not suitable (a listed company/transportation).

It would be practically difficult to discount lease payments at the present value for every lease.
¾

It would be practically difficult for us to record all the leases on a consolidated basis by ourselves and toapportion

all

the

lease

payments

betweeninterest

expensesandprincipals(alistedcompany/construction).
¾

We have many rental transactions rather than finance leases. Those rental transactions are immaterial fromthe standpoint of consideration. On-balance treatment is not suitable to those rental transactions otherthan a finance lease, given the burden (or costs) associated with on-balance treatment for thosetransactions (a listed company/manufacturing).

<Reasons some lessees view it as unwillingly acceptable to capitalize a contractually non-cancelable operating lease(examples)>¾

It would be unwillingly acceptable to capitalize contractually non-cancelable operating leases becauseof those lease payments being contractually fixed. However, given immateriality per contract, there could
be some cases where a lessee would be allowed not to capitalize immaterial contracts (a listedcompany/manufacturing).

¾

It is unwillingly acceptable that an asset and a liability arise during the contractually non-cancelable lease
term. In addition, given the needs raised by users of F/S, it would be necessary to accept capitalization of
non-cancelable operating leases. However, a lessee is able to avoid lease payments where the lessee has
a right to cancel the lease without material penalty. It does not seem that this kind of lease would meet“a present obligation” in the definition of liabilities in IAS37. This is why it would be inappropriate tocapitalize this kind of lease and this kind of lease should be accounted for in accordance with theoperating lease model (a listed company/wholesale etc.).

¾

A lessee has financial information on contractually non-cancelable operating leases because the current

A large company is the company defined by the Companies Act and that is not subject to the Financial Instruments andExchange Act.

*4

guidance requires a lessee to disclose contractually non-cancelable operating leases in footnote.
However, capitalizing operating leases would require entities to prepare F/Ss more accurately andcomprehensively. In addition, it has been already burdensome to accord with the internal control systemregulated by the Financial Instruments and Exchange Act (Japanese Sarbanes-Oxley Act), and there
would be some cases where staff in accounting division need to increase (a listed company/retail).

<Reason few lessees agree with capitalizing both non-cancelable and cancelable operating lease (examples)>¾

It is agreeable to remove the subjective classification between a finance lease and an operating lease, as
proposed in the Leases ED. However, there is still a concern that the right-of use model would be moreburdensome in practice because of expanding the scope of transactions that need to be capitalized andso on. Therefore, it might be necessary to consider another approach in which the right-of-use model isapplied only to leases with materiality (i.e. if the right-of-use model is not applied to those material leases,
this could provide misleading information to users of F/S.) (a listed company/manufacturing).

（4） The proposals for options to extend/terminate the lease in the Leases ED
For the proposals in the Leases ED for options to extend/terminate the lease (i.e. estimating a lease term andrecognizing an asset and liability during the estimated lease term at the inception of the lease), nearly 90% of
the researched lessees (89.9%) view the proposals as inappropriate, while only 10% of the researched lessees(10.1%) are supportive of the proposals. The reasons why many lessees view the proposals as inappropriate areas follows:•

Options to extend/terminate the lease are provided in order to cope with future uncertainty.
Estimating options to be exercised would be neither accurate nor reliable. Therefore, the proposals
would reduce reliability of financial statements (75.7%).

•

Estimating options to extend/terminate the lease would lead to either overstating or understating an
asset and liability, which would not reflect nature of an entity (53.9%).

•

Estimating options to extend/terminate the lease would be an unnecessary process, because an entity
determines its lease term based on the business plan (30.9%).

Other reasons are related to costs and benefits, subjectivity, or impossibility to estimate those options.

Table 4-1The proposals for options to extend/terminate the lease in the Leases ED(n=169)Inappropriate
89.9%

0%

20%

40%

Appropriate
10.1%

60%

5

80%

100%

Table 4-2 Reasons many lessees view the proposals for options as inappropriate (multiple answers) (n=152)

Options are provided to cope with future uncertainty.
Estimating options would be neither accurate nor reliable,
and would reduce reliability of F/S.

75.7%

Estimating options would lead to either overstating or
understating an asset and liability, which would not reflectnature of an entity.

53.9%

Estimating options would be an unnecessary process,because an entity determines its lease term based on thebusiness plan.

30.9%

12.5%

Others
0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

<Other reasons (examples)><Reliability on financial statements>¾

The proposals in the Leases ED would reduce reliability of F/S. In a case that an entity, as a lessee, leases
retail stores and offices all over Japan, lease contracts of real estates are very different depending on aneach business convention or each region. Although it would be staff in accounting division that record andaccount for a number of various lease transactions, it would be impossible for the staff to accurately trace
those transactions and there would be discrepancies arising from estimating lease terms (a listedcompany/eating and drinking services).

¾

Even if we estimate a lease term based on the probabilities of renewal options to be exercised, we are notable to assure our investors of reliability associated with what occurs in the future. In addition, even
investors would wonder if costs associated with estimating lease terms and capitalizing leases based on theestimated lease terms could excess the benefits to users of F/S (a listed company/service N.E.C.).

¾

Capitalizing leases with uncertainty could lead to subjective judgment (a listed company/transportation).

¾

Comparability could be reduced because each of estimated lease terms is different from each other,
depending on how preparers estimate the lease terms regardless of whether preparers do so arbitrarily ornot (an unlisted company/finance).

<Costs and benefits>¾

Estimating probabilities of options to be exercised would not balance between costs incurred by preparers
and benefits to users because of being much more burdensome and costly for preparers (a listedcompany/wholesale and retail etc.).

<Practical challenges>¾

Each business division in an entity uses or is in charge of each leased asset but does not record the past
usage data for leases by itself, while the accounting division in the entity records the data for leases for the
purpose of accounting. It is impossible for the accounting division to be comprehensively in charge of6each usage of each leased asset in each business division because of each usage being different fromeach other (a listed company/information and communication).
¾

Based on the useful life of the underlying asset or past convention, an entity usually determines the period(lease term) during which the entity uses the underlying asset. However, the period is determined based on
the entity’s business plan if the entity uses the underlying asset to launch into new business (a large
company/wholesale).

（5） The accounting requirements to estimate probabilities of options to extend/terminate the lease
For the accounting requirements to estimate probabilities of options to extend/terminate the lease, almost all
the researched lessees think that it would be difficult to do so (94.1%), while a minority of the researched lessees(5.9%) think that it would be possible to do so.
They specified reasons for difficulties in estimating probabilities of options as follows.

•

It would be difficult to estimate, because probabilities of options to be exercised are uncertain (77.5%).

•

It would be costly to estimate the probabilities of a lease-by-lease basis because of there being a
number of leases (59.4%).

•

When an entity enters into a lease contract, the lease term specified in the contract needs to beinternally approved. Therefore, the entity is not able to estimate another lease term differently from thecontractual lease term that is internally approved (27.5%).

Other reasons are related to impossibility in practice (or extraordinary difficulty) to estimate the probabilities,no information available to do so. The other is related to internal control system.
Table 5-1 Requirements to estimate probabilities of options to extend/terminate the lease(n=170)

Possibleto estimate
5.9%

Diificult to estimate
94.1%

0%

20%

40%

60%

80%

100%

Table 5-2 Reasons the proposals for options are viewed as difficult (multiple answers)(n=160)

It would be difficult to estimate probabilities on options to be
exercised, because the probabilities are uncertain.

77.5%

It would be costly to estimate the probabilities on a lease-bylease basis because of there being a number of leases.

59.4%

27.5%

When entering into a lease, the lease term in the contract
needs to be internally approved. The entity is not able toestimate another lease term differently from the contractual
one.
Others

13.1%
0.0%

7

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

<Other reasons (examples)><Practical challenges>¾

When determining a lease term, we regard the lease term as the period during which we actually use theunderlying asset at the inception of the lease. Therefore, it is impossible to estimate probabilities of renewal
options (a listed company/manufacturing).

¾

Whether an entity renews the lease of its retail store or not depends on a future circumstance. Therefore,
the entity is not able to estimate lease term at the inception of the lease. If the entity were required toestimate the lease term, the current staffing system would not be able to cope with the proposals in the
Leases ED because of there being a number of leased retail stores and much more burdens (a listedcompany/wholesale and retail).

¾

We have many athletic clubs all over Japan. Each club uses training machines (leased assets) as a lessee.
There are countless leased assets and those assets are held/managed by each club. Therefore, it would besubstantially impossible for us, as an entity, to estimate each lease term (a listed company/service, N.E.C.).

¾

We have nursing homes. In the nursing homes, we, as a lessee, use pictures, artificial flowers and, curtains
through rental transactions and there are many leased assets and parties that we have transactions with.
Capitalizing those leased assets would be highly burdensome and the current staffing system would not beable to cope with the accounting requirements in the Leases ED (a listed company/care services).

<Data to estimate lease term>¾

It would be impossible to estimate any lease term, because of lack of track record (a listedcompany/information and communication).

¾

We manufacture products using a leased facility and sell the products to a customer. If the customer stops
purchasing the products, we do not need the leased facility any more. This is why it would be impossible toestimate any lease term. Even if we sell similar products to the identical customer, the track record for pastleases is not useful to estimate a lease term (a large

company/electronic-components manufacturing).

<Problems associated with estimating lease term>¾

Internal control system may not work well (an unlisted company that is subject to the Financial Instruments
and Exchange Act/services).

¾

Under circumstances that both business condition and business activity could drastically change, it would
be impossible and would not make sense to estimate a lease term. Renewal options are provided to react
to changing business conditions. If an entity knew at the inception the period during which the entity would
use the underlying asset, the entity would regard the period as the contractual lease term (a listedcompany/printing).

¾

Utilizing many production lines introduced by way of lease contracts, we manufacture various products inline with the precise production plans. Because the plans are fixed, it would not make sense to estimate attheinception

of

the

lease

how

long

the

8

underlying

asset

would

be

used

(a

large

company/plastic-products manufacturing).
¾

We sometimes transfer a production line from Japan to another country, or between other countries. For
example, if we transfer a production line in Hong Kong to mainland China, each of Hong Kong andmainland China has useful lives specified in each tax treatment. Consequently, this requires us todetermine a lease term different from the previous lease term. Even though accounting forms are often
discussed separately from tax treatments, it is not workable to require an entity to determine an idealistic
lease term, only focusing on an accounting perspective (a listed company/pharmaceutical).

（6） Other views on the new lease accounting standard, adoption of IFRSs, and Japan GAAP etc.
<Scope/Definition of a lease>¾

A lease of an intangible asset should be included in the scope of the new IFRS for leases. We often enter
into many lease contracts where PP&E and intangible asset are packaged. It seems unreasonable that an
intangible asset is excluded (a listed company/IT-equipments manufacturing etc.).

¾

The criteria on whether a contract is a lease or not should be more clarified. We need to determine
whether a contract is or contains a lease based on the nature of the contract. However, it would bepractically impossible to do so where an entity has countless contracts (a listed company/information andcommunication).

<Short term lease>¾

A Lessee should be allowed to apply the operating lease model to short term leases. A lessee usually pays
lump-sum annual lease payment for re-lease. Therefore, the lessee is free from any liabilities. In spite thatlease payments for re-leases are deductible as expenses in tax treatment, requiring a lessee to capitalize
those re-leases would be unnecessary and unreasonable (many companies).

<Materiality; non-core asset or any simplified accounting requirements for sub-lease>¾

Any simplified accounting requirements for a lease of a non-core asset should be developed, similarly tothe simplified requirements under the current Japan GAAP. Applying the proposals in the Leases ED to all
the leases would require an entity to develop a new IT accounting control system with much more costs
incurred (a listed company/retail etc.).

¾

It would be preferable to continue to initially recognize an asset and liability at the undiscounted lease
payments, and to subsequently amortize the asset and liability at the amount of the lease payments (alisted company/precision-instruments manufacturing etc.).

¾

It is questionable whether users of F/S are supportive of lease payments being apportioned between
interest expense and principal, which results in spending much more costs in preparing F/S (a listedcompany/electrical-apparatus manufacturing).

¾

A subsidiary company, as a sub-lessor, operates sub-leases, which are not on a large scale. The subsidiarycompany has accounted for its sub-leases in accordance with the simplified accounting requirements

9under the current Japan GAAP. However, if the parent company applies the IFRS for leases, theaccounting requirements the subsidiary company has ever applied would be changed. This would bequite burdensome (a listed gas-fittings manufacturer)<Adoption of IFRSs/Japan GAAP>¾

It would be difficult to apply the new IFRS unless a more detailed guideline is published (a listedcompany/information and communication, a listed company/manufacturing).

¾

In spite that it would be rare for us that are listed in a local stock exchange to acquire funds from overseas,
applying IFRS would be quite burdensome. It would be preferable not to apply the new IFRS (a listedcompany/retail).

10

Survey on the Lease Accounting Standard (numerical data)

Researched Entities (Lessees) : 171 companies
Types of Researched Entities(n=171)Companies

Ratio

Listed companies

115

67.3%

Unlisted companies that are subject to the Financial Instruments and Exchange Act

19

11.1%

Large companies defined by the Companies Act that are not subject to the Financial

37

21.6%

Instruments and Exchange Act

SQ Timing of Applying IFRSs by Listed Companies(n=115)Companies

Ratio

Fiscal Year 2010

0

0.0%

Fiscal Year 2011

0

0.0%

Fiscal Year 2012

0

0.0%

Fiscal Year 2013

4

3.5%

Mandatory effective date

69

60.0%

Not yet determined

42

36.5%

Business Types of Researched Companies(n=171)Companies

Ratio

Construction

7

4.1%

Manufacturing

67

39.2%

Electricity, Gas, Hear supply, and Water

2

1.2%

Information and Communication

13

7.6%

Transportation

23

13.5%

Wholesale and Retail trade, Accommodation, eating and drinking services

23

13.5%

Finance and Insurance

9

5.3%

Real estate

4

2.3%

Services, N.E.C.

23

13.5%

11

Ratio of assets at the end of previous reporting period that arise from finance leases that do not transfer thetitle to the lessee (Compared to the total of both tangible assets and intangible assets) (n=162)

Companies

Ratio

0% ~ 5%

101

62.3%

5% ~ 10%

27

16.7%

10% ~ 20%

16

9.9%

20% ~ 30%6

3.7%

30% ~ 40%6

3.7%

40% ~ 50%3

1.9%

50% ~ 60%2

1.2%

60% ~ 70%1

0.6%

70% ~ 80%00.0%

80% ~ 90%00.0%

90% ~ 100%

0

0.0%

Remaining lease payments arising from non-cancelable operating leases at the end of previous reporting period (n=167)

Companies

Ratio~ 0.1 billion yen

55

32.9%

0.1 ~ 1 billion yen

32

19.2%

1 ~ 5 billion yen

19

11.4%

5 ~ 10 billion yen

8

4.8%

10 ~ 50 billion yen

24

14.4%

50 ~ 100 billion yen

5

3.0%

Over 100 billion yen

8

4.8%

unrevealed

16

9.6%

Reasons for using finance leases and operating leases(n=156)
Finance lease(n=153)Operating Lease

Companies

Ratio

Companies

Ratio

Leases enable entities to streamline the administrative work.

33

21.2%

49

32.0%

Leases enable entities to easily recognize how much cost incurs.

18

11.5%

14

9.2%

Entities need not to prepare funds when acquiring new property, plant, and equipment.

68

43.6%

31

20.3%

Entities are able to adjust the lease term to the period for which they would like to use the asset.

14

9.0%

16

10.5%

Entities are able to comply with environmental-protection-related laws and regulations.

3

1.9%

0

0.0%

Leases have more advantages compared to bank borrowing.

9

5.8%

13

8.5%

Entities are able to derive the benefits from outsourcing assets.

5

3.2%

17

11.1%

Others

6

3.8%

13

8.5%

12

Administration for financial information on operating leases (including a lease of real estate and ashort-term rental transaction)(n=165)Companies

Ratio

On a consolidated company basis (a consolidated F/S basis).

43

26.1%

On an entity-by-entity basis (an unconsolidated F/S basis).

85

51.5%

On an site-by-site basis (not administering the info as an entity).

30

18.2%

Others7

4.2%

SQ How to administer financial information on operating leases (O/L)(n=38)(n=62)

On a consolidated

On an entity-by-entity

company basis

basis

Companies

Ratio

Companies

Ratio

Administer both cancelable O/L and non-cancelable O/L

24

63.2%

38

61.3%

Administer only non-cancelable O/L

14

36.8%

24

38.7%

Costs having arisen in introducing IT accounting system for the current Japan GAAP

(n=163)Companies

Ratio

Much more costs have arisen compared to costs arising from other accounting standards.

22

13.5%

Costs have arisen that are approximately equal to costs arising from other accounting standards.

38

23.3%

Less costs have arisen compared to costs arising from other accounting standards.

35

21.5%

No costs have arisen.

68

41.7%

13

Question 1: How many lessees are aware of the Leases ED (n=171)

Companies

Ratio

Aware of the Lease ED

154

90.1%

Unaware of the Lease ED

17

9.9%

Question 2: How many lessees are aware of the detailed accounting requirements in the Leases ED (that would abolish thebright line between a finance lease and an operating lease and apply a single accounting model to all the leases,
including a lease of real estate such as an office building and a short term rental transaction) (n=171)

Companies

Ratio

Aware of the detailed accounting requirements

152

88.9%

Unaware of the detailed accounting requirements

19

11.1%

Question 3: The proposals for on-balance treatment for the current operating leases(N=167)Companies

Ratio

112

67.1%

48

28.7%

7

4.2%

It is appropriate to account for current operating leases in accordance with the operatinglease model, and on-balance treatment is not suitable to operating leases.
It is unwillingly acceptable to recognize assets and liabilities arising from contractually
non-cancelable operating leases.
It is agreeable to recognize assets and liabilities arising from both non-cancelable
operating leases and cancelable ones.
Question 4: The proposals for options to extend/terminate the lease in the Lease ED(n=169)Companies

Ratio

The proposals for options are appropriate.

17

10.1%

The proposals for options are inappropriate.

152

89.9%

SQ Reasons the proposals for options are viewed as inappropriate(multiple answers)(n=152)Companies

Options to extend/terminate the lease are provided to cope with future

Ratio

82

53.9%

115

75.7%

47

30.9%

19

12.5%

uncertainty. Estimating options to be exercised would be neither accurate nor
reliable. Therefore, this would reduce reliability of financial statements.
Estimating options to extend/terminate the lease would lead to either overstating
or understating an asset and liability, which would not reflect nature of an entity.
Estimating options to extend/terminate the lease would be an unnecessary
process, because an entity determines its lease term based on the business plan.
Others14

Question 5: The accounting requirements to estimate probabilities of options to extend/terminate the lease(n=170)Companies

Ratio

It would be possible.

10

5.9%

It would be difficult.

160

94.1%

SQ Reasons the accounting for options are viewed as difficult (multiple answers)(n=160)Companies
It would be difficult to estimate probabilities of options to be exercised because

Ratio

95

59.4%

44

27.5%

124

77.5%

21

13.1%

of uncertainty.
It would be costly to estimate the probabilities on a lease-by-lease basis becauseof there being a number of leases.
When an entity enters into a lease contract, the lease term specified in the contract
needs to be internally approved. Therefore, the entity is not able to estimate alease term differently from the contractual lease term that is internally approved.
Others15