Japan Leasing Association (JLA) ’s Proposal on the Tentative Decision on the Distinction
between Different Types of Lease
JLA is supportive of the perspective that there should be different lease expense
recognition patterns for different leases. However, JLA is strongly opposed to thetentative decision that the distinction between leases should be based on “theacquisition/consumption of a portion of the underlying asset” and “the nature of theunderlying asset”. The principle in IAS 17 Leases should be adopted as indicators todistinguish between two different types of lease.
1. JLA is supportive of the perspective that there should be different lease expense
recognition patterns for different leases.
JLA has submitted several comment letters to the IASB and the FASB (the Boards).
JLA has submitted a comment letter in July 11th, 2011, in which JLA proposes as follows:
The Boards should repeal the tentative decision in May 2011 that a lessee should
apply a single accounting approach for all leases. The Boards should also restore
the tentative decision made before May 2011 that there should be two types oflease (i.e. finance leases and other-than finance leases) for both lessee and lessor
accounting.
This proposal by JLA is based on its cornerstone that several accounting models should beappropriately applied to various types of lease.
This is why JLA is supportive of the perspective proposed in June 2012 that there should be twotypes of lease.
2. JLA is strongly opposed to the tentative decision that the distinction between leases
should be based on“the acquisition/consumption of a portion of the underlying asset”
and “the nature of the underlying asset”.
For the purpose of classifying leases into two types of lease, the boards have tentatively decided
as follows:
In principle, a lessee should distinguish between these two different types oflease on the basis of whether the lessee acquires and consumes more than an
insignificant portion of the underlying asset over the lease term. However, as apractical expedient, the distinction can be based on whether the underlying asset
is property or an asset other than property.
JLA is strongly opposed to the tentative decision for the following reasons.
<Reasons>
A. It is not rational to draw a line between leases of property and those of assets otherthan property.
It is explained that property (except land) is usually expected to retain its significant value overthe lease term and the lease payments the lessor would charge for renewing the lease term at the end

1

of the initial lease term would be approximately the same lease payments. It is also explained that
this characteristic of property is different from that of assets other than property.
However, it is expected that some property loses its value as time passes and the lessor would not
expect to charge approximately the same lease payments at the end of the lease if the lessee renewed
the lease at that time. Although an asset other than property decreases in its value, the lease
payments after the lessee renews the lease of the asset could be often the same lease payments at theend of the lease. For example, this case is applied to leases of a vehicle or measuring machine inwhich the same underlying asset is leased to multiple lessees over the economic life of the asset. A
lessor who is engaged in this kind of leasing business prices each lease to obtain a desired return on
the whole underlying asset over the entire period for which it intends to hold the asset. Consequently,
regardless of whether the underlying asset is expected to retain a significant portion of its value, orwhether the underlying asset loses a significant portion of its value over the lease term, lease
payments for each lease remain the same as long as each lease term is same to each other (assumingthat there is no change in significant economic conditions or significant obsoleteness.).
According to the threshold tentatively decided by the Boards, the expense recognition pattern fora lease of property would be determined on the threshold similar to the current IAS 17. A lessee
would apply the reducing lease expense recognition profile to a lease of property classified as thecurrent finance lease, while applying the straight line expense recognition profile to the other leaseof property. On the other hand, a lessee would apply the reducing lease expense recognition profile
to a lease of an asset other than property unless (i) the lease term is an insignificant portion of theeconomic life of the underlying asset or (ii) the present value of the fixed lease payments is
insignificant relative to the fair value of the underlying asset. According to this threshold, it would
be difficult to apply the straight line expense recognition profile to leases of assets other thanproperty (refer to “B” below.). As a result, even if the economic life of property is equal to that of anasset other than property and the lease term of the property is equal to that of the asset other thanproperty, those leases would be accounted under different lease expense recognition profiles, which
would raise another inconsistence. JLA cannot see any rationale to draw such a line.
Therefore, JLA disagrees to the distinction proposed by the Boards, because it is not rational todetermine whether a lessee acquires and consumes more than an insignificant portion of theunderlying asset over the lease term by using a practical expedient based on whether the underlying
asset is property or an asset other than property.
B. According to the tentative decision, the straight line expense recognition profile
could not be practically applied to leases of assets other than property.
According to the tentative decision, a lessee would be able to apply the straight line expense
recognition profile to leases of assets other than property only if:(i)the lease term is an insignificant portion of the economic life of theunderlying asset; or(ii) the present value of the fixed lease payments is insignificant relative to thefair value of the underlying asset.
However, it would be practically difficult to determine whether the lease term is a significant portion2

or whether the present value is significant or not. This would result in the straight line expense
recognition profile not being able to be applied to a majority of leases of assets other than property,
because of the inability to clearly determine whether the lease term or the present value is significant.
In addition, if a lessee were to use the remaining economic life or the fair value of the underlying asset
at the commencement of the lease in determining which expense recognition profile should be adopted, alease of the underlying asset (i.e. second-hand asset) that was previously leased out many times would beaccounted for under the reducing lease expense recognition profile, because the remaining economic lifeof the underlying asset (second-hand asset) would be much shorter and the fair value of the asset would
be much smaller. Therefore, that kind of lease would not meet either (i) or (ii) above.
The original purpose of applying two approaches to leases is to properly reflect different economics ofdifferent leases that range from those similar to a service contract to those similar to a purchase of theunderlying asset. However, leases of assets other than property would effectively result in being
accounted for under a single accounting model.
3. The principle in IAS 17 Leases should be adopted as indicators to distinguish between
two different types of lease.
JLA proposes that the principle in IAS 17 leases should be adopted as indicators to classify leases into
two types of lease for the following reasons.
<Reasons>
The aim of the right-of-use model would be achieved even if the Boards adopted theprinciple in IAS 17 leases to distinguish between two types of lease.
The principle in IAS 17 leases in effect differentiates between a lease in which substantially all of therisks and rewards of ownership of the underlying asset have been transferred to the lessee (finance leases)
and all other lease contracts that are treated as executory contracts (operating leases).
There is a concern that the principle in IAS 17 leases was developed for a different purpose under theright-of-use model. However, the main purpose of the right-of-use model is to make a lessee to recognize
a right-of-use asset (an asset that represents the lessee’s right to use, or control the use of, a specified asset
for the lease term) and a liability to make lease payments for the current operating leases (i.e. on-balance
sheet treatment for leases). The purpose of making a lessee recognize a financing element that is notshown in current operating accounting is not specified in the Discussion Paper or the Exposure Draft andis not as important as making a lessee to recognize an asset and liability arising from leases.
The aim would be achieved that a lessee recognizes a right-of-use asset and a liability to make lease
payments on its balance sheet, even if the lessee distinguishes between two types of lease by using theprinciple in IAS 17 leases.
Therefore, the principle in IAS 17 leases would be the most feasible and appropriate line from thestandpoint of mitigating confusion and costs arising from applying a new standard, because it enables alessee to clearly classify leases into a lease similar to a purchase of the underlying asset and a leasesimilar to a service contract.

3