Dealing with the Issue of Lease Accounting

The Accounting Standards Board of Japan (ASBJ) had discussed accounting treatment for non-ownership-transfer finance lease transactions since August 2002. The content of the discussion was to annul lessee's off balance treatment of non-ownership-transfer finance lease transaction, and to ensure superficially the consistency with IAS 17.

The commercial law accounting and corporation tax one are also to be changed in parallel with the revision of Accounting standards for Leases, As decreasing of the capital investment by lease, which now accounts for 10% of private capital investment, Japanese economy would be inevitably damaged. The declining use of leasing would accelerate slump of leasing industry, and it would have a severe influence on the management of small and medium sized enterprises. Suppliers that have sold equipment through leasing companies would find client companies and sales opportunities decreasing, which seriously affects their earnings.

Thus, lease accounting standards revision is a question of vital importance, which dominates leasing industry, the entire industrial world, and Japanese economy itself.

Japan Leasing Association (JLA) has strongly protested against the revision of lease accounting standards at ASBJ meeting. The ASBJ members who show an understanding of the viewpoint of the leasing industry pointed out the difficulty to revise lease accounting standards within Japan's accounting system, and the consequence of on balance treatment and its influence.

Finally, at ASBJ meeting, there were opposite opinions that the off balance treatment 'should be abolished' or 'should subsist', and they could not be integrated. For this reason, ASBJ announced officially "the interim report of consideration regarding the accounting treatment for non-ownership-transfer finance lease transactions" and after discontinuing the discussion, requested JLA to discuss the direction toward the solution of lease accounting issues.

Receiving this request, JLA put together "About the examination regarding lease accounting standard" (report on the progress of examination) after the minute examination for over a year, and reported it at the ASBJ meeting in March 2005.

After due consideration to the recognition in ASBJ, JLA showed certain ideas regarding the way of accounting treatment for non-ownership-transfer transactions. In addition to that, taking into account economic substance of Japanese finance lease and availabilities of the present accounting standard, JLA clarified its basic position to continue and maintain the present accounting standard again. Moreover, after due consideration to the economic influence from the change of the accounting standard, JLA argued that it is necessary to hold careful conferences about Japanese lease which is essential for business management and is consisted of the present accounting system and the taxation one.

≪ Reference ≫

In Japan, the accounting system consists of the commercial law, the corporation tax law and the securities exchange law, each of which was established for the respective purposes, checking and affecting each other. ('The triangle doctrine')

With respect to leasing, the corporation tax law requires to treat finance lease transactions as letting agreements, excepting some lease transactions which are practically sale-and-purchase ones such as ownership-transfer lease. (Refer to 'Outline of Leasing Taxes' for further information) This kind of accounting treatment of finance lease transactions is accepted in commercial law accounting as one of generally accepted accounting practices. Also in securities exchange accountings, 'the non-ownership-transfer finance lease transactions' are accepted as letting agreements. Thus, the accounting treatment of finance lease corresponds to tax accounting, commercial law accounting, and securities exchange accounting. This makes lease more convenient. Many companies use lease transactions for the purpose of the convenience.