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Key Issues in a Review of Lease Accounting Standards

December 16, 2005


* On the grounds that regulations allowing the parties to choose whether "finance lease transactions other than transactions involving transfer of ownership" should be treated as sale transactions or lease transactions are making it difficult to ensure comparability, the Accounting Standards Board of Japan (ASBJ) recently indicated that it is considering treating all such transactions as "sale transactions". The Board aims to reach a decision by the end of the current fiscal year.
* In the worst case scenario, this policy presents a risk that companies investing in capital equipment will no longer be able to opt for a "finance lease" (hereafter "lease"), which offers a number of advantages as compared with hire or purchase.
* In the forthcoming debate surrounding the review of lease accounting standards, there are four key issues:

1. The impact on Japanese industry and Japanese companies must be considered.
Although the review of accounting standards might have the merit of making it easier to compare financial tables, this would be of very limited benefit and, as companies would no longer be able to use leasing, which is an established as a method of capital investment, it could even impact on capital investment just as it is beginning to recover. There is something amiss when the debate overemphasizes the forms of accounting without due consideration for the impact that the modification of accounting standards may have on the Japanese economy.

2. Any review should be coordinated with the tax system.
The ASBJ has declared that the review of lease accounting standards will not interfere with the tax system, but if nothing is done to ensure compatibility with the tax system, the review may undermine key elements of the very foundation of the lease business in which taxation and accounting matters are closely intertwined and deprive Japanese companies of capital investment opportunities based on leasing. The review of accounting standards should set out a vision for an integrated accounting and taxation solution, based on current tax treatment.

3. A uniquely Japanese solution should be sought.
The major overseas economies have all taken their own unique approach to the medium-to-long term ideal of convergence with international accounting standards, preserving the treatment of lease transactions as leasing, by adopting measures such as "separation of consolidated and individual financial statements" and paving the way for the continued existence of leasing. If Japan alone were to abolish the treatment of leasing as leasing, Japanese companies would no longer be able to use the lease, currently one of the most important methods of equipment procurement, and this would be likely to have a significant impact on their international competitiveness. While taking account of the need for "convergence with international standards", a review of lease accounting standards should be subject to a debate that takes account of national interests, of the response in other countries, and of current circumstances in Japan.

4. The timing of the review should be considered with care.
From the outside, Japan's lease accounting standards, like equivalence assessment in the EU, present a problem in terms of compatibility with international accounting standards, and for this reason, the modification of lease accounting standards is also currently under consideration in the context of international accounting standards. Thus, not only is there no hurry for a review of Japan's lease accounting standards, but a review at the present time could actually make future changes in accounting standards double the work. It is important to take account of the international trend and gauge the timing of the review with care.

For more information on the content of this report, please contact: Tetsuo Fujita / Junko Ikkatai the Japan Research Institute, Limited.

Tel: 03-3288-5054 / 5053
E-mail:fujita.tetsuo@jri.co.jp / ikkatai.junko@jri.co.jp

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