Effective date

The current lease accounting standard is effective on the consolidated fiscal year and the fiscal year starting on and after April 1st 2008, and is applied to quarterly financial statements for the consolidated fiscal year and fiscal year starting on and after April 1st 2009.

Scope

The current lease accounting standard is applied to companies to which "Accounting Guidance for SME" or "Accounting Basic Guidance for SME" is not applied. It is regulated based on the regulation on financial statements that listed companies etc., which "the Financial Instruments and Exchange Law" is applied to, should be subject to the current lease accounting standard.

Definition and Classification of Lease

A lease is defined as follows:
A lessor, an owner of a leased asset, provides a lessee with a right to generate benefits by using the asset for the agreed period (lease term), while the lessee pays the agreed lease payments to the lessor. A lease is classified either as a finance lease or as an operating lease.

＜Finance Lease＞
A finance lease is a lease which is non-cancelable for the lease term specified by the contract or a lease which is similar to that, and in which the lessee is able to substantially derive all the economic benefits arising from the leased asset, and the lessee pays substantially all of the costs arising from using the asset over the lease term.
A finance lease is classified either as "a finance lease which transfers the title of leased asset to the lessee" or as "the other finance lease which does not".

＜Operating Lease ＞
An operating lease is a lease which is not classified as a finance lease.

Numerical Criteria for Classifying Finance Lease

If a lease applies to either (i) or (ii) written below, the lease is recognized as a finance lease. Even if the present value of the total lease payments for the non-cancelable lease term is 88% or even if the lease term is 73% of the economic life of the leased asset, those kinds of leases could be classified as finance leases, because the criteria include the word, "approximately".

ⅰ.The criterion for the present value (90%)
The present value of the total lease payments for the non-cancelable lease term is "approximately" 90% or more of the estimated purchase price of the leased asset by the lessee.

ⅱ.The criterion for the economic life of the lease assets (75%)
The non-cancelable lease term is "approximately" 75% or more of the estimated economic life of the lease asset.

＜How to Measure the Present Value of the Total Lease Payments＞
Based on the condition of the lease payments, a lessee should measure the present value of the total lease payments at the inception of the lease. A lessee discounts total lease payments, using an imputed interest rate by a lessor. If the lessee does not know the imputed interest rate by the lessor, the lessee is allowed to discount the total lease payments using its incremental borrowing rate.

If a lessee guarantees the residual value of the leased asset, the lessee and the lessor should include the guaranteed amount in the total lease payments when measuring the present value of the total lease payments. If a third party guarantees the residual value of the leased asset, only the lessor should include the guaranteed amount in the total lease payments.
A lessee and a lessor should exclude the administrative expense, such as personal property tax and insurance costs, from the lease payments. Similarly, a lessee and a lessor should exclude the maintenance expense from lease payments. However, a lessor and a lessee need not exclude those expenses, if the amount of those expenses is immaterial.
If a lease contract includes a bargain purchase option, the amount of the option should be included in the total lease payments when measuring the present value of the total lease payments.

Criteria for Classifying Finance Lease which Transfers Title of Leased Asset to Lessee

If a finance lease meets one of the conditions below, the finance lease is classified as a finance lease which transfers the title of leased asset to the lessee.

• A lease with a condition that the title of the leased asset transfers to the lessee
  A lease contract includes a condition that the title of the leased asset transfers to the lessee for the lease term or at the end of the lease term.
• A lease which includes a bargain purchase option
  A lease contract which grants the lessee the right to purchase the leased asset at a nominal price or a price significantly lower than the fair value of the asset at the point of exercising the option - it is reasonably certain that the bargain purchase option will be exercised.
• A lease with assets manufactured according to the specification by a lessee
  A lessor is unlikely to sell or re-lease a leased asset to a third party at the end of lease term, because the asset is manufactured according to specification by a specific lessee. Consequently, it is reasonably certain that the leased asset will be used by only the specific lessee for the economic life of the leased asset.

Lessee Accounting for Finance Lease

【Recognition of Leased Assets and the Liabilities】
A lessee should initially recognize a leased asset and the liability arising from a finance lease which does not transfer the title of leased asset to the lessee at the lower of (i) and (ii) at the inception of the lease.

1. The present value of the total lease payments
2. The price at which the lessor has purchased the leased asset (a lessee is allowed to use the estimated purchase price, if the lessee does not know the price at which the lessor has purchased the asset.)

A lessee should similarly recognize the leased asset and the liability arising from a finance lease which transfers the title of leased asset to the lessee at the price at which the lessor has purchased the asset. If a lessee does not know the price, the lessee is allowed to recognize them at the lower of the present value of the total lease payments and the estimated purchase price.
A lessee should aggregately recognize leased assets attributed to "property, plant and equipment", separating from leased assets attributed to "intangible fixed asset". A lessee is also allowed to include leased assets attributed to property, plant and equipment in "property, plant and equipment" and to include leased assets attributed to intangible fixed asset in "intangible fixed asset".
A lessee should classify the corresponding liability as follows.

1. The liability whose due date from the balance sheet date is within 1 year : Current liability
2. The liability whose due date from the balance sheet date is after 1 year : Fixed liability

【Depreciation of Leased Assets】
A lessee should depreciate the leased asset arising from a finance lease which does not transfer the title of leased asset to the lessee during the lease term, and the residual value of leased asset is nil (If a lessee guarantees the residual value of leased asset, the guaranteed amount should be treated as the residual value.).
A lessee can select one of depreciation methods and the method the lessee selects does not need to be the same with the one which the lessee selects for its own assets. However, the lease taxation allows a lessee to only choose "the straight-line depreciation over the lease term". This means that a lessee should practically depreciate a leased asset on a straight-line basis over the lease term. If a lessee chose another method, the depreciation expense could not be tax-deductible because that amount of depreciation expense could excess the limitation of the amount tax-deductible.
For a finance lease which transfers the title of leased asset to the lessee, the lessee needs to depreciate the leased asset over the economic life of the asset with the depreciation method identical to the one for the lessee's own asset.

【Accounting for Lease Payments】
A lessee should allocate the lease payments between the interest component and the liability component. A lessee should account for the interest component as expense and account for the liability component as repayment of the liability.
The interest component should be allocated by each fiscal period over the lease term, using the effective interest method in principle. When a lessee measures the interest component, the lessee should use the interest rate that makes the present value of the total lease payments equal to the carrying amount of the leased asset and the liability. A lessee treats the amount of lease payment minus the amount of interest component as the repayment of the liability.
If a lessee classifies a lease as a finance lease, excluding the administrative expense component or maintenance expense component from the lease payments, the lessee should account for the lease payment minus those expenses based on the accounting method explained above. Those expenses excluded from lease payments should be recognized as administrative expenses or maintenance expenses.

【Accounting at the End of Lease Term】
At the end of the lease term, a lessee is not required to account for a finance lease which does not transfer the title of leased asset to the lessee, unless the lessee guarantees the residual value of the leased asset. If a lessee guarantees the residual value of the leased asset, the lessee should account for the amount to be paid to the lessor as loss on sale etc., when the amount is fixed. The amount to be paid to the lessor is the difference between the amount guaranteed by the lessee and the actual sales value by the lessor.

【Accounting for Lease to Identical Lessee After Expiration (re-lease)】
If a lessee chooses to continue to use the leased assets after the end of the finance lease which does not transfer the title of the leased asset to the lessee, the lessee should recognize the lease payment as expense on accrual basis.
If the title of leased asset is transferred to the lessee, the lessee should change the account from "leased asset" to its own asset and continue to depreciate the asset as its own assets.

【Footnote】
A lessee is required to explain the depreciation method for leased assets arising from finance leases and the kinds of the leased assets in the footnote to financial statements. However, a lessee would not be required to do it if finance leases are immaterial (Leases are treated as immaterial if the balance of the remaining lease payments at the year-end is less than 10%. A lessee would judge whether the leases are material or not, as explained below.).

Simplified Accounting Requirements by Lessee for Finance Lease

【Lease assets without materiality】
A lessee is allowed to account for an immaterial finance lease which does not transfer the title of leased asset to the lessee in accordance with a simplified accounting method. The simplified accounting method a lessee may adopt is either (i) or (ii).

1. The simplified accounting method in which the lessee does not allocate lease payments between interest component and liability component.
   A lessee recognizes a leased asset and the corresponding liability at the amount of the total lease payments. The lessee only recognizes depreciation expenses in profit and loss.
2. The simplified accounting method in which the lessee recognizes the amount of the interest component on a straight-line basis over the lease term.
   A lessee recognizes a leased asset and the corresponding liability at the present value of the total lease payments or the estimated purchase price of the leased asset. Although the lessee recognizes both of interest payment and depreciation expense, the amount of the interest component is allocated on a straight line basis over the lease term.

If lease payments are evenly made over the lease term in the lease contract, the amount of expense recognized by the lessee in a simplified accounting method would be equal to the amount of lease payments on the condition that the lessee depreciates the leased asset with "straight-line method over the lease term".

＜The Ratio of the Outstanding Lease Payments at the Year-end＞

【Lease with Each Leased Asset being Small Purchase Priced and Lease with Short Term】

• A lease in which the amount of the total lease payments is less than 3 million yen
  A lessee is allowed to adopt the off-balance sheet treatment  the lessee recognizes any lease payment as expense, if a finance lease which does not transfer the title of the leased asset to the lessee is immaterial on the lessee's business activity and the amount of the total lease payments is less than 3 million yen. Furthermore, if the finance lease includes several assets classified to different accounts, the lessee is allowed to allocate the amount of the total lease payments into each account in judging whether the amount of the total lease payment is less than 3 million yen.
• A lease whose lease term is 1 year or less.
  A lessee is allowed to adopt the off-balance sheet treatment, if the lease term is 1 year or less.
• A lease in which the amount of the total lease payments is less than the amount depreciable in a lump if a lessee purchases the same asset
  If leased assets are immaterial, and the amount of the total lease payments per asset is less than the amount depreciable in a lump at the moment a lessee purchases the same asset, the lessee is allowed to adopt the off-balance sheet treatment. As some interest expenses are usually included in lease payments, a lessee is allowed to judge whether the amount of the total lease payments could fall into off-balance sheet treatment, considering the interest expenses into account.

Lessor Accounting for Finance Lease

【Recognition of Investment Asset in Leases or Lease Receivable】
A lessor should initially recognize an investment asset in leases arising from a finance lease which does not transfer the title of leased asset to the lessee on its balance sheet at inception, while a lessor should initially recognize a lease receivable arising from a finance lease which transfers the title of leased asset to the lessee on its balance sheet at inception. An investment asset in leases is composed of the right to receive lease payments in the future and the estimated residual value of the leased asset.
The amount to be recognized as "an investment asset in leases" or a lease receivable depends on the accounting method a lessor adopts. The accounting method 1 requires a lessor to recognize an investment asset in leases or a lease receivable at the amount of the total lease payments. The accounting method 2 or 3 requires a lessor to do it at the purchase price of the leased asset.
A lessor should classify its investment assets in leases or leasing receivables as follows.

1. The investment asset in leases or lease receivable arising from the main business activity : Current assets
2. The investment asset in leases or lease receivable arising from the business activity which is out of the main business activity
   － The investment asset in leases or lease receivable which will be received within 1 year from the date after the balance sheet date : Current Assets
   － The investment asset in leases or lease receivable which will be received after 1 year from the date after the balance sheet date : Fixed Assets

【Basis of Lessor Accounting】
A lessor should choose one of the accounting methods and the lessor should continue to use the accounting method (In a case of a finance lease which transfers the title of leased asset, the account "investment asset in leases" is replaced by "lease receivable".).

＜The accounting method 1; a lessor recognizes sales revenue and cost of sales at the inception of the finance lease＞

• A lessor should recognize sales revenue at the amount of the total lease payments, and should recognize an investment asset in leases at the same amount at the inception of the lease.
• A lessor should recognize the purchased cost of the leased asset as cost of sales.
• A lessor should recognize the difference between the sales revenue and the cost of sales as interest revenue. A lessor should defer the interest revenue which should be recognized after the current period, and set off the interest revenue with the investment asset in leases in each year-end.

＜The accounting method 2; a lessor recognizes sales revenue and cost of sales on an accrual basis＞

• A lessor should recognize an investment asset in leases at the amount of purchased cost of the leased asset at the inception of the finance lease.
• A lessor should recognize the amount of lease payments to be received in the current period as sales revenue.
• A lessor should recognize the amount of lease payments in the current period minus the amount of interest revenue allocated in the current period as cost of sales.

＜The accounting method 3; a lessor recognizes interest revenue, without recognizing sales revenues＞

• A lessor should recognize an investment asset in leases at the amount of the purchased cost of the leased asset at the inception of the finance lease.
• A lessor should allocate the lease payments to be received between interest revenue and collection of the investment asset in leases, and should recognize the amount of interest revenue as profit.
• A lessor should recognize the amount of lease payments in the current period minus the amount of interest revenue allocated in the current period as collection of the investment asset in leases.

【Accounting for Interest Revenues】
The amount of interest revenue is the amount of the total lease payments and the estimated residual value minus the purchased cost of leased asset. The amount of interest revenue in each fiscal period would be a same amount regardless of the accounting method 1, 2 or 3. A lessor should measure the amount of interest revenue with the effective interest method, using an interest rate implicit in the lease by the lessor.

【Accounting for Administrative Cost and Maintenance Cost】
If a lessor deducts administrative costs or maintenance costs from the amount of the total lease payments to be received in classifying a lease as a finance lease or an operating lease, the lessor should recognize the amount of those costs as profit, separating from any revenue measured in either accounting method 1, 2, or 3. Otherwise, the lessor should recognize the actual cost of the fixed asset tax, insurance cost, or the others as deduction.

【Accounting at the End of Lease Term】
A lessor is required to account for an asset returned from a lessee at the end of the finance lease which does not transfer the title of the leased asset to the lessee. A lessor should transfer the account "investment asset in leases" to "supplies" or "property, plant and equipment" based on its purpose for the returned asset. If a lessor sells or disposes of the returned asset, the lessor should recognize the difference between the carrying amount of the asset and the selling price as profit and loss.

【Accounting for Lease to the Identical Lessee After the Expiration (re-lease)】
If a lessee chose to continue to use the leased assets after the end of the finance lease which does not transfer the title of the leased asset to the lessee, the lessee would enter into a re-lease. In this case, a lessor should transfer the account "investment asset in leases" to the account "property, plant, and equipment", and the lessor should depreciate the property, plant, and equipment over the estimated lease term of the re-lease. A lessor should recognize the lease payments to be received as revenue on an accrual basis.

【Footnote】
A lessor should explain its investment asset in leases arising from finance leases which do not transfer the title of leased asset in the footnote, disaggregated into the receivable component, the estimated residual value of leased assets (not guaranteed by lessees), and the interest component.

Lease receivable component 　　　　　　　　　　 　×××
Estimated residual value of leased assets　　　 　　 ×××
Interest revenue component　　　　　　　　　 　 △ ×××
Investment asset in leases 　　　　　　　　　　　　 ×××

A lessor should explain the amount to be collected within 5 years and the amount to be collected after 5 years in the footnote for both lease receivables (arising from finance leases which transfer the title of leased asset to the lessee) and investment assets in leases (arising from finance leases which do not transfer the title of leased asset). A lessor should also explain the amount to be collected by each year within 5 years.
If the lease receivables or the investment assets in leases are immaterial, the lessor is not required to explain in the footnote. Those are treated as immaterial if the total amount of the remaining lease payments to be received and the residual value of leased assets is less than 10%, as explained below. In addition, a lessor should explain in the footnote which accounting method the lessor has chosen.

Simplified Accounting Requirements for Finance Lease

A lessor is allowed to account for interest component in accordance with a simplified accounting method if the remaining balance written below is immaterial. Under the simplified accounting method, a lessor is allowed to recognize interest component on a straight line basis over the lease term. A lessor would judge whether the investment assets in leases and the residual value are immaterial or not as follows.
However, a lessor mainly engaged in lease transactions is not able to adopt the simplified accounting method.

＜The Ratio of the Outstanding Lease Payments & the Estimated Residual value of the leased assets at the Year-end＞

Accounting for Sale and Leaseback Transaction

If a sale and leaseback transaction is classified as a finance lease, the lessee and the lessor should account for the sale and leaseback transaction in accordance with the accounting for a finance lease. The lessee should recognize the leased asset at the actual selling price of the leased asset to the lessor and depreciate the leased asset, while the lessor should recognize the investment asset in leases or lease receivable at the actual purchase price of the leased asset.

The lessee should defer the difference between the selling price and the carrying amount at the point of selling the asset to the lessor, and should recognize the difference as long term prepaid expense or long term deferred revenue. Based on the ratio of depreciation expense, the lessee should add the long term prepaid expense to the depreciation expense or subtract the long term deferred revenue from the depreciation expense. If it is clear that loss on sales of the asset arises from the estimated fair value of the asset being lower than the book value of the asset, the lessee would recognize the loss at the point of selling the asset, instead of deferring the loss.

Accounting for Operating Lease

A lessor and a lessee account for an operating lease in accordance with the accounting method for a rental transaction (that is, the off-balance sheet treatment for lessee accounting.). A lessee recognizes lease payments as expense without recognizing a leased asset or the corresponding liability. On the other hand, a lessor recognizes a leased asset associated with an operating lease on its balance sheet, and depreciates the leased asset. The lessor recognizes the lease payments to be received as revenues.
A lessor and a lessee are required to explain non-cancelable operating leases in the footnote as follows.

• The amount of the remaining lease payments to be paid or received within 1 year after the balance sheet date.
• The amount of the remaining lease payments to be paid or received after 1 year.

If an operating lease is partially non-cancelable, a lessor and a lessee are required to explain the amount of the remaining lease payments during the partially non-cancelable lease term in the footnote. However, a lessee and a lessor are not required to explain an operating lease in the footnote if the operating lease meets the one of conditions below. The conditions (a) to (c) are identical to those for a finance lease.

1. An operating lease is immaterial for the lessee's business activity and the amount of the total lease payments is less than 3 million yen. Furthermore, if an operating lease includes assets classified to different accounts, the lessee is allowed to allocate the amount of the total lease payments into each account in judging whether the amount of the total lease payments is less than 3 million yen.
2. The lease term is 1 year or less.
3. Leased assets are immaterial, and the amount of the total lease payments per asset is less than the amount depreciable in a lump at the moment a lessee purchases the same asset.
4. If a lessee informs a lessor of the intention to cancel the operating lease in advance (2 or 3 months before the cancellation date), The lessee is able to cancel the operating lease and is not required to pay the lease payment arising after the notified cancellation date. In this case, the lessee is not required to explain the lease payment arising from the notification date to the cancellation date in the footnote.