Key Points for Determining an Entity Subject to the New Lease Accounting Standard (Quick Reference Table)

In order to comply with the new lease accounting standard, it is important to first determine at an early stage whether your company is one of the subject companies. The table below provides an overview of the guidelines for making an initial determination. Depending on your consolidation policy Possibility of Spreading to Subsidiaries and Affiliates The following points should also be taken into consideration depending on the consolidation policy.

Summary

In principle

• Listed company

• Company with accounting auditor

• Large companies under the Companies Act

Requests for application are likely to arise (depending on the consolidated package/parent company's policy)

• Subsidiary or affiliate whose parent company is listed

In principle, voluntary application

• Unlisted, small and medium-sized companies (preparing for IPO/planning to raise funds/receiving requests for application from major business partners (including overseas), if applicable)

Individual judgment

• Equity method affiliate

• SPC

• Overseas subsidiaries (IFRS operation: depends on whether there is a request for consistency with IFRS 16), etc.

Depending on the consolidation policy, the request may be extended to subsidiaries and affiliates.

2. Details of the subject companies

2-1. Listed companies

In principle
Listed companies, It is assumed that the company will respond to the new lease accounting standards from the viewpoint of disclosure and audit requirements. It is important to define requirements and collect contracts in advance for the entire scope of consolidation in accordance with the financial closing schedule, and to prepare a consistent design up to the notes and explanation of the impact amount. In particular, the key to the initial response is to comprehensively identify the subject contracts, including real estate leases, long-term rentals, and other real leases. Since the request for application is likely to spread to subsidiaries and affiliates depending on the consolidation policy, it would be smooth if the criteria and operational flow common to the group are standardized at an early stage.

2-2. Companies with independent auditors

In principle, optional, but may be applicable in case of specific request.
Some companies have accounting auditors, In principle, companies that have accounting auditors are required to comply with the standard in terms of audit response. Document the operational flow from identification, measurement, and notes, and maintain recordkeeping and evidence in preparation for re-measurement and index revisions. If the structure is such that requests are extended to subsidiaries, it is important to develop a unified policy based on the consolidation package.

2-3. Large company under the Companies Act

In principle
Large companies under the Companies Act (with capital of 500 million yen or more or total liabilities of 20 billion yen or more), It is a prerequisite to comply with the new lease accounting standards from both institutional and audit perspectives. In light of the trend toward a large number of contracts and offices, it is effective in leveling the load during the accounting period if the system design is solidified at an early stage based on the assumption that the contract collection and remeasurement process will be automated. In addition, depending on the consolidation policy and the group's accounting governance, application requests may spread to subsidiaries and affiliates. It would be smooth to unify the judgment criteria and operational flow common to the group at an early stage.

2-4. Subsidiaries/affiliates whose parent companies are listed

[Applicable requests are likely to arise].
This is a category where requests for application are likely to arise depending on the consolidation package and policies of the parent company. It is recommended to prepare not only your own closing policies but also the accounting policies, note formats, and data granularity required by the parent company, and to align the assumptions for period setting and consistency with IFRS 16 in advance to facilitate smooth implementation.

Unlisted companies and small and medium-sized companies

In principle, voluntary, but may be required at specific requests.
In principle, application is voluntary for unlisted companies and small and medium-sized companies. However, if there is a request from IPO preparation, fundraising, or major business partners (including overseas), it is subject to consideration. Application may increase the visibility of lease obligations and consistency of disclosures, and improve financial credibility. It is practical to evaluate whether or not to adopt the standard based on the balance between benefits and operational burdens, taking into account the volume of contracts, existing accounting policies, and disclosure needs.

Companies to which IFRS 16 is applied

In principle, voluntary, but may have an impact that should not be underestimated.
Companies already operating under IFRS 16 are unlikely to experience significant accounting changes because the concept of recognition and measurement is similar to the new lease accounting standard. On the other hand, (Where previously only consolidated adjustments were required, reporting on non-consolidated financial statements will also be necessary. Therefore, the treatment of business flow and consolidation adjustments may change significantly. In addition, considering the handling of exceptions to domestic standards and notes, etc, It is by no means unnecessary to prepare, but it is necessary to confirm the handling. We will clarify the policy consistency with the parent company and overseas offices, consistency of period and option judgments, and differences in note formats, etc., to ensure that they are clearly incorporated into domestic reporting.

3. What the companies subject to the new lease accounting standard should keep in mind

3-1. On-balance sheet contracts

What is the determination of subject contracts? It is done based on the substance of the transaction, regardless of the name of the formal contract, and The emphasis will be on "identified assets" and "control of use." Therefore, real leases such as real estate leases, long-term rentals, and supply and outsourcing contracts are also subject to confirmation.

Exceptions and Transitional Measures

There is room for simplified treatment for short-term leases (12 months or less, no purchase option) and small leases. There is room for simplified treatment for short-term leases (12 months or less without purchase option) and small leases. At the time of transition, either the modified retrospective method or the full retrospective method can be selected as the transition method. In addition, there are practical convenience methods (practical simplification measures) such as the re-determination waiver.

Web Articles

Three Conditions for Using the ¥3 Million Standard in New Lease Accounting

In May 2023, the ASBJ (Accounting Standards Board of Japan) issued an exposure draft of a new lease accounting standard. Under the new standard, in principle, all lease contracts must be treated as on-balance sheet, but the so-called "3 million yen standard" is expected to be maintained, so many companies may find that their on-balance sheet targets differ significantly depending on how the small amount determination can be applied. In this article, we will provide an overview of the new lease accounting standards and explain in detail the conditions that should be considered when applying the ¥3 million standard.

3-2. Timing of Application (Mandatory Application) / Early Adoption)

What is the effective date of the new lease accounting standard? April 2027, and early adoption is permitted from April 2025. Early adoption is permitted from the beginning of April 2025. As for the impact on financial indicators, right-of-use assets and lease liabilities will increase in B/S, and P/L will be replaced by depreciation plus interest instead of rent (expenses tend to be accelerated in the initial period). Please refer to this article for a detailed explanation of the impact of the new lease accounting standards and changes.

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Complete Explanation] New Lease Accounting Standards Effective in 2027｜Outline, Changes, Impact, and Practical Responses

The new lease accounting standard effective from April 2027 is a major revision that, in principle, requires many contracts that were previously treated as off-balance sheet to be recorded on the balance sheet. Therefore, the scope of work to be performed by accountants will be broader than ever before, including inventorying of contracts, lease judgments, discount calculations, review of journal entries and notes, and system support.

3-3. Practical Points of Accounting Treatment

Basic Procedures for Lessee Accounting

The basic procedures for lessee accounting are (1) identification, (2) classification of a lease/non-lease component, (3) determination of the lease term, (4) initial measurement and recognition (including determination of the discount rate), and (5) subsequent measurement.
At the inception, a lessee recognizes "right-of-use asset/lease liability" and during the term, "principal repayment + interest". In principle, the right-of-use asset is depreciated over the lease term. If the transfer of ownership or the exercise of the purchase option is reasonably certain, the lease term is estimated including the period of the transfer.

▶For details, please refer to "4.1 Accounting Flow (Lessee)" in the article [Complete Explanation].

Remeasurement and Automation

Re-measurement frequently occurs due to index revisions, contract modifications, and changes in term and option judgments. The new lease accounting standard increases the frequency of remeasurement and recalculation as well as journal entries Therefore, it is recommended to determine the limits of human work and start designing automation as early as possible.

Sublease essentials

For companies with subleases, the practice is complicated by the need for lessor processing in addition to lessee processing. The treatment is divided according to the classification of the sublease (finance lease/operating lease). In the case of a finance lease, the right-of-use asset (or part of it) under the head lease is extinguished and a net investment is recognized and interest income is recognized. It is practical to systematically deal with the reconciliation of the terms of the head lease and the sublease, restoration of treatment at the time of termination, and recognition of the difference in profit or loss.

▶For details, please refer to "4.3 Image when a sublease is involved" in the [Complete Explanation] article.

Multi-Location Impairment Determination

For companies that operate multiple locations, the combination of differences in lease conditions at each location, differences in estimation assumptions, and inconsistencies in data can easily lead to variations in the determination of impairment. To minimize this, it is recommended that the following four points be established in advance to stabilize operations: (1) definition of grouping units, (2) standardization of check items for signs of impairment, (3) estimated future cash flow, and (4) rules for prorating the amount of impairment. In addition, Since leased real estate, which has been off-balance sheet so far, will be recorded as right-of-use assets, the scope for determining the amount of quarterly impairment will be expanded.

Tax implications

Under the current standard, operating leases are accounted for as "depreciation plus interest expense" and taxation is based on the "amount paid" (debt settled basis), which in principle results in a discrepancy between the two tax bases. Countermeasures include maintaining a double ledger (accounting and tax values), automatic generation of loss recognition schedules, and standardization of tax return adjustment materials. Note that tax association discrepancies will grow as the number of applicable contracts increases. Based on the premise of double ledger management for accounting and taxation, design and test the system from an early stage to equalize the workload for closing and filing tax returns.

▶For details, please refer to "4.4 Discrepancies with Taxes (Tax Association Discrepancies)" in the [Full Explanation] article.

3-4. Planning for Transition

The requirements to comply with the new lease accounting standard cover a very wide range, including contract collection, judgment, remeasurement (re-estimation), journal entries, notes, and taxation. The workload will increase in stages before, during the first year, and after application, Avoid Excel-centric operations, It is important to select a system that can withstand impact estimation, calculation, and re-measurement, and to implement it while involving the relevant departments.
The main system requirements may include the following.

System requirements

• Contract registration/ Bulk registration

• Right-of-use asset/lease liability measurement

• Amortization calculation/interest calculation

• Re-estimation registration/History maintenance

• Journal entries

• Automatic note creation

• Tax discrepancy handling/approval schedule output

• Approval workflow

• Logging and audit trail

• Automatic integration with accounting system (master/ journal entries)
  

• Lessor/sublease support

In HUE, Two solutions to choose from according to the functions and operations you need HUE offers two solutions to meet your needs. You can choose the one that best suits your company's situation. We hope you will consider them.

HUE Asset Product Introduction

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HUE Lease Accounting Product Introduction

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Lessee Lease System

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4. If you want to proceed with the application of the new lease accounting standard

The starting point is Initial determination of applicable (company) and identification of applicable contracts are. Estimate the numerical impact and proceed in parallel with the creation of policies, systems, and frameworks while aligning views with management and audit.

Identifying the subject contracts is a difficult task to collect from the field. Therefore, we have prepared a free sheet to collect contracts that will be on-balance sheet under the new lease accounting standards from each department. We provide a ready-to-use collection sheet with an easy-to-understand layout, as well as slides to explain the process to the field, so you can distribute and collect the information immediately.

Supervised by a certified public accountant, it is possible to collect the necessary and sufficient items with minimal preparation. We hope you will take advantage of this service.

White Paper

＼Certified Public Accountant, Masahiko Inoue, Supervisor/
New Lease Accounting Standards Contract Collection Sheet

This is a format to collect information scattered in each department, such as lease and rental contracts, from the field without difficulty. Please use this as the first step in contract management and ledger maintenance.

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We also provide the "Impact Cost Estimation Tool (Excel)" free of charge for estimating the impact amount. Based on input values such as monthly lease payments and discounted present value, various on-balance sheet amounts and cost amounts can be estimated. Please use this tool as well.

White Paper

New Lease Accounting Standards: Impact Calculation Tool

This is a tool for estimating the impact of converting current off-balance sheet contracts to on-balance sheet contracts based on the new lease accounting standard draft released in 2023.

Download ArielAirOne

We hope that this article will serve as a practical guide to help you move forward with your company's application policy and transition plan today.

Related Articles :
Complete Explanation] New Lease Accounting Standards Effective in 2027｜Outline, Changes, Impact, and Practical Responses
Three Conditions for Using the ¥3 Million Standard in New Lease Accounting
How to Set the Lease Term under IFRS 16? A Survey of Major Companies in Japan
What journal entries and accounting procedures are required under IFRS 16 (new lease accounting standard)?
New lease accounting standards explained in an easy-to-understand manner! How does it differ from the current standard?
When will the new lease accounting standards become effective? Explanation of the expected timing from the exposure draft!