Discussions in the U.S. and the IASC

788 Such a lease is believed to bear a greater similarity to a purchase contract than it does to a rental contract. As with purchase contracts, the finance lease is considered fulfilled at the time of delivery of the asset to the lessee. If it is a purchase contract, the contract is considered fulfilled at the time of delivery of the property. As such, the lessee should recognize the asset and liability associated with the executed contract because finance leases are accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee in the same way as an installment purchase is. All other kinds of leases are classified as operating leases and their rental is charged to expense over the lease term as it becomes payable. Operating leases are considered to be executory contracts in the same way as rental contracts are regarded as executory contracts. In both cases, assets and liabilities are not recognized on the lessees‘s balance sheet. In 1996 and 2000 86 , G4+1 87 published special reports which proposed that operating leases be capitalized. In their framework, a non-cancellable operating lease is regarded as an installment purchase that allows the purchaser the right to use, but not dispose of the property. Since they believe that the rights and obligations arising from an operating lease meet the definition of an asset and liability, they argue that a 86 Mcgregor 1996, Nailer et al.2000 87 G4+1 was a working group consisting of members of the standard-setting bodies of Australia, Canada, New Zealand, the UK, the USA and International Accounting Standards Committee IASC; the predecessor of IASB. 789 non- cancellable lease should be capitalized on the lessee‘s balance sheet 88 and that the resulting asset and liability should be recognized as the present value of the minimum lease rentals at the inception of the lease. The lease asset is subsequently to be amortized over the lease term and the lease liability is to be reduced by the part of the principal of the lease payment calculated based on the discount rate, which determines the present value of the minimum lease rentals.

2.2 Accounting for leases in Japan

ASBJ, the Accounting Standard Board of Japan, released the new accounting standard for leases in 2006. This new accounting standard which became effective in March 2009 is very similar to the SFAS No.13 and IAS No.17 standards. The older accounting standard was released by the Business Accounting Council of the Japanese Ministry of Finance 89 the present Financial Service Agency in 1993. Under this standard, lease commitments were divided into two categories: finance leases and operating leases. The Business Accounting Council‘s definition of a finance lease is almost identical to the SFAS‘s definition of a capital lease 90 . Under the older 88 Nailer et al. 2000, p.22, par.38. 89 Prior to 2001, the public sector set accounting standards. The private sector, the Accounting Standard Board of Japan ASBJ was established in 2001 and has been the standard setter ever since. The ASBJ published new accounting standards for leases which abolished the exception for capital leases. The new standards became mandatory in 2007. 90 Income measurement for lessors is calculated slightly differently in Japan than it is in the U.S. 790 standard, a finance lease was accounted for as a purchase-with-loan. Note, however, that this standard allowed lessees to avoid capitalizing the type of finance lease that did not transfer ownership of the property to the lessee by the end of the lease term. Because firms preferred this off-balance treatment, most finance-lease users arranged lease contracts so as not to be obliged to capitalize them. Lessees that do not capitalize finance leases are instead required to disclose capitalized information such as the present value of lease liabilities, the acquisition cost of lease assets, the book value of lease assets after depreciation, the amount of their lease rentals, and depreciation expenses on lease assets and interest expenses on lease liabilities in the footnotes of their financial statements. Users whose lease liabilities are less than 10 of the sum of the book value of their PPE and their lease liabilities 91 are also allowed to use a concise footnoting method for disclosing their capital leases. This method allows users to substitute the gross amount of their lease rentals for the present value of the measurement of lease assets and liabilities. In this case, the book value of lease assets and liabilities is the gross amount of the lease In the U.S., the revenue measurement for sales-type leases is to be separated from that of direct financing leases whereas in Japan, we treat both types of leases as finance leases. However because this paper focuses on the earnings of lessees, this makes no difference to my argument. 91 10   Liability Lease PPE of V B Liability Lease