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Companies

Japan to classify leases as assets, in line with global standards

New rule boosts transparency but expected to hit return ratios

Operating leases are used by such sectors as real estate, logistics and marine transport.

TOKYO -- Japanese companies will be required to list lease contracts as assets on their balance sheets under planned accounting rule changes, a move that would erode their return on assets but increase the transparency of corporate finances.

The Accounting Standards Board of Japan will meet Friday to start discussing reforms that will bring Japanese rules more in line with international standards, with the aim of reaching an agreement by the end of the month.

The changes mean listed companies will have to book roughly 17 trillion yen ($152 billion) in additional assets on their balance sheets.

The move follows similar changes made to International Financial Reporting Standards in January and America's Generally Accepted Accounting Principles in December last year.

With some on the ASBJ expressing reservations, however, it could take two to three years to actually introduce the change.

Lease contracts can be largely divided into two categories. Finance leases, which resemble purchase, cover such items as office equipment and computers. They are already treated as assets on balance sheets.

Operating leases, which are typically used for ships, aircraft, warehouses and other assets with long operational lives, are currently kept off the balance sheet, and the new accounting rules will change that.

The impact will be felt in multiple sectors that rely on such arrangements, including real estate, retail, logistics and marine transport. 

Real estate companies Leopalace21 and Daito Trust Construction, whose business models center on leasing rental units from owners and guaranteeing them revenues, would have to book hefty amounts of additional assets and debts.

More assets could translate to a lower return on assets, a metric closely watched by investors. Companies already in shaky financial positions could be hit with extra interest-bearing debt.

The operational leases of 1,250 companies tallied by Nikkei put the total at roughly 17 trillion yen. The number rises to nearly 25 trillion yen when companies using IFRS and GAAP are included. The scale would increase total assets held by listed companies by 2%.

The leasing sector could stand to lose as well. Clients were enticed by how lease payments can be treated as simple expenses for accounting purposes. Lessees can still reduce initial costs of procuring equipment compared to purchasing under the new rules, but annual depreciation write-downs will become necessary.

"If the merits of off-balance-sheet accounting diminishes, companies will become less eager to use leased equipment for facility investment," said one source.

Reflecting the sentiment in the business community, the ASBJ had been resistant to updating accounting rules for leases. But with international and U.S. accounting standards having been updated, some worry that Japanese financial disclosures could lose credibility in the eyes of investors.

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