News Details
2025.10.31
Overview of Japan’s New Lease Accounting Standard
Implications for Companies and Practical Considerations
1. Introduction
In September 2024, the Accounting Standards Board of Japan (ASBJ) issued the Accounting Standard for Leases (ASBJ Statement No. 34). This represents a major revision aligning Japan’s lease accounting more closely with International Financial Reporting Standard (IFRS) 16 Leases. This article outlines the key concepts and practical considerations of the new standard in a concise format.
2. Background of the New Standard
Under the previous Japanese GAAP, lease transactions were classified into finance leases and operating leases, with the latter generally treated as off-balance sheet. However, as companies increasingly relied on lease-based investments, the need arose to reflect the economic substance of leases more accurately in financial statements. In response, the ASBJ developed a new standard that—while maintaining consistency with international standards—requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet.
3. Key Provisions of the New Lease Accounting Standard
(1) Effective Date
Applicable for fiscal years beginning on or after April 1, 2027.
(2) Scope of Application
The standard applies to all lease contracts in principle. However, practical expedients are available for
short-term leases (terms of 12 months or less) and leases of low-value assets.
short-term leases (terms of 12 months or less) and leases of low-value assets.
(3) Accounting Treatment for Lessees
Lessees must recognize:
- Right-of-use asset – the right to use the leased asset
- Lease liability – the present value of future lease payments
This effectively eliminates the off-balance-sheet treatment previously allowed for operating leases.
(4) Accounting Treatment for Lessors
Lessors continue to classify leases as finance leases or operating leases, retaining the current
accounting model.
accounting model.
4. Comparison with IFRS 16
*See Table 1
Japan’s new standard is largely based on IFRS 16, sharing its fundamental concept of recognizing right-of-use assets and lease liabilities. However, certain simplifications are included to reduce administrative burdens for Japanese companies, especially concerning disclosures, judgment thresholds, and tax alignment.
Japan’s new standard is largely based on IFRS 16, sharing its fundamental concept of recognizing right-of-use assets and lease liabilities. However, certain simplifications are included to reduce administrative burdens for Japanese companies, especially concerning disclosures, judgment thresholds, and tax alignment.
5. Key Practical Issues
(1). Identification of Leases
Determining whether a contract—such as equipment usage or outsourcing—contains a lease
component.
component.
(2). Lease Term and Renewal Options
Estimating the lease term by considering options reasonably certain to be exercised or not terminated.
Estimating the lease term by considering options reasonably certain to be exercised or not terminated.
(3). Determination of Discount Rate
Selecting an appropriate discount rate, such as the lessee’s incremental borrowing rate.
Selecting an appropriate discount rate, such as the lessee’s incremental borrowing rate.
(4). Impact on Financial Ratios
The increase in assets and liabilities may affect financial ratios such as equity ratio and ROA, requiring
attention to loan covenants.
The increase in assets and liabilities may affect financial ratios such as equity ratio and ROA, requiring
attention to loan covenants.
(5). Tax and System Readiness
Some tax treatments remain uncertain. Companies should review system integration between
accounting and tax functions.
accounting and tax functions.
６. Conclusion
The new lease accounting standard enhances financial transparency but also increases operational complexity. In particular, the identification of lease contracts, estimation of lease terms, and determination of discount rates require professional judgment. This article provides an overview only; companies are advised to seek professional guidance before implementation.
References
*Table 1
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