Introduction
Starting with the fiscal year beginning on or after April 1, 2027, all companies will be required to apply the following:New Lease Accounting Standards」。
"Another new standard..." "Things that were off-balance sheet are now on-balance sheet, I can't keep up with the paperwork!"
I imagine that anxiety and tension are already spreading in accounting and finance departments. Indeed, this new standard requires even contracts that were previously "just loans" to be recorded as assets or liabilities, which will undoubtedly result in a huge administrative burden.
But wait here.
In fact, assuming that these new standards should be applied blindly to everyone could lead to a major mistake.
This article explains the overview of the new lease accounting standards and the "true criteria for reducing administrative burden" that accounting personnel should know.
What are the "new lease standards" that are overturning conventional accounting practices?
First, let's explain the core reason why the "new lease accounting standards" are such a hot topic right now.
From off-balance to on-balance
Under previous accounting standards, if a company borrowed something, it was generally not recorded on the balance sheet (a statement listing assets and liabilities)."Off-balance"That was recognized.
- Traditional thinking: If you're simply renting (operating lease), you can just treat the amount you paid as "lease fees (expenses)."
- The new standard's approach: Everything you borrow is recognized as an asset and a liability."On-balance"I'll do that.
In other words, things that were previously treated as "expenses," such as renting photocopiers or guaranteeing employees' home loans, will now all appear as "assets" and "liabilities."
Reasons why the burden on accounting staff is drastically increasing
This change will force accounting staff to perform the following tasks:
- Contract inventory: Review all contracts within the company and determine whether they are "lease agreements."
- Asset accounting and depreciation: All borrowed items are inventoryed as assets, and depreciation calculations are performed.
- Accounting for liabilities and calculating interest: Calculate liabilities by discounting future payments to their present value, and then calculate monthly interest.
These are all extremely complex and time-consuming tasks. For large companies with thousands or even tens of thousands of lease agreements, it can truly be described as a "flood of paperwork."
"Behind-the-scenes stories" and criteria for judging "importance" that accounting personnel should know
Now, let's get to the main point. While the introduction of the new standards is mandatory, it's crucial to consider whether there's a "necessity to apply every single detail" to all companies.
Questioning accounting "common sense": A hearing in London
In fact, when these new standards were formulated, there was an interesting exchange at the International Accounting Standards Board (IASB) public hearing.
A European businessman posed this question to the IASB chairman.
"It's true that the benefits to your company may be minimal. However, the new lease accounting will increase transparency in companies' financial conditions, which will lead to proper capital allocation and contribute to the healthy growth of the global economy."
In response, a certain Japanese business leader offered a calm and insightful opinion.
"I fully understand the purpose of this revision of the standards. There are indeed companies that mislead investors by disguising large finance lease transactions as off-balance sheet transactions, and this needs to be corrected. However, aren't such companies actually just a handful? The social cost of involving hundreds of thousands of other companies that do not engage in such practices in order to accommodate that handful of companies is enormous. The standards should be more targeted."
For companies using 73%, the impact is minimal.
In response to this opinion, survey data was presented. A survey of 500 listed companies in Europe at the time examined the percentage of total assets accounted for by outstanding off-balance-sheet lease contracts, and the following results were obtained.
- A company with a value of 73% keeps its lease balance below 5% of its total assets.
- Companies with a ratio of 53% have reduced that ratio to 2% or less.
In other words, for most companies, applying the new standards had a very minor impact on their total assets.
You can make a judgment based on "importance".
Following this investigation, the IASB considered a proposal to exempt companies with outstanding lease contracts of 51 TP3T or less of total assets from the standard, but ultimately this was not adopted.
However, what accounting personnel should keep in mind here is that the IASB has clearly defined the concept of "materiality."
"Since the same criteria apply to all accounting standards, setting a special threshold only for lease standards would disrupt the overall balance and should be avoided."
In other words, the interpretation is that "companies are allowed to decide whether or not to apply the standards, taking into consideration their importance to their own company."
How to respond on the ground? Three steps to avoid blind obedience.
Based on the concept of "importance," what specific actions should be taken on-site? Before hastily implementing a system, please review the following steps.
1. Visualize the degree of impact on our company.
It's important not to jump to conclusions and think, "Our company is also below 5%, so this doesn't apply to us," but let's start by doing some calculations for our own company.
For companies where the ratio of lease liabilities to total assets is 1% or less, the impact on their financial statements even if the new standards are strictly applied will be minimal.
2. Using a "conceptual framework" as a shield
IFRS (International Financial Reporting Standards) has a fundamental concept called the "Conceptual Framework for Financial Reporting," which includes a clear description of "materiality."
If it can be determined that applying the new standards will only result in "formal rule compliance" and impose an unwarranted burden, then it is justifiable to argue that there is little point in applying those standards.
3. Trust the judgment of the accounting staff.
Japanese accounting practices lack the strict materiality criteria of IFRS, which makes implementation difficult in practice. However, it is perfectly acceptable for the person in charge to decide not to apply the new standards.
Rather than simply applying the rules because they've been established, a professional accountant should ask themselves, "What is the purpose of this rule?" and "Is it truly necessary for our company?" This is the perspective that is expected of an accountant.
Summary
Accounting is a language, not a set of rules.
Accounting standards are the "language" used to accurately communicate a company's financial status to third parties.
If the language used is too complex and obscures the "healthiness" or "reality" of the company that was originally intended to be conveyed, then that defeats the purpose.
The introduction of the new lease accounting standards is not simply an increase in administrative work.
Is paying the cost of "burdened administrative procedures" truly sufficient to achieve the objective of "increasing transparency"?
We are constantly being tested on our sense of balance.
Rather than blindly following the rules, the ability to judge what is important in light of the company's actual situation—that may be the most important skill for accounting professionals going forward.
