Accounting Guidance for SMEs or Accounting Basic Guidance for SMEs

Small sized enterprises (SMEs) are allowed to prepare their financial statements in accordance with either "the Accounting Guidance for SMEs" or "the Accounting Basic Guidance for SMEs" instead of the lease accounting standard (Japan GAAP). In this section, SMEs are defined as entities which are classifies as neither (a) nor (b) below.

1. an entity to which　the Financial Instruments and Exchange Act is applied, its subsidiary entity and its affiliated entity.
2. an entity which is required to be the one with accounting auditors under the Company Law.

The Accounting Basic Guidance for SMEs has been developed in February 2012 for SMEs which should apply simpler accounting methods than the Accounting Guidance for SMEs is from the standpoint of their practicality. The Accounting Basic Guidance for SMEs is defined as the one which would not be affected by the IFRS in order to make the Accounting Basic Guidance for SMEs stably applicable.
For finance leases, the Accounting Guidance for SMEs treats accounting for sale and purchase transactions (on-balance sheet treatment) as a more generally accepted accounting principle than accounting for rental transaction (off-balance sheet treatment) in accordance with the lease accounting standard (Japan GAAP), which has been affected by the IFRS. On the other hand, the Accounting Basic Guidance for SMEs treats accounting for rental transactions as a more generally accepted accounting principle for finance leases. This means that a SME (lessee) is able to account for leases by recognizing lease payments as expense without recognizing any asset and liability on its balance sheet.

＜Accounting Guidance for SMEs＞

A lessee should account for a finance lease which does not transfer the title to the leased asset to the lessee, as if that finance lease was a sale and purchase transaction (on-balance sheet treatment). However, a lessee is alternatively allowed to account for that finance lease as if the lease was a rental transaction (off-balance sheet treatment).

＜Accounting Basic Guidance for SMEs＞

A lessee should account for leases either (a) or (b) below.

1. as if leases were rental transactions (off-balance sheet treatment) or
2. as if leases were sale and purchase transactions (on-balance sheet treatment).

It has been viewed as one of the generally accepted accounting principles for a lessee to account for leases as if they were rental transactions (the off-balance sheet treatment), since the Accounting Basic Guidance for SMEs was published.
A lessee (SME) is required to disclose the amount of the remaining lease payments in footnote if the payments are material. This applies to a lessee who applies the Accounting Guidance for SMEs instead of the Accounting Basic Guidance for SMEs.
The Accounting Basic Guidance for SMEs does not clarify the classification of leases to which the Accounting Basic Guidance for SMEs is applied. However, it seems that finance leases that do not transfer the title to the asset to the lessee under the lease accounting standard are the leases to which the Accounting Basic Guidance for SMEs is applied.

Tax Treatment for leases a lessee accounts for as if they are rental transactions (off-balance sheet treatment)

Even when a lessee accounts for finance leases as if they were rental transactions (off-balance sheet treatment), those leases are treated as sale and purchase transactions under the lease taxation. Under the lease taxation, the amount a lessee recognizes as lease expense is included in depreciation expense. In this case, the lessee does not need to include that amount treated as depreciation expense in a detailed document for the purpose of tax return.
If lease payments are made evenly on a monthly basis and the lessee depreciates the lease asset on a straight-line basis over the lease term (depreciable term), there would be no difference between lease expense under the lease accounting and the amount tax-deductible under the lease taxation. In addition, there would be no need for the lessee to adjust the difference between the lease expense under the lease accounting and the amount tax-deductible under the lease taxation. This means that there is no substantial difference with the treatment of leases as rental transactions.

＜Depreciating a lease asset on a straight-line basis over the lease term＞
Acquisition cost of leased asset  residual value guarantee by lessee/the number of months over the lease term x the number of months within the current fiscal year.

※ Under the lease taxation, the acquisition cost of leased asset is, in principle, defined as the total amount of lease payments.