ACCOUNTING STANDARD

FOR

LEASE INDUSTRY

Accounting Standard for Lease Industry

CONTENTS

I.	General Provisions

1.	Purpose

2.	Scope of Application

3.	Definitions

4.	Classification of Leases

II.	Accounting and Reporting By Lessors

Section 1. Operating Leases

5.	Valuation of Operating Lease Property

6.	Recognition of Rental Revenue

7.	Termination of Operating Leases

Section 2. Finance Leases

8.	Valuation of Lease Receivables

9.	Recognition of Interest Income

10.	Manufacturers' or Distributors' Accounting

11.	Termination of Finance Leases

Section 3. Disclosure

12.	Balance Sheet Presentation

13.	Income Statement Presentation

14.	Note Disclosures

III.	Accounting and Reporting by Lessees

Section 1. Operating Leases

15.	Recognition of Rental Expense

Section 2. Financing Leases

16.	Valuation of Leased Assets and Lease Liabilities

17.	Recognition of Rental Expense

Section 3. Disclosure

18.	Balance Sheet Presentation

19.	Note Disclosures

IV.	Miscellaneous

20.	New Leases Subsequent to Lease Termination

21.	Syndicated Leases

22.	Accounting for Lessee's Portion

23.	Sale-Leaseback Transactions

24.	Special Provisions for Use of Account Titles

V.	Special Provisions for Lessors under Credit-Specialized Financial Business Act

25.	Provision for Bad Debts

26.	Present Value Measurement of Lease Receivables

27.	Other Implementation Details

Addenda

Enacted on April 1, 1998

Fully Amended on July 23, 1998

Amended on Dec. 8, 1999

CHAPTER I.

GENERAL PROVISIONS

1. Purpose

The purpose of this Standard is to prescribe the accounting and disclosure for lease transactions in accordance with Article 90 of the Financial Accounting Standards for Business Enterprises (hereinafter referred to as "the FAS").

(1-1) This Standard should be applied to all lease transactions including rentals.

2. Scope of Application

This Standard should be applied in accounting by lessors and lessees. However, this Standard does not apply to the following cases:

a. Contracts to develop or use natural resources such as oil, gas, timber, metals and other mining rights; and

b. Contracts to use such items as patents and copyrights.

(2-1) Contracts to develop or use depletive assets and to use intangible assets are excluded from the scope of this Standard.

3. Definitions

For purposes of this Standard, certain terms are defined as follows:

A. A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

B. The inception date of the lease is the initial date for computing lease payments in accordance with the provisions of the lease contract.

C. The lease term is the period from the inception date of the lease to the expiration date stipulated in the lease contract.

D. The basic lease rental is the amount that the lessee should pay in return for the use of leased property, which includes:

1.	Rental payments that the lessee is obligated to make to the lessor under the lease contract from the inception of the lease;

2.	Agreed amount to be paid by the lessee for transfer of the ownership of leased property to the lessee at the expiration of lease term;

3.	Any guarantee by the lessee of the residual value of leased property at the expiration of lease term; and

4.	Payment called for by the bargain purchase option when such option is given to the lessee.

E. The contingent rental is an increase or decrease from basic lease rentals due to changes occurring subsequent to the inception of the lease in the factors(excluding interest rates and exchange rates, and the same hereinafter) on which calculation of the basic lease rentals is based.

F. The bargain purchase option is a provision allowing the lessee, at its option, to purchase the leased property or to renew the lease contract for a price which is significantly lower than the expected fair value of the property at the time when the option becomes exercisable.

G. The fair value is the exchange price agreed in an arm's length transaction between the seller and the buyer with rational judgement and intention of transaction at the inception of the lease. However, in case the lessor newly purchases an asset for lease, the acquisition cost will be the fair value.

H. The unguaranteed residual value is the portion of the estimated residual value of the leased property, which is not guaranteed by a lessee or by a third party at the inception of the lease.

I. The implicit interest rate is the discount rate which equates the sum of basic lease rental and unguaranteed residual value with the fair value of the leased property at the inception of the lease.

J. The weighted average borrowing rate is the weighted average of the interest rates of the existing borrowings at the inception of the lease.

K. The lease feasibility date is the date when the acquisition of the leased property is de factor completed and so it becomes available for lease.

(3-1) The definition of lease is so comprehensive that it includes not only the lease rentals under the Credit-Specialized Financial Business Act, but also rental transactions and other letting and hiring transactions which are similar thereto.

(3-2) Because the lessor probably collects agreed amounts for the transfer of ownership, the exercise of bargain purchase option, and/or guaranteed residual value until the expiration of lease term, these amounts are included in the basic lease rental.

(3-3) In case the risk arising from fluctuation of interest rates is on the lessee, this transaction is the same as a loan transaction. Therefore, the lease which includes such contents in the contract shall be classified as a finance lease. In an operating lease, the contingent rental which is related to interest rate fluctuation should not occur. In a finance lease, interest income increases or decreases every period as the interest rate changes. Such change in interest income should be included in interest income from the finance lease, not being separated out as a contingent rental. In case of the lease contract which collects rentals in foreign currencies or in a local currency to which the current exchange rate is applicable, such lease rentals should be calculated in foreign currencies. The contingent rental does not arise from fluctuation of exchange rates when the basic lease rentals are calculated in foreign currencies.

(3-4) In case the lessor is a manufacturer or distributor, the fair value means the normal selling price after sales allowances, and in other cases, the acquisition cost should be the fair value. In case of the second-hand assets, when there is a market for them, the market price should be the fair value, and if not, the appraisal value quoted by a certified appraisal agency should be deemed the fair value. When the lessor newly acquires assets, the acquisition price should be the fair value since it can be deemed to have been purchased in the market at a reasonable price.

(3-5) A lessee or person having a special relationship therewith may provide payment guarantee at the time of the lease contract for the estimated residual value at the expiration of lease term. Then its collection risk is transferred effectively from the lessor to the lessee. If the portion of guarantee provided by the lessee is larger, the lessor secures more stable revenue. In this case, the portion of estimated residual value to which a guarantee by a lessee or a third party has not been provided is the unguaranteed residual value. For the leased property whose residual value can not be objectively determined because there is no second-hand market for such assets or it is judged not for general use, the unguaranteed residual value should be estimated as null(0). The unguaranteed residual value should not be included in the basic lease rental because the lessee has no obligation for that.

(3-6) For the lessor, the sum of basic lease rental and unguaranteed residual value is estimated cash income in the future, and the implicit interest rate is used for valuing such sum at the present. Since the implicit interest rate is discount rate which equates the estimated cash income in the future at the inception of the lease with the fair value of the leased property, this is equivalent to the return on investment to the lessor. Meanwhile, the lessee may use the weighted average borrowing rate when it is difficult to get the implicit interest rate of the lessor, although the use of the implicit interest rate is desirable for consistency in accounting between the lessor and the lessee. Only the long-term borrowings(including the current portion of long-term borrowings) should be considered in computing the weighted average borrowing rate. The borrowings from the person having a special relationship, and the borrowings with a significantly lower interest rate than the market rate such as for export or certain capital expenditures that the Government encourages should be excluded in computing the weighted average borrowing rate. The amount on the latest balance sheet may be used if it is difficult to obtain the amount of borrowings at the inception of the lease. The market rate corporate bond yield determined on a reasonable and objective basis in consideration of lease period and credit-rating of the corporation relative to the basic yield of bond-market-value quoted by the Korea Securities Dealers Association as of the date closest to the inception of the lease be the weighted average borrowing rate, in case there are no long-term borrowings.

(3-7) If the leased property is acquired after the lessee is determined, the inception date of the lease is the lease feasibility date.

4. Classification of Leases

A. In case the risk and benefit from the ownership of the leased property is de facto transferred to the lessee, such lease should be classified as a finance lease, and an operating lease otherwise.

B. The lease which is non-cancelable in substance for the entire lease term should be classified as a finance lease if at least one of the following conditions are met:

1	The ownership of the leased property is to be transferred to the lessee at the end or before of the lease term for free or some agreed price;

2.	The lessee has a bargain purchase option;

3.	The lease term is not less than 75/100 of the estimated economic life of the leased property; and

4.	The present value of the basic lease rentals as of the inception of the lease using the implicit interest rate is not less than 90/100 of the fair value of the leased property.

C. If the renewal option of a lease is non-cancelable at the expiration date of the lease, such renewal option should be reflected in the above test provisions 1 through 4.

D. If the classification of lease is different between the lessor and the lessee, the classification by the lessor, in principle, be adopted.

(4-1) The accounting of lease should be administered not by a simple legal form, but by economic substance. In other words, if it is judged that the risk and benefit involved in the ownership of a leased property is substantially transferred to a lessee, the leased property is de facto the lessee's and thus it should be classified as a finance lease. The risk might be from the suspension of operation, loss from technological obsolescence, and fluctuations in revenue due to the changes of economic conditions. The benefit means the expected value of profit arising from operation of assets over the economic useful life, increase in value or realization of the residual value. The lease transaction under which the lessor acquires a leased property with foreign currency loans and the lessee is responsible for the exchange rate fluctuations for such foreign currency loans should be classified as a finance lease because the risk and benefit related to such leased property is to the lessee.

(4-2) Non-cancelable condition should be a prerequisite for the classification of a finance lease because the recovery of investments should be assured through the collection of lease rentals.

(4-3) In case an asset not for common use is leased, the risk and benefit related to such lease property is transferred to the lessee, and this should be classified as a finance lease, unless it is objectively determined that the risk and benefit is not on the lessee. The asset not for common use means the asset for specific purpose, which is impossible or de facto impossible to physically divert for different purpose due to excessive cost for diversion

(4-4) The computation of fair value and unguaranteed residual value is essential for the classification of the lease. In case such amount differs between the lessor and the lessee, its classification may be different between the two parties. Then the lessee should adopt the classification of the lessor while applying the weighted average borrowing rate in valuing the leased assets and lease liabilities.

(4-5) In case the lessor does not follow the above provision 4 because he is located abroad or not subject to this lease Standard, the lessee should classify a lease in accordance with [4A] through [4C] notwithstanding [4D].

CHAPTER Ⅱ.

ACCOUNTING AND REPORTING BY LESSORS

Section 1.

Operating Leases

5. Valuation of Operating Lease Property

A. Property on operating lease should be recorded based on its acquisition cost as of the inception of the lease, and interest costs and other similar financing charges incurred for the acquisition of leased property prior to the inception of the lease are capitalized as a part of the acquisition cost of such property.

B. In case the lessor pays in foreign currencies or borrows foreign currency loans for the acquisition of property on operating lease, the applicable exchange rate in calculating leased property value should be the exchange rate at the time of such payment or loans.

C. Property on operating lease should be depreciated consistently with the depreciation of the same or similar tangible assets of the company.

(5-1) Advances for operating lease in foreign currencies occurred in relation to the acquisition of property on operating lease will be converted to operating leased property. Historical exchange rate at the balance sheet date should be applied to advances for operating lease in foreign currencies because they are regarded as non-monetary assets the same as the operating lease property.

(5-2) While the lessor holds property on operating lease, the risk and benefit from its ownership(for the purpose of leasing business) is on him/her. Thus property on operating lease should be depreciated consistently using the same methods prescribed for acquisition, maintenance and disposal of the similar tangible assets of the company in the FAS. The depreciation on the lease property should be continued for the non-lease period.

6. Recognition of Rental Revenue

A. Basic lease rentals should, in principle, be recognized as revenue on straight-line basis over the lease term. However, the method which better represents the recognition procedure of lease revenue may be applied.

B. Contingent rentals should be recognized as revenue when they are incurred. However, if collection of contingent rentals is uncertain, contingent rentals should be recognized as revenue when they become due for collection.

(6-1) The revenue from operating lease should, in principle, be recognized as revenue on a straight-line basis over the lease term. If the rentals are not equally distributed over the period, the revenue differs from the rentals by period.

(6-2) When the declining-balance method is employed for depreciating property on operating lease, there may occur losses in the beginning of the period for which the depreciation amount exceeds the revenue from operation. In this case, revenue may be recognized by making the profit from such leased property equally distributed throughout the period in consideration of depreciation expense. If the benefit from the use of leased property is diminishes as time passes, the lease rental may be differently determined according to the periods upon agreement between the parties. In such lease contract, the revenue recognition method considering the diminishing benefit may better represent the periodic income than the straight-line basis. For example, in the case of an operating lease where a lessee has an option to extend and the lease rentals at the beginning period are higher than those at the extended period, the lease rentals may be equally distributed throughout the whole period.

(6-3) Contingent rentals, the upward or downward adjustment from the basic lease rentals upon occurrence of an unexpected event after the inception of the lease, should be recognized as revenue or expense when they are incurred. However, if collection of contingent rentals is uncertain, contingent rentals should be recognized as revenue when they are collected.

7. Termination of Operating Leases

If an operating lease is terminated prior to the expiration date, the amount collectable from the lessee or the guarantor in relation to the lease contract should be recorded as income for the period of the termination, and uncollected amount as of the balance sheet date should be disclosed in the accompanying notes.

Section 2.

Financing Leases

8. Valuation of Lease Receivables

A. In the case of a finance lease, the amount to be presented as lease receivables should be the fair value of the leased property.

B. For the lease contracts where lease rentals are paid in foreign currencies or paid in local currency while denominated in a foreign currency, the calculation of lease receivables should be based on the exchange rate on the inception of the lease, and the difference between the leased property and lease receivables should be accounted for in accordance with Article 68 of the FAS.

C. Advances for a finance lease in foreign currencies related to the acquisition of leased property should be translated using the exchange rate at the balance sheet date.

(8-1) For a finance lease, the lessor removes the leased property and record the lease receivables at the inception of the lease. The lease receivables should be recorded at its fair value. When the lessor newly acquires an asset for leased property, the acquisition cost is deemed the fair value. In this case, interest expense and other financing cost for the borrowings for the acquisition of leased property incurred up to the inception of the lease should be added to the acquisition cost.

(8-2) The leased property is replaced with lease receivables at the inception date of the lease. If lease rentals are to be collected in foreign currencies, such rentals should be translated into local currency based on the exchange rate as of the inception date of the lease in computing lease receivables.

(8-3) Advances for lease rentals in foreign currencies related to a finance lease will be converted to lease receivables at the inception of the lease. These advances, deemed monetary assets, should be translated into local currency using the current exchange rate pursuant to the FAS.

9. Recognition of Interest Income

A. Basic lease rentals consist of the principal lease receivables component and the interest income component in a finance lease. For each period, the ratio of the interest income to the lease receivables should be computed by the effective interest method using the implicit interest rate.

B. Contingent rentals should be recognized in accordance with 6B. However, if their amount is significant, they may be recognized separately as the principal portion and interest income portion.

(9-1) A finance lease can be viewed as a lending for acquisition of the leased property from the lessor to the lessee. Interest income naturally arises from the lending. Therefore, basic lease rentals should be recognized separately as the collection of lease receivables and the interest income on lease. Interest income should be computed by the effective interest method on the balance of lease receivables each period. Here the implicit interest rate should be used, which is a discount rate to equate the sum of the basic lease rental and the unguaranteed residual value with the fair value of the leased property.

(9-2) Contingent rentals, in their nature, are variable. Therefore, these should be recognized as income (loss) for the period during which such lease rentals occur. This applies equally both to a finance lease and an operating lease. However, for a finance lease, if contingent rentals are significant in amount, they may be recognized separately as the principal portion and the interest income portion.

10. Manufacturers' or Distributors' Accounting

In case a manufacturer or distributor sells the asset manufactured or purchased in the form of a finance lease contract, the sales price and lease receivables should be computed as the lower of the sum of basic lease rentals and unguaranteed residual value discounted by the weighted average borrowing rate and the fair value of such asset.

(10-1) The cases where a manufacturer or distributor is a lessor include not only those where a company which is not a leasing company under the Credit-Specialized Financial Business Act manufactures or purchases commodities and sells them in the form of a finance lease, but also those where a leasing company under the Credit-Specialized Financial Business Act directly purchases commodities for lease.

(10-2) A contract to sell an asset manufactured or purchased by a manufacturer or distributor in the form of a finance lease may be divided into the contract to sell such asset and the contract to make loans. Therefore, the lessor shall recognize total revenue by dividing it into sales and finance income. In this case, the generally-accepted selling price of the same kind of asset in inventory, but not the lease receivables mutually agreed between the lessor and the lessee, should be applied in recording sales. It is because if a lessor determines the lease receivables by applying a low interest rate, the sales price will be determined at relatively higher price, which results in a false presentation of the periodic income due to excess recording of gains on sales. In calculation of sales price, the reason not to apply the fair value but to apply the lower amount of the discounted sum of basic lease rental and the unguaranteed residual value and the fair value of such asset, can be explained as follows: such asset will not be sold at a higher price than the fair market value, and it is appropriate for the substance of transaction to present the amount calculated at a lower price as a sales price when the present value calculated using the weighted average borrowing rate is lower than the fair value, i.e., sold at lower price than the fair value. In this case, a leasing company whose main business is leasing should recognize the difference between the acquisition cost and sales price as operating income, and record it as gain (loss) on disposal of leased property.

11. Termination of Finance Leases

A. Of lease receivables, uncollected amount of receivables which are due prior to the termination date and interest receivables accrued up to the termination date should be recorded as terminated lease receivables.

B. The leased property recovered should be presented as terminated leased property in case a finance lease contract is terminated. The terminated leased property should be recorded in amount after subtracting the collectible guarantee by the lessee or the third party from the lease receivables due at the termination date. In this case, if the collectible amount exceeds the lease receivables due, the amount of terminated leased property recorded will be null, and the excess amount, if any, should be recorded as operating income.

C. [5C] should be applied to the depreciation of terminated leased property.

(11-1) Lease receivables decrease as lease rental is paid, and uncollected amount remains as outstanding receivable. The receivable uncollected, which are due by the termination date, will be recorded as terminated receivables on lease, distinguished from normal lease receivables.

(11-2) A prerequisite for being classified as a finance lease is non-cancelable condition. Therefore, it would be infrequent to cancel a lease contract during the lease term. Some contracts, however, may be cancelled for unavoidable reasons, and the lessee or the third party guarantor should pay the burdensome penalty in general. When the lessor receives penalty and collect the leased property, the lease claims for the remaining lease term are extinguished.

(11-3) Collected leased property should be classified, in distinction with other assets, as terminated leased property, because it is not for common use and its asset value is deteriorated. Leased property is mostly not for common use and it is difficult to value the degree of deterioration. It is not recommended for the lessor to recognize the income by valuing terminated leased property high in consideration of its future benefit potential. Therefore, terminated leased property should be recorded as the remainder after subtracting the collectible amount from the lessee and guarantors (penalties, etc.) from the lease receivables due after the termination date. If the collectible amount exceeds outstanding receivables due, there is profit related to the termination. In this case, the excess amount should be recognized as profit, and the collected property should be recorded as null. The collectible amount should be calculated under clauses (25-1) through (25-3).

(11-4) The terminated property on a finance lease should be depreciated consistently with the depreciation of the same or similar tangible assets, even though it is not used for the original purpose.

Section 3.

Disclosure

12. Balance Sheet Presentation

Lease related assets, to be further classified into lease receivables, terminated lease receivables, terminated property on financing lease, property on operating lease, and advance payments for leases, shall be presented in the balance sheet under a separate asset category between current assets and fixed assets.

13. Income Statement Presentation

A. The income statement should be presented showing each class of operating income (loss), ordinary income (loss), income (loss) before income taxes, and net income (loss) for the period.

B. Operating income (loss) should be presented by deducting operating expenses from operating revenues.

C. The following should be included in the operating income (loss) on lease operating revenue (expense) on lease:

1.	Interest income on finance lease and rental income on operating lease;

2.	Depreciation on terminated property on finance lease and property on operating lease;

3.	Interest expenses and other charges on debt related to leases;

4.	Interest expenses on corporate bonds and depreciation of issuance cost thereof;

5.	Foreign exchange gain (loss) from borrowings related to leases;

6.	Gain (loss) related to cancellation of lease contracts; gain (loss) incidental to the transfer of ownership; gain (loss) in disposal of leased property; and

7.	Other gain (loss) related to leases.

D. For the companies whose main business is not leasing and whose lease transaction is temporary or minor operation in light of the whole operation, the revenue and expenses related to leases should be included in other revenues (expenses).

(13-1) For the leasing companies under the Credit-Specialized Financial Business Act or companies in which the portion of leasing business is predominant, gain (loss) related to leases should be presented as operating income (expenses). However, the revenue and expenses related to temporary lease transactions should be included in other revenues (expenses) in accordance with the FAS.

14. Note Disclosures

The information with respect to lease transactions should be sufficiently and adequately disclosed in the notes.

A. The outline of lease business including general explanations of lease contract contents by class of leases should be disclosed in the notes.

B. The following information with respect to operating lease should be disclosed in the notes.

1.	Acquisition cost of leased property, by major class according to nature or function, as of the balance sheet date;

2.	Details of lease receivables which include annual basic lease rentals and contingent rentals to be collected under the lease contracts as of the balance sheet date for the next five (5) years, and the subsequent period;

3.	Amount and contents of terminated property if included in the property on operating lease ; and

4.	Details of lease rentals of which collection is highly uncertain.

C. The following information with respect to finance lease shall be disclosed in notes:

1.	Details of lease receivables which include annual basic lease rentals and contingent rentals to be collected as of the balance sheet date separately for the next five (5) year and for the subsequent period, both gross amount and net amount after subtracting the unearned interest income; and

2.	Details of terminated lease receivables and related accrued interest receivables.

CHAPTER III.

ACCOUNTING AND REPORTING BY LESSEE

Section 1.

Operating Leases

15. Recognition of Rental Expense

A. Basic lease rentals should, in principle, be charged to expenses on a straight-line basis over the lease term. However, when there is any method which better represents the procedure of allocation of expenses related to lease, this method may be applied.

B. Contingent rentals should be charged to expenses when they are incurred. However, if payment of contingent rental is uncertain, contingent rentals may be charged as expense when they become due for payment.

(15-1) Revenue of the lessor and expense of the lessee should be matched each other. In other words, for the better presentation of a transaction, the amount recognized by the lessor as the revenue should be the amount reported by the lessee as an expense. Therefore, 6 in which recognition of rental revenue is prescribed, should apply in order to recognize the lease rentals as expense from the part of the lessee of operating lease.

Section 2.

Financing Leases

16. Valuation of Leased Assets and Lease Liabilities

A. The lower of the present value after discounting basic lease rentals by the implicit interest rate and the fair value of leased property should be respectively recorded as assets and liabilities on finance lease.

B. When the lessee does not, or is difficult to, know the implicit interest rate, the weighted average borrowing rate of the lessee should be deemed the applicable implicit interest rate.

C. Leased assets should be depreciated consistently with the depreciation of the same or similar tangible assets which the lessee owns.

(16-1) For a finance lease, the lower of the present value after discounting basic lease rentals by the implicit interest rate and the fair value of leased property should be recorded as leased assets, and the same amount should be recorded as lease liabilities, because the lessee de facto has the risk and receives the benefit of leased property. The amount to be recorded as assets and liabilities should be the present value of basic lease rentals to be paid to the lessor. However, when the fair value is lower than the present value, the fair value should be used because it is deemed to better reflect the economic value of the assets. In this case, by recording assets and liabilities at the lower fair value, higher interest expenses will be recorded over the lease term in the income statement of the lessee.

(16-2) Leased assets should be depreciated consistently with the depreciation of other tangible assets which the lessee owns. Only if a lease is classified as a finance lease in accordance with [4B 3 or 4] of this Standard, the leased assets should be depreciated over the lease term. In this case, the depreciable amount is the acquisition cost minus guaranteed residual value.

17. Recognition of Rental Expense

A. Basic lease rentals constitute the principal lease liabilities component and the interest expense component in a finance lease. For each period, the ratio of the interest expense to the lease liabilities should be computed by the effective interest method using the implicit interest rate.

B. Contingent rentals should be recognized in accordance with [15B]. However, if their amount is significant, they may be recognized separately as the principal liabilities portion and interest income portion over the remaining period of the lease term.

C. Expenditures incurred in relation to the facilities incidental to the leased property and the capitalized maintenance expenditures (limited to the portion for which the lessee is responsible) directly related to the leased property should be capitalized as the account title, Leased Property Improvement, which is subject to depreciation by the same method as for leased property.

D. Maintenance expenditures directly related to leased property (excluding the amount classified as Leased Property Improvement pursuant to [17C]), taxes and dues, insurance premiums, etc., incurred after the inception of the lease, which are to be paid separately from lease rentals, should be charged as expenses when incurred.

(17-1) From the stand point of the lessee, the payment of basic lease rentals is divided into the redemption of the lease liabilities and interest expense on lease. Interest expense should be computed by the effective interest method on the balance of lease liabilities each period. For the appropriate allocation of basic lease rentals between the redemption of the lease obligations and interest expense, the implicit interest rate should be used in principle. In the case where the implicit interest rate is hardly obtainable, the weighted average borrowing rate should be used.

(17-2) Of the amount additionally paid for the use of leased property, capital expenditures and incidental expenditures incurred for installation of leased property should be capitalized as Leased Property Improvement, but excluding the portion which the lessor bears. [17C] equally applies to the capital expenditures incurred for an operating lease.

Section 3.

Disclosure

18. Balance Sheet Presentation

Leased assets should be presented under a separate asset category in the fixed assets; and lease liabilities, under a separate liability in the current liabilities or fixed liabilities, depending on the length of the collection period.

19. Note Disclosures

The information with respect to lease transactions should be sufficiently and adequately disclosed in the notes.

A. For operating lease, the total amount of annual basic lease rentals and contingent rentals payable under the lease contracts as of the balance sheet date for the next five (5) years and for the subsequent period, should be separately disclosed in the notes.

B. The following information with respect to finance leases should be disclosed in the notes:

1.	Total amount of assets recorded under finance leases as of the balance sheet date should be further classified into major classes according to the nature or function of the leased property;

2.	Details of lease liabilities which include annual basic lease rentals and contingent rentals payable under the lease contracts as of the balance sheet date, for the next five (5) years and for the subsequent period, both gross amount and net amount after subtracting the unexpired interest; and

3.	Depreciation expenses of the leased property.

C. The following information with respect to operating lease and finance lease shall be disclosed in the notes:

1.	Of material contents in the lease contract, financial restrictions such as those concerning dividends, additional indebtedness, additional leases, etc.;

2.	For sale-leaseback transactions provided in [23], the contents of such lease contract, disposal amount and book value of related property and basic lease rentals payable;

3.	Bargain purchase options and clauses in adjustment of basic lease rentals, if any; and

4.	Expenses estimated to be incurred at the termination of lease contracts and related contingent liabilities.

CHAPTER IV.

MISCELLANEOUS

20. New Leases Subsequent to Lease Termination

A. In case leased property returned from terminated or cancelled leases is re-leased, this lease should be considered as a new lease. However, if the elapsed economic useful life of the property exceeds 75/100 of its original economic useful life, [4B/ 3 and 4] should not be applied for classification of leases.

B. If a new lease is classified as an operating lease, the value of leased property of the lessor should be the carrying book value of the property on operating lease or finance lease terminated or cancelled as of the inception date of the new lease.

C. If a new lease is classified as a finance lease, the lease receivable should be the fair value of the newly leased property at the inception of the new lease, and the difference, if any, between the fair value and the carrying book value of such property should be included in the current operating income(loss) as gain(loss) on leased property disposal.

(20-1) If the lessor re-leases the leased property whose economic benefit remains after cancellation or termination of a lease contract, then this Standard applies to the new lease. Because there is no economic benefit if the economic useful life of such property has elapsed for not less than 75/100 of its original economic useful life, [4B/ 3 and 4B/4] should not be applied for classification of leases.

(20-2) If a new lease is classified as an operating lease, the carrying book value of the property should be used as the value of such leased property held by the lessor, because the lessor has the risk and receives the benefit related to such property and earnings process is not completed.

(20-3) The carrying book value of terminated property on finance lease should be the amount after subtracting the accumulated depreciation from the termination date to the inception date of the new lease from its book value at the termination date. If the terminated property is leased as operating lease, such property should be reclassified as property on operating lease at the inception of the new lease.

(20-4) If a new lease is classified as a finance lease, the lease receivable should be recorded as the fair value of the leased property at the inception of the lease because de facto ownership of the property has been transferred to the lessee. The difference between the fair value and the carrying book value of the property on operating lease or finance lease terminated or cancelled should be recorded as operating income(loss) as gain(loss) on leased property disposal at the inception of lease.

21. Syndicated Leases

In a syndicated lease involving two (2) or more lessors, each lessor should record the leased assets based on its proportional equity in the investment therein.

(21-1) In the cases where a lease contract is made for a large-size leased asset jointly acquired by two (2) or more lessors, the acquisition cost of such leased property should be recorded respectively by the two parties in proportion to their investments, and applies this Standard thereto.

22. Accounting for Lessee's Portion

In case a lessee pays a portion of the price of leased property, and thereby such portion is recognized as a joint equity, it should be recorded in the tangible assets, subject to depreciation over its useful life. If not, it should be recorded in the prepaid lease rentals.

(22-1) The price of leased property means the price of leased goods (invoice price) not including the cost incidental to acquisition.

(22-2) A lessor and a lessee jointly acquire the leased property and the lessor may lease its portion. In other words, the lessee pays a portion of payment for leased property. This type of transaction should be classified as a finance lease because it is exceptional in light of the nature of lease and it is de facto for the purpose of lending money. However, the lessee's payment for a portion of purchasing funds of leased property is not a prerequisite to classify such transaction as finance lease. Thus the portion paid by a lessor should be accounted for differently depending on the nature of such payment. For example, in the case where the lessee has a co-ownership for the leased property, such portion shall be recorded as the tangible assets subject to depreciation over the useful life; otherwise, it should be deemed prepaid lease rentals, and recorded as the long-term prepaid lease rentals subject to amortization over the lease term.

23. Sale-Leaseback Transactions

A. In case the lessee sells to the lessor the property newly manufactured or purchased and leases such property back, any profit (loss) on the sale should be deferred and amortized in equal amounts over the lease term. The same accounting treatment applies for transactions where the lessee sells property to any third party and the lessor acquires from the third party and leases the property to the lessee.

B. In case the lessee sells to the lessor the used property and leases the property back, the sales transaction should not be recorded by both the lessee and the lessor. The same accounting treatment applies for transactions where the lessee sells property to any third party and the lessor acquires from the third party and leases the property to the lessee.

C. Notwithstanding [23A and 23B], in case a sale-leaseback transaction is classified as operating lease and lease rentals and sales price are determined on the basis of the fair value, gain (loss) on sale of the asset may be recognized at the time of sale.

(23-1) Sale-leaseback transactions are those where the lessee sells the newly acquired or used asset to the lessor and then lease it back from the lessor, including the cases where the asset sold by the lessee to a third party is leased after the lessor acquires it. Generally, sale-leaseback transactions are mainly for securing funds on the part of the seller, thus de facto loan transactions. Since such activities are merely supplementary means to secure funds, they should not be recognized as completed sales transactions. Thus, gain (loss) on sale-leaseback transactions should be deferred and amortized over the lease term.

(23-2) In the case of sale-leaseback transactions involving used assets, accounting for deferring gain (loss) is complicated while there is no change in economic substance between before and after the lease contract except some funds inflow, Thus, such transactions are regarded entirely as loan transactions, but not sales transactions.

(23-3) In the case that sale-leaseback transactions are classified as operating lease, since the risk and the benefit involved in the leased property are transferred to the lessor and the process of income generation is de facto completed, gain (loss) on disposal should be recognized at the time of transaction.

24. Special Provisions for Use of Account Titles

In case a transaction between the lessor who is not a leasing company under the Credit-Specialized Financial Business Act and the lessee is classified as operating lease, the account titles designated in this Standard may not be used.

(24-1) Lease transactions are classified into finance lease and operating lease. Operating lease in its nature is almost the same as a simple rental. Since the former Lease Accounting Standard was applied only to the transactions involving leasing companies under the Credit-Specialized Financial Business Act, there could be a confusion in extending the application scope of lease transactions. Therefore, in a simple rental like operating lease between the lessor which is not a leasing company under the Credit-Specialized Financial Business Act and the lessee, such unnecessary confusion may be avoided by using the account titles used for the existing rental transactions.

CHAPTER V.

SPECIAL PROVISIONS FOR LESSORS

UNDER CREDIT-SPECIALIZED FINANCIAL BUSINESS ACT

25. Provision for Bad Debts

A. Allowance for bad debts should be established by estimating the bad debt ratio using the objective criteria. In this case, different bad debt ratios may be applied to the bad debts depending on the degree of uncertainty, and such ratios, once determined, should be consistently applied every year unless there are justifiable reasons for change.

B. Bad debts should be written off by offsetting with allowance for bad debts, and if the allowance is insufficient, bad debt expense should be recorded to that extent.

C. The lessor should disclose the followings in the notes:

1.	Criteria for classification of clients, e.g., financial stability of clients;

2.	Amounts and criteria for debts classified as normal, doubtful, and uncollectible;

3.	Amount of doubtful debts, bad debt ratios, and their calculation bases by uncertainty category;

4.	Ratios of allowance for bad debts to total receivables for the last five (5) years;

5.	Recovery of bad debts previously written off for the period; and

6.	Accounting policies with respect to bad debts.

(25-1) The following procedure should be adopted in classifying the doubtful and the uncollectible debts:

1.	Receivables should be classified as normal, precautionary, and delinquent on the basis of clients' financial conditions;

2.	Of the receivables to be collected from precautionary clients, the receivables which are certain to be collected in consideration of the collateral asset value, payment capability of guarantors, etc. are classified as normal receivables, and doubtful receivables otherwise; and

3.	Of the receivables to be collected from delinquent clients, the receivables which are certain to be collected in consideration of the collateral asset value, payment capability of guarantors etc. are classified as normal receivables; and uncollectible receivables otherwise.

(25-2) The criteria for classification of normal, precautionary, and delinquent clients may be determined in consideration of past experience or industry practice. Precautionary clients may be further detailed. Unless there is justifiable reasons for change, this classification should be consistently applied. The following clients should be classified as delinquent clients, unless there are justifiable counter - evidence:

1.	Those who have held overdue loans for six(6) months or longer;

2.	Those classified as red-rated client under the Covenant on Exchange and Administration of Credit Information of Banking Institutions;

3.	Those under the company reorganization process (including applicants) under the Company Reorganization Act;

4.	Those under the composition process (including applicants) under the Composition Act;

5.	Those for whom six(6) months have elapsed after the suspension of business; and

6.	Those who received the disclaimer opinion in audit report for the latest fiscal year.

(25-3) Past experience or industry practice may guide differentiation of the bad debt ratios by degree of uncertainty.

26. Present Value Measurement of Lease Receivables

A. In the case of receivables arising from lease transactions for leasing companies under the Credit-Specialized Financial Business Act, when there is a material difference between the nominal values and the present value due to the changes in contract conditions, such receivables should be reported as the present value. Here the interest rate at time of recording such receivables should be used as the discount rate.

B. The difference between the nominal value and the present value arising pursuant to [26A] is termed discount on receivables. Receivables are presented as the present value by subtracting discount on receivables from the nominal value. The applied interest rate, period, accounting method, etc. should be disclosed in the notes.

C. Discount on receivables should be amortized using the effective interest method, and the amortization is recorded as interest income.

27. Other Implementation Details

Other details necessary in implementing this Standard may be separately prescribed by the Chairman of the SFC.

Addenda

(July 23,1998)

1. Effective Date

This Standard shall be effective on July 23,1998.

2.  Applicability to Leasing Companies under Credit-Specialized Financial Business Act

This Standard shall apply to the lease contracts concluded after the commencement date of the fiscal year to which the enforcement date of this Standard belongs. However, [25 and 26] shall also apply to the outstanding balance of receivables on lease arising from the lease contracts concluded before the fiscal year to which the effective date of this Standard belongs.

3.  Applicability to Lessors and Lessees Other Than Leasing Companies under Credit-Specialized Financial Business Act

This Standard shall apply to the lease contracts concluded after the commencement date of the fiscal year which first commences after the effective date of this Standard.

4. Interim measures

This Standard may apply to the lease contract concluded before the commencement date (in the case of lessors and lessees other than leasing companies under the Credit-Specialized Financial Business Act, the Commencement date of the fiscal year to be first commenced after the enforcement date of this Standard) of the fiscal year to which the effective date of this Standard belongs.

Addendum

(December 9, 1999)

This procedure shall be effective on December 9, 1999.