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    Identifying A Lease Contract Cases

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    200617
    The document discusses 5 cases to determine if there is an identified asset and whether the customer has the right to obtain substantially all economic benefits from the asset and direct how and for what purpose the asset is used. Case 1 involves a customer entering a contract for a specially designed rolling stock from a supplier to transport materials for the customer's production. Case 2 is a contract for a specified car that is not yet built. Case 3 is a contract granting fiber optic cable capacity. Case 4 grants pipeline capacity. Case 5 is the same as Case 4 but for a lower capacity percentage.

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    Identifying A Lease Contract Cases

    Uploaded by

    200617
    55 views2 pages
    The document discusses 5 cases to determine if there is an identified asset and whether the customer has the right to obtain substantially all economic benefits from the asset and direct how and for what purpose the asset is used. Case 1 involves a customer entering a contract for a specially designed rolling stock from a supplier to transport materials for the customer's production. Case 2 is a contract for a specified car that is not yet built. Case 3 is a contract granting fiber optic cable capacity. Case 4 grants pipeline capacity. Case 5 is the same as Case 4 but for a lower capacity percentage.

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    Identifying-a-Lease-Contract-Cases

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    The document discusses 5 cases to determine if there is an identified asset and whether the customer has the right to obtain substantially all economic benefits from the asset and direct how and for what purpose the asset is used. Case 1 involves a customer entering a contract for a specially designed rolling stock from a supplier to transport materials for the customer's production. Case 2 is a contract for a specified car that is not yet built. Case 3 is a contract granting fiber optic cable capacity. Case 4 grants pipeline capacity. Case 5 is the same as Case 4 but for a lower capacity percentage.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    55 views2 pages

    Identifying A Lease Contract Cases

    Uploaded by

    200617
    The document discusses 5 cases to determine if there is an identified asset and whether the customer has the right to obtain substantially all economic benefits from the asset and direct how and for what purpose the asset is used. Case 1 involves a customer entering a contract for a specially designed rolling stock from a supplier to transport materials for the customer's production. Case 2 is a contract for a specified car that is not yet built. Case 3 is a contract granting fiber optic cable capacity. Case 4 grants pipeline capacity. Case 5 is the same as Case 4 but for a lower capacity percentage.

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    1st step: Is there an identified asset?

    Case 1: Customer X enters into a five year contract with Supplier Y for the use of rolling stock
    specifically designed for Customer X. The rolling stock is designed to transport materials used in
    Customer X’s production process and is not suitable for use by other customers. The rolling stock
    is not explicitly specified in the contract, but Supplier Y owns only one rolling stock that is suitable
    for Customer X’s use. If the rolling stock does not operate properly, the contract requires Supplier
    Y to repair or replace the rolling stock. Assume that Supplier Y does not have a substantive
    substitution right.

    Case 2: Customer X enters into a five year contract with Supplier Y for the use of a car. The
    specification of the car is contained in the contract (brand, type, colour, options, etc.). At inception
    of the contract the car is not yet built.

    Case 3: Customer X enters into a 12-year contract with Supplier Y for the right to use three fibres
    within a fibre optic cable between New York and London. The contract identifies three of the
    cable’s 20 fibres for use by Customer X. The three fibres are dedicated solely to Customer X’s
    data for the duration of the contract term. Assume that Supplier Y does not have a substantive
    substitution right.

    Case 4: Customer X enters into a five-year contract with Supplier Y for the right to transport oil
    from Country A to Country B through Supplier Y’s pipeline. The contract provides that Customer
    X will have the right to use 95% of the pipeline’s capacity throughout the term of the arrangement.

    Case 5: Assume the same facts as in Case 4, except that Customer X has the right to use 60% of
    the pipeline’s capacity throughout the term of the arrangement.

    2nd step: Does the customer have the right to obtain substantially all of the economic benefits from
    the use of the asset throughout the period of use?

    Case 1: Customer X enters into a five year contract with Supplier Y for the use of rolling stock
    specifically designed for Customer X. The rolling stock is designed to transport materials used in
    Customer X’s production process and is not suitable for use by other customers. The rolling stock
    is not explicitly specified in the contract, but Supplier Y owns only one rolling stock that is suitable
    for Customer X’s use. If the rolling stock does not operate properly, the contract requires Supplier
    Y to repair or replace the rolling stock. Assume that Supplier Y does not have a substantive
    substitution right.

    3rd step: Who has the right to direct how and for what purpose the asset is used throughout the
    period of use?

    Case 1: Customer X enters into a contract with Supplier Y to use a vehicle for a three year period.
    The vehicle is identified in the contract. Supplier Y cannot substitute another vehicle unless the
    specified vehicle is not operational (e.g. it breaks down). Under the contract:

    • Customer X operates the vehicle (i.e. drives the vehicle) or directs others to operate the vehicle
    (e.g. hires a driver);

    • Customer X decides how to use the vehicle (within contractual limitations, discussed below). For
    example, throughout the period of use, Customer X decides where the vehicle goes as well as
    when or whether it is used and what it is used for. Customer X can also change these decisions
    throughout the period of use; and

    • Supplier Y prohibits certain uses of the vehicle (e.g. moving it overseas) and modifications to the
    vehicle to protect its interest in the asset.

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