Question

Warehousing Corp. owns a large warehouse that can be subdivided into numerous subsections by inserting removable wall. It leases out different portions of storage space to its customers based on their needs.

Manufacturing Corp. contracts with Warehousing Corp. to reserve 1,000 square feet of space to store excess inventory for a three-year period. The contract specifies that Manufacturing Corp.’s inventory will be stored in an identified location in the warehouse. However, Warehousing Corp. has the right to shift Manufacturing Corp.’s inventory to another location within its warehouse at its discretion, subject to the requirement to provide 1,000 square feet for the three-year period.

Warehousing Corp. frequently reorganizes its space to meet the needs of new contracts. The cost of relocating is low compared to the benefits of being able to accommodate as many customers as possible in the warehouse.

Does the contract explicitly or implicitly identify an asset to be used to fulfill the contract?

Answer 1

As per IFRS 16''Leases'','' a lease is defined as -

• A contract or
• a part of contract
• that conveys the right to contol the use of
• an identified asset
• for a period of time
• in exchange for consideration.

A contract or an arranage ment can only contains a lease if there is an identified Asset.

An identified Asset can be-(1) Explicitly specified in the contract or (2) Implicitly specified.

If the Suplier of the asset has Substantive Substitution Rights on the asset, then there is no Identified Asset and hence it will not be a valid lease contract.

A supplier has Substantive Substitution Rights on the asset if both the condition has fulfilled-

(1)The supplier has practically ability to substitute alternative assets Throughout the contract period and

(2) The supplier would benefit economically by the substutution (i.e his cost < income from the substitution).

In this case, the supplier Warehousing Corp. has Substantive Substitution Rights because-

(1)arehousing Corp. has the right to shift Manufacturing Corp.’s inventory to another location within its warehouse at its discretion the three-year period and

(2)The cost of relocating is low compared to the benefits of being able to accommodate as many customers as possible in the warehouse.

Hence as the supplier has Substantive Substitution Rights, there is no identified asset explicitly or implicitly in the contract.

Hence it is not a valid lease Contract.