Question

Customer Corp contracts with Supplier Corp to manufacture parts in a facility on

Customer Corp’s property. Customer Corp designed the facility and stipulates its

specifications. Supplier Corp owns the facility and leases the land from Customer Corp. Customer Corp specifies how many parts it needs and when it needs the parts to be available. Supplier Corp operates the machinery and makes all operating decisions including how and when the parts are to be produced, as long as it meets the contractual requirements to deliver the specified number on the specified date.

Which party has the right to control the use of the identified asset (i.e., building and equipment) during the period of use?

Answer 1

In the above question customer corp is the owner of land and Supplier corp is the owner of building and machinery.

Ownership can be defined as “The ultimate and exclusive right conferred by a lawful claim or title, and subject to certain restrictions to enjoy, occupy, possess, rent, sell, use, give away, or even destroy an item of property.”

Exclusive right means that only the owner can control the use of asset.

Customer corp is the owner of land and he chose to lease it to Supplier corp. Likewise Supplier corp is the owner of building and machinery (i.e, the facility) that stands on the land and only he gets to control it. No one else can control the facility.

In the absence of any other information, it can be assumed that he can even choose to terminate the contract with Customer Corp. of manufacturing without having to lose the ownership of facility.

Such type of contracts are often seen in govt. building projects where the contractor takes land on lease from the govt. for manufacturing certain parts for the government. In addition to making parts for the govt. he can do any other work too on the facility. But in such contracts there can be restrictions as to use of building and machinery.

Thus, in this question Customer Corp has the right to control the use of the identified asset i.e building and machinery.