Question

Customer Ltd enters into a 10-year contract with Supplier Ltd for the right to use two specified physically distinct dark fibres within a larger cable connecting Hong Kong to Tokyo. Customer Ltd makes the decisions about the use of the fibres by connecting each end of the fibres to its electronic equipment (i.e., Customer ‘light’ the fibres and decides what data and how much data to transfer). If the fibres are damaged, Supplier Ltd is responsible for the repairs and maintenance. Supplier Ltd owns extra fibres but can substitute those for Customer Ltd’s fibres only for reasons of repairs, maintenance or malfunction.

REQUIRED: Determine whether the contract contains a lease. Please explain and justify your conclusion according to AASB 16.

Answer 1

The contract indeed contains a lease because:

• There are three physically distinct, identified and explicity specified dark fibres.
• These fibres can not be substituted by the supplier except for reasons of repairs, maintenance or malfunction
• And finally, the customer has the right to use and control the use of these fibres throughout the 15-year period. Customer
  • Has right to exclusive use.
  • Obtains materially and substantially all of the economic benefits from use of the fibres over the 15-year period of use.
  • Is in possession of the right to direct the use of the fibres
  • Decides how and for what purpose the fibres are used; when and whether to light the fibres and when and how much output the fibres will produce
  • Has the right to change these decisions during the 15-year period of use.
• Despite the fact that the supplier’s decisions about repairing and maintaining the fibres are essential to their efficient use, they don't empower the supplier the right to direct how and for what purpose the fibres are used.
• Thus the supplier does not control the use of the fibres during the period of use.