In: Accounting
Explain whether the following arrangements are lease transactions, in accordance to NZ IFRS 16.
1. Company S enters into a contract with Company T, whereby Company T provides 6 delivery vans for Company S to use over the next 5 years. The vans have been selected by Company S from a large pool of similar vans and are explicitly identified in the contract. Company T is only allowed to substitute the vans if, and only for the period when, the vans are being repaired.
2. Company A enters into a contract with Company B, whereby Company B will provide 4 aeroplanes for Company A to use over the next 3 years. The aeroplanes have been selected by Company A from a large pool of similar aircraft, but remain in the airport hangar owned by Company B when not in use and can be substituted at any time by Company B.
3. Company Y enters into a contract with Company Z, an entertainment arcade operator, whereby Company Y will be offered a space for a pop-up shop in one of the arcades managed by Company Z. The contract specifies the size of the space to be provided.
IFRS 16 has established three situations to be evaluated , to decide if the arrangement is a lease or not. |
Accordingly, |
1.The underlying asset must have been clearly identified----ie. Should be able to distinctly-distinguish the leased asset ---like not giving the lessee, access to use any , from among the many. |
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2.The customer should have a right to mostly-all-of the benefits accruing from that identified asset , for the entire duration of its lease /or his use. |
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3.The customer should be in a postion , to command the above use in whatever manner ,he deems fit , to reap the above benefits , during the entire period of its use. |
That said, we can analyse the three cases, one by one , as follows: |
Case-1--- |
The assets , ie. The 6 delivery vane have been explicitly identified, for the use of Company S, the lessee or the customer. |
and also given that |
Company T , the supplier of the vans ,is only allowed to substitute the vans if, and only for the period when, the vans are being repaired |
clearly indicates that the vans are the identified vans only & also, Company S is able to direct its location & use , during those 5 years--- |
during which he is entitled to all its economic benefits. |
So, the above arrangement is a lease contract as per NZ IFRS 16. |
Case-2-- |
Even though the first requirement is satisfied, ie,all the 4 aeroplanes have been identified initially, |
they will not be in Company A's possession through-out the period of his use----they are going to lie in Co. B's hangar , when not in use -- |
also the possibilty of substitution , by Company B is there , when the underlying asset will change. |
So, the asset identified is not permanent for the tenure of use---neither Co.A has full possession or control of the aeroplalnes nor enjoys the facility to use them whenever & how-so-ever , he wants. |
So, the above arrangement is not a lease contract as per NZ IFRS 16. |
Case--3--- |
The contract specifies the size of the space to be provided---so the asset, ie floor space has been identified. |
During the tenure of its use, Company Y will use it for his intended use -- pop-up shop |
which will be fully under his control -- he can set up the shop according to his convenience. |
So, the above arrangement is a lease contract as per NZ IFRS 16. |