Question

In: Accounting

Explain whether the following arrangements are lease transactions, in accordance to NZ IFRS 16. 1. Company...

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.

Solutions

Expert Solution

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.
&
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.
&
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.

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