ACCT20002 Lecture 5: Leases
5 Jun 2018
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SOLUTION FOR INCLASS TUTORIAL SOLUTIONS: LEASES
Case Study 1 – LEASE IDENTIFICATION
Case study 10.3 Identification of leases
For the following arrangements, discuss whether they are lease transactions, and thus fall
under the ambit of AASB 16/IFRS 16.
1. Entity A enters into a contract with Entity B, whereby Entity B will provide 5 SUV
vehicles for Entity A to use over the next 3 years. The vehicles have been selected by
Entity A from a large pool of similar vehicles and are explicitly identified in the
contract. Entity B is only allowed to substitute the vehicles if, and only for the period
when, the vehicles are being repaired.
2. Entity C enters into a contract with Entity D, whereby Entity D will provide 2
aeroplanes for Entity C to use over the next 5 years. The aeroplanes have been
selected by Entity C from a large pool of similar aircraft, but remain in the airport
hangar owned by Entity D when not in use and can be substituted at any time by
Entity D.
3. Entity E enters into a contract with Entity F, a shopping centre operator, whereby
Entity E will be offered a space for a pop-up shop in one of the centres managed
by Entity F. The contract specifies the size of the space to be provided, not the
actual location.
Appendix A of AASB 16/IFRS 16 defines a lease as follows.
“A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for
a period of time in exchange for consideration.”
Paragraphs B9–B31 provide detailed guidance to help in assessing whether a contract is, or
contains, a lease. The transfer of the right to use is essential in the definition and therefore the
guidance focuses on clarifying the concept of the right to use. According to paragraph B9, that
includes:
(a) the right to obtain substantially all of the economic benefits from use of the identified asset
(as described in paragraphs B21–B23); and
(b) the right to direct the use of the identified asset (as described in paragraphs B24–B30).
The concept of underlying asset and identified asset are used interchangeably. Nevertheless,
paragraph B13 provides the following explanation about what constitutes an identified asset:
“An asset is typically identified by being explicitly specified in a contract. However, an asset can
also be identified by being implicitly specified at the time that the asset is made available for use
by the customer.”
Note that if the lessor has a substantive right to substitute the asset, the contract cannot be
recognised as a lease as the right to use the asset cannot be considered to have been transferred.
A substantive right to substitute the asset would exist if the lessor has the practical ability to
substitute the asset at any time without needing the lessee’s approval and can benefit from
substituting the asset. Note that a substantive right does not exist if the underlying asset
can be substituted only when the asset is not operating properly or when a technical
upgrade is available
— therefore, in those cases, the contract can be recognised as a lease.
In example 1 above, Entity B can substitute the underlying asset only when the asset is not
operating properly— therefore, the contract can be recognised as a lease.
In example 2 above, Entity D has the practical ability to substitute the asset at any time without
needing the lessee’s approval and therefore the contract cannot be recognised as a lease as the
right to use the asset cannot be considered to have been transferred— therefore, the contract
cannot be recognised as a lease.
In example 3 above, Entity F provides by contract an asset that is being implicitly specified at the
time that the asset is made available for use by the customer — therefore, the contract can be
recognised as a lease.
Case Study 2 – LEASE IDENTIFICATION
Case Description and Instruction
Below is a contract between Q Airway (customer – airline company) and Flybus Ltd (supplier –
aircraft manufacturer/owner) presented in this case study.
REQUIRED:
Examine the contract and apply AASB 16 to determine whether the contract contains a lease.
All information in this case study is hypothetical.
Q Airway enters into a contract with Flybus Ltd for the use of an explicitly specified cargo
aircraft (i.e. a freight aircraft for the carriage of cargo only) for a two-year period. The contract
details the exterior and interior specifications of the aircraft. Flybus is responsible for
operating the aircraft, using its own crew. Q Airway is prohibited from hiring another
operator for the aircraft or operating the aircraft itself during the period ofuse.
There are also contractual and legal restrictions in the contract on where the aircraft can fly.
Subject to the restrictions, Q Airway will fly in accordance with a predetermined flight
schedule which details when and where the aircraft will fly in the next two years, as well as
what products/cargos will be loaded onto each flight. This schedule was negotiated between
Flybus, Q Airway, and Q Airway’s customers WMB Cars (a high-end car company whose
headquarter is in Germany but its production is scattered across a number of countries in
Europe and Asia) and TC Equip (one of world’s largest medical equipment developer and
manufacturer whose headquarter is in Australia but its production is based in China). Q
Airway will use the aircraft exclusively for transporting the WMB cars and the cargos
containing a variety of TC Equip’s medical equipment around the world in accordance with
the schedule.
The contract permits Flybus to substitute the aircraft at any time during the two-year period
and must substitute the aircraft if it is not working. Any substitute aircraft must be the same
model (i.e. model F050) as the originally specified aircraft, and meet the same exterior and
interior specifications mandated in the contract. Flybus has a fleet of F050 planes and
multiple sets of crew members available, and its customers also include a number of other air
freight businesses.
Document Summary
Entity a from a large pool of similar vehicles and are explicitly identified in the contract. The aeroplanes have been selected by entity c from a large pool of similar aircraft, but remain in the airport hangar owned by entity d when not in use and can be substituted at any time by. Entity d: entity e enters into a contract with entity f, a shopping centre operator, whereby. Entity e will be offered a space for a pop-up shop in one of the centres managed by entity f. the contract specifies the size of the space to be provided, not the actual location. Appendix a of aasb 16/ifrs 16 defines a lease as follows. A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.
