3.7 Codification Examples
ASC 842-10
15-27 See Examples 1 through 10 (paragraphs 842-10-55-41 through 55-130) for illustrations of the
requirements for identifying a lease.
55-41 Examples 1 through 10 illustrate the identification of a lease.
The examples below from ASC 842-10-55-42 through 55-130, which have been
reproduced in their entirety, reflect
implementation considerations related to the
guidance in ASC 842-10-15-2 through 15-26 on
identifying a lease. Although some of these
examples may illustrate a specific point with
respect to the guidance in ASC 842-10-15-2 through
15-26, each example walks through, at a minimum,
the entirety of the analysis of either (1) whether
there is an identified asset or (2) whether the
customer has the right to control the use of
PP&E.
3.7.1 Example 1 — Rail Cars
ASC 842-10
Example 1 — Rail Cars
Case A — Contract Contains a Lease
55-42 A contract between Customer and a freight carrier (Supplier) provides Customer with the use of 10 rail cars of a particular type for 5 years. The contract specifies the rail cars; the cars are owned by Supplier. Customer determines when, where, and which goods are to be transported using the cars. When the cars are not in use, they are kept at Customer’s premises. Customer can use the cars for another purpose (for example, storage) if it so chooses. However, the contract specifies that Customer cannot transport particular types of cargo (for example, explosives). If a particular car needs to be serviced or repaired, Supplier is required to substitute a car of the same type. Otherwise, and other than on default by Customer, Supplier cannot retrieve the cars during the five-year period.
55-43 The contract also requires Supplier to provide an engine and a driver when requested by Customer. Supplier keeps the engines at its premises and provides instructions to the driver detailing Customer’s requests to transport goods. Supplier can choose to use any one of a number of engines to fulfill each of Customer’s requests, and one engine could be used to transport not only Customer’s goods, but also the goods of other customers (for example, if other customers require the transport of goods to destinations close to the destination requested by Customer and within a similar timeframe, Supplier can choose to attach up to 100 rail cars to the engine).
55-44 The contract contains leases of rail cars. Customer has the right to use 10 rail cars for 5 years.
55-45 There are 10 identified cars. The cars are explicitly specified in the contract. Once delivered to Customer, the cars can be substituted only when they need to be serviced or repaired. The engine used to transport the rail cars is not an identified asset because it is neither explicitly specified nor implicitly specified in the contract.
55-46 Customer has the right to control the use of the 10 rail cars throughout the 5-year period of use because:
- Customer has the right to obtain substantially all of the economic benefits from use of the cars over the five-year period of use. Customer has exclusive use of the cars throughout the period of use, including when they are not being used to transport Customer’s goods.
- Customer has the right to direct the use of the cars. The contractual restrictions on the cargo that can be transported by the cars are protective rights of Supplier and define the scope of Customer’s right to use the cars. Within the scope of its right of use defined in the contract, Customer makes the relevant decisions about how and for what purpose the cars are used by being able to decide when and where the rail cars will be used and which goods are transported using the cars. Customer also determines whether and how the cars will be used when not being used to transport its goods (for example, whether and when they will be used for storage). Customer has the right to change these decisions during the five-year period of use.
55-47 Although having an engine and driver (controlled by Supplier) to transport the rail cars is essential to the
efficient use of the cars, Supplier’s decisions in this regard do not give it the right to direct how and for what
purpose the rail cars are used. Consequently, Supplier does not control the use of the cars during the period of
use.
Case B — Contract Does Not Contain a Lease
55-48 The contract between Customer and Supplier requires Supplier to transport a specified quantity of
goods by using a specified type of rail car in accordance with a stated timetable for a period of five years. The
timetable and quantity of goods specified are equivalent to Customer having the use of 10 rail cars for 5 years.
Supplier provides the rail cars, driver, and engine as part of the contract. The contract states the nature and
quantity of the goods to be transported (and the type of rail car to be used to transport the goods). Supplier
has a large pool of similar cars that can be used to fulfill the requirements of the contract. Similarly, Supplier
can choose to use any one of a number of engines to fulfill each of Customer’s requests, and one engine could
be used to transport not only Customer’s goods, but also the goods of other customers. The cars and engines
are stored at Supplier’s premises when not being used to transport goods.
55-49 The contract does not contain a lease of rail cars or of an engine.
55-50 The rail cars and the engines used to transport Customer’s goods are not identified assets. Supplier has
the substantive right to substitute the rail cars and engine because:
- Supplier has the practical ability to substitute each car and the engine throughout the period of use. Alternative cars and engines are readily available to Supplier, and Supplier can substitute each car and the engine without Customer’s approval.
- Supplier would benefit economically from substituting each car and the engine. There would be minimal, if any, cost associated with substituting each car or the engine because the cars and engines are stored at Supplier’s premises and Supplier has a large pool of similar cars and engines. Supplier benefits from substituting each car or the engine in contracts of this nature because substitution allows Supplier to, for example, (1) use cars or an engine to fulfill a task for which the cars or engine are already positioned to perform (for example, a task at a rail yard close to the point of origin) or (2) use cars or an engine that would otherwise be sitting idle because they are not being used by a customer.
55-51 Accordingly, Customer does not direct the use and does not have the right to obtain substantially all of
the economic benefits from use of an identified car or an engine. Supplier directs the use of the rail cars and
engine by selecting which cars and engine are used for each particular delivery and obtains substantially all of
the economic benefits from use of the rail cars and engine. Supplier is only providing freight capacity.
3.7.2 Example 2 — Concession Space
ASC 842-10
Example 2 — Concession Space
55-52 A coffee company (Customer) enters into a contract with an airport operator (Supplier) to use a space in
the airport to sell its goods for a three-year period. The contract states the amount of space and that the space
may be located at any one of several boarding areas within the airport. Supplier has the right to change the
location of the space allocated to Customer at any time during the period of use. There are minimal costs to
Supplier associated with changing the space for the Customer: Customer uses a kiosk (that it owns) that can be
moved easily to sell its goods. There are many areas in the airport that are available and that would meet the
specifications for the space in the contract.
55-53 The contract does not contain a lease.
55-54 Although the amount of space Customer uses is specified in the contract, there is no identified asset. Customer controls its owned kiosk. However, the contract is for space in the airport, and this space can change at the discretion of Supplier. Supplier has the substantive right to substitute the space Customer uses because:
- Supplier has the practical ability to change the space used by Customer throughout the period of use. There are many areas in the airport that meet the specifications for the space in the contract, and Supplier has the right to change the location of the space to other space that meets the specifications at any time without Customer’s approval.
- Supplier would benefit economically from substituting the space. There would be minimal cost associated with changing the space used by Customer because the kiosk can be moved easily. Supplier benefits from substituting the space in the airport because substitution allows Supplier to make the most effective use of the space at boarding areas in the airport to meet changing circumstances.
3.7.3 Example 3 — Fiber-Optic Cable
ASC 842-10
Example 3 — Fiber-Optic Cable
Case A — Contract Contains a Lease
55-55 Customer enters into a 15-year contract with a utilities company (Supplier) for the right to use 3 specified, physically distinct dark fibers within a larger cable connecting Hong Kong to Tokyo. Customer makes the decisions about the use of the fibers by connecting each end of the fibers to its electronic equipment (for example, Customer “lights” the fibers and decides what data and how much data those fibers will transport). If the fibers are damaged, Supplier is responsible for the repairs and maintenance. Supplier owns extra fibers but can substitute those for Customer’s fibers only for reasons of repairs, maintenance, or malfunction (and is obliged to substitute the fibers in these cases).
55-56 The contract contains a lease of dark fibers. Customer has the right to use the 3 dark fibers for 15 years.
55-57 There are three identified fibers. The fibers are explicitly specified in the contract and are physically distinct from other fibers within the cable. Supplier cannot substitute the fibers other than for reasons of repairs, maintenance, or malfunction.
55-58 Customer has the right to control the use of the fibers throughout the 15-year period of use because:
- Customer has the right to obtain substantially all of the economic benefits from use of the fibers over the 15-year period of use. Customer has exclusive use of the fibers throughout the period of use.
- Customer has the right to direct the use of the fibers. Customer makes the relevant decisions about how and for what purpose the fibers are used by deciding when and whether to light the fibers and when and how much output the fibers will produce (that is, what data and how much data those fibers will transport). Customer has the right to change these decisions during the 15-year period of use.
55-59 Although Supplier’s decisions about repairing and maintaining the fibers are essential to their efficient use, those decisions do not give Supplier the right to direct how and for what purpose the fibers are used. Consequently, Supplier does not control the use of the fibers during the period of use.
Case B — Contract Does Not Contain a Lease
55-60 Customer enters into a 15-year contract with Supplier for the right to use a specified amount of capacity within a cable connecting Hong Kong to Tokyo. The specified amount is equivalent to Customer having the use of the full capacity of 3 strands within the cable (the cable contains 15 fibers with similar capacities). Supplier makes decisions about the transmission of data (that is, Supplier lights the fibers and makes decisions about which fibers are used to transmit Customer’s traffic and about the electronic equipment that Supplier owns and connects to the fibers).
55-61 The contract does not contain a lease.
55-62 Supplier makes all decisions about the transmission of its customers’ data, which requires the use of only
a portion of the capacity of the cable for each customer. The capacity portion that will be provided to Customer
is not physically distinct from the remaining capacity of the cable and does not represent substantially all of the
capacity of the cable. Consequently, Customer does not have the right to use an identified asset.
3.7.4 Example 4 — Retail Unit
ASC 842-10
Example 4 — Retail Unit
55-63 Customer enters into a contract with property owner (Supplier) to use Retail Unit A for a five-year period.
Retail Unit A is part of a larger retail space with many retail units.
55-64 Customer is granted the right to use Retail Unit A. Supplier can require Customer to relocate to another
retail unit. In that case, Supplier is required to provide Customer with a retail unit of similar quality and
specifications to Retail Unit A and to pay for Customer’s relocation costs. Supplier would benefit economically
from relocating Customer only if a major new tenant were to decide to occupy a large amount of retail space at
a rate sufficiently favorable to cover the costs of relocating Customer and other tenants in the retail space that
the new tenant will occupy. However, although it is possible that those circumstances will arise, at inception of
the contract, it is not likely that those circumstances will arise. For example, whether a major new tenant will
decide to lease a large amount of retail space at a rate that would be sufficiently favorable to cover the costs of
relocating Customer is highly susceptible to factors outside Supplier’s influence.
55-65 The contract requires Customer to use Retail Unit A to operate its well-known store brand to sell its
goods during the hours that the larger retail space is open. Customer makes all of the decisions about the use
of the retail unit during the period of use. For example, Customer decides on the mix of goods sold from the
unit, the pricing of the goods sold, and the quantities of inventory held. Customer also controls physical access
to the unit throughout the five-year period of use.
55-66 The contract requires Customer to make fixed payments to Supplier as well as variable payments that
are a percentage of sales from Retail Unit A.
55-67 Supplier provides cleaning and security services as well as advertising services as part of the contract.
55-68 The contract contains a lease of retail space. Customer has the right to use Retail Unit A for five years.
55-69 Retail Unit A is an identified asset. It is explicitly specified in the contract. Supplier has the practical ability
to substitute the retail unit, but could benefit economically from substitution only in specific circumstances.
Supplier’s substitution right is not substantive because, at inception of the contract, those circumstances are
not considered likely to arise.
55-70 Customer has the right to control the use of Retail Unit A throughout the five-year period of use because:
- Customer has the right to obtain substantially all of the economic benefits from use of Retail Unit A over the five-year period of use. Customer has exclusive use of Retail Unit A throughout the period of use. Although a portion of the cash flows derived from sales from Retail Unit A will flow from Customer to Supplier, this represents consideration that Customer pays Supplier for the right to use the retail unit. It does not prevent Customer from having the right to obtain substantially all of the economic benefits from use of Retail Unit A.
- Customer has the right to direct the use of Retail Unit A. The contractual restrictions on the goods that can be sold from Retail Unit A and when Retail Unit A is open define the scope of Customer’s right to use Retail Unit A. Within the scope of its right of use defined in the contract, Customer makes the relevant decisions about how and for what purpose Retail Unit A is used by being able to decide, for example, the mix of products that will be sold in the retail unit and the sale price for those products. Customer has the right to change these decisions during the five-year period of use.
55-71 Although cleaning, security, and advertising services are essential to the efficient use of Retail Unit A, Supplier’s decisions in this regard do not give it the right to direct how and for what purpose Retail Unit A is used. Consequently, Supplier does not control the use of Retail Unit A during the period of use, and Supplier’s decisions do not affect Customer’s control of the use of Retail Unit A.
3.7.5 Example 5 — Truck Rental
ASC 842-10
Example 5 — Truck Rental
55-72 Customer enters into a contract with Supplier for the use of a truck for one week to transport cargo from New York to San Francisco. Supplier does not have substitution rights. Only cargo specified in the contract is permitted to be transported on this truck for the period of the contract. The contract specifies a maximum distance that the truck can be driven. Customer is able to choose the details of the journey (speed, route, rest stops, and so forth) within the parameters of the contract. Customer does not have the right to continue using the truck after the specified trip is complete.
55-73 The cargo to be transported and the timing and location of pickup in New York and delivery in San Francisco are specified in the contract.
55-74 Customer is responsible for driving the truck from New York to San Francisco.
55-75 The contract contains a lease of a truck. Customer has the right to use the truck for the duration of the specified trip.
55-76 There is an identified asset. The truck is explicitly specified in the contract, and Supplier does not have the right to substitute the truck.
55-77 Customer has the right to control the use of the truck throughout the period of use because:
- Customer has the right to obtain substantially all of the economic benefits from the use of the truck over the period of use. Customer has exclusive use of the truck throughout the period of use.
- Customer has the right to direct the use of the truck. How and for what purpose the truck will be used (that is, the transport of specified cargo from New York to San Francisco within a specified time frame) are predetermined in the contract. Customer directs the use of the truck because it has the right to operate the truck (for example, speed, route, and rest stops) throughout the period of use. Customer makes all of the decisions about the use of the truck that can be made during the period of use through its control of the operations of the truck.
55-78 Because the duration of the contract is one week, this lease meets the definition of a short-term lease.
3.7.6 Example 6 — Ship
ASC 842-10
Example 6 — Ship
Case A — Contract Does Not Contain a Lease
55-79 Customer enters into a contract with a ship owner (Supplier) for the transport of cargo from Rotterdam
to Sydney on a specified ship. The ship is explicitly specified in the contract, and Supplier does not have
substitution rights. The cargo will occupy substantially all of the capacity of the ship. The contract specifies the
cargo to be transported on the ship and the dates of pickup and delivery.
55-80 Supplier operates and maintains the ship and is responsible for the safe passage of the cargo onboard
the ship. Customer is prohibited from hiring another operator for the ship or operating the ship itself during
the term of the contract.
55-81 The contract does not contain a lease.
55-82 There is an identified asset. The ship is explicitly specified in the contract, and Supplier does not have the
right to substitute that specified ship.
55-83 Customer has the right to obtain substantially all of the economic benefits from use of the ship over the
period of use. Its cargo will occupy substantially all of the capacity of the ship, thereby preventing other parties
from obtaining economic benefits from use of the ship.
55-84 However, Customer does not have the right to control the use of the ship because it does not have the
right to direct its use. Customer does not have the right to direct how and for what purpose the ship is used.
How and for what purpose the ship will be used (that is, the transport of specified cargo from Rotterdam to
Sydney within a specified time frame) are predetermined in the contract. Customer has no right to change how
and for what purpose the ship is used during the period of use. Customer has no other decision-making rights
about the use of the ship during the period of use (for example, it does not have the right to operate the ship)
and did not design the ship. Customer has the same rights regarding the use of the ship as if it were one of
multiple customers transporting cargo on the ship.
Case B — Contract Contains a Lease
55-85 Customer enters into a contract with Supplier for the use of a specified ship for a five-year period. The
ship is explicitly specified in the contract, and Supplier does not have substitution rights.
55-86 Customer decides what cargo will be transported and whether, when, and to which ports the ship will
sail, throughout the five-year period of use, subject to restrictions specified in the contract. Those restrictions
prevent Customer from sailing the ship into waters at a high risk of piracy or carrying hazardous materials as
cargo.
55-87 Supplier operates and maintains the ship and is responsible for the safe passage of the cargo onboard
the ship. Customer is prohibited from hiring another operator for the ship or operating the ship itself during
the term of the contract.
55-88 The contract contains a lease. Customer has the right to use the ship for five years.
55-89 There is an identified asset. The ship is explicitly specified in the contract, and Supplier does not have the right to substitute that specified ship.
55-90 Customer has the right to control the use of the ship throughout the five-year period of use because:
- Customer has the right to obtain substantially all of the economic benefits from use of the ship over the five-year period of use. Customer has exclusive use of the ship throughout the period of use.
- Customer has the right to direct the use of the ship. The contractual restrictions about where the ship can sail and the cargo to be transported by the ship define the scope of Customer’s right to use the ship. They are protective rights that protect Supplier’s investment in the ship and Supplier’s personnel. Within the scope of its right of use, Customer makes the relevant decisions about how and for what purpose the ship is used throughout the five-year period of use because it decides whether, where, and when the ship sails, as well as the cargo it will transport. Customer has the right to change these decisions throughout the five-year period of use.
55-91 Although the operation and maintenance of the ship are essential to its efficient use, Supplier’s decisions in this regard do not give it the right to direct how and for what purpose the ship is used. Instead, Supplier’s decisions are dependent on Customer’s decisions about how and for what purpose the ship is used.
3.7.7 Example 7 — Aircraft
ASC 842-10
Example 7 — Aircraft
55-92 Customer enters into a contract with an aircraft owner (Supplier) for the use of an explicitly specified aircraft for a two-year period. The contract details the interior and exterior specifications for the aircraft.
55-93 There are contractual and legal restrictions in the contract on where the aircraft can fly. Subject to those restrictions, Customer determines where and when the aircraft will fly and which passengers and cargo will be transported on the aircraft.
55-94 Supplier is responsible for operating the aircraft, using its own crew. Customer is prohibited from hiring another operator for the aircraft or operating the aircraft itself during the term of the contract.
55-95 Supplier is permitted 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 meet the interior and exterior specifications in the contract. There are significant costs involved in outfitting an aircraft in Supplier’s fleet to meet Customer’s specifications.
55-96 The contract contains a lease. Customer has the right to use the aircraft for two years.
55-97 There is an identified asset. The aircraft is explicitly specified in the contract, and although Supplier can substitute the aircraft, its substitution right is not substantive. Supplier’s substitution right is not substantive because of the significant costs involved in outfitting another aircraft to meet the specifications required by the contract such that Supplier is not expected to benefit economically from substituting the aircraft.
55-98 Customer has the right to control the use of the aircraft throughout the two-year period of use because:
- Customer has the right to obtain substantially all of the economic benefits from use of the aircraft over the two-year period of use. Customer has exclusive use of the aircraft throughout the period of use.
- Customer has the right to direct the use of the aircraft. The restrictions on where the aircraft can fly define the scope of Customer’s right to use the aircraft. Within the scope of its right of use, Customer makes the relevant decisions about how and for what purpose the aircraft is used throughout the two-year period of use because it decides whether, where, and when the aircraft travels as well as the passengers and cargo it will transport. Customer has the right to change these decisions throughout the two-year period of use.
55-99 Although the operation of the aircraft is essential to its efficient use, Supplier’s decisions in this regard
do not give it the right to direct how and for what purpose the aircraft is used. Consequently, Supplier does
not control the use of the aircraft during the period of use, and Supplier’s decisions do not affect Customer’s
control of the use of the aircraft.
3.7.8 Example 8 — Contract for Shirts
ASC 842-10
Example 8 — Contract for Shirts
55-100 Customer enters into a contract with a manufacturer (Supplier) to purchase a particular type, quality,
and quantity of shirts for a three-year period. The type, quality, and quantity of shirts are specified in the
contract.
55-101 Supplier has only one factory that can meet the needs of Customer. Supplier is unable to supply the
shirts from another factory or source the shirts from a third-party supplier. The capacity of the factory exceeds
the output for which Customer has contracted (that is, Customer has not contracted for substantially all of the
capacity of the factory).
55-102 Supplier makes all decisions about the operations of the factory, including the production level at which
to run the factory and which customer contracts to fulfill with the output of the factory that is not used to fulfill
Customer’s contract.
55-103 The contract does not contain a lease.
55-104 The factory is an identified asset. The factory is implicitly specified because Supplier can fulfill the
contract only through the use of this asset.
55-105 However, Customer does not control the use of the factory because it does not have the right to obtain
substantially all of the economic benefits from use of the factory. This is because Supplier could decide to use
the factory to fulfill other customer contracts during the period of use.
55-106 Customer also does not control the use of the factory because it does not have the right to direct the
use of the factory. Customer does not have the right to direct how and for what purpose the factory is used
during the three-year period of use. Customer’s rights are limited to specifying output from the factory in the
contract with Supplier. Customer has the same rights regarding the use of the factory as other customers
purchasing shirts from the factory. Supplier has the right to direct the use of the factory because Supplier can
decide how and for what purpose the factory is used (that is, Supplier has the right to decide the production
level at which to run the factory and which customer contracts to fulfill with the output produced).
55-107 Either the fact that Customer does not have the right to obtain substantially all of the economic benefits
from use of the factory or the fact that Customer does not have the right to direct the use of the factory would
be sufficient in isolation to conclude that Customer does not control the use of the factory.
3.7.9 Example 9 — Contract for Energy/Power
ASC 842-10
Example 9 — Contract for Energy/Power
Case A — Contract Contains a Lease
55-108 A utility company (Customer) enters into a contract with a power company (Supplier) to purchase all of the electricity produced by a new solar farm for 20 years. The solar farm is explicitly specified in the contract, and Supplier has no substitution rights. The solar farm is owned by Supplier, and the energy cannot be provided to Customer from another asset. Customer designed the solar farm before it was constructed — Customer hired experts in solar energy to assist in determining the location of the farm and the engineering of the equipment to be used. Supplier is responsible for building the solar farm to Customer’s specifications and then operating and maintaining it. There are no decisions to be made about whether, when, or how much electricity will be produced because the design of the asset has predetermined these decisions. Supplier will receive tax credits relating to the construction and ownership of the solar farm, while Customer receives renewable energy credits that accrue from use of the solar farm.
55-109 The contract contains a lease. Customer has the right to use the solar farm for 20 years.
55-110 There is an identified asset because the solar farm is explicitly specified in the contract, and Supplier does not have the right to substitute the specified solar farm.
55-111 Customer has the right to control the use of the solar farm throughout the 20-year period of use because:
- Customer has the right to obtain substantially all of the economic benefits from use of the solar farm over the 20-year period of use. Customer has exclusive use of the solar farm; it takes all of the electricity produced by the farm over the 20-year period of use as well as the renewable energy credits that are a by-product from use of the solar farm. Although Supplier will be receiving economic benefits from the solar farm in the form of tax credits, those economic benefits relate to the ownership of the solar farm rather than the use of the solar farm and, thus, are not considered in this assessment.
- Customer has the right to direct the use of the solar farm. Neither Customer nor Supplier decides how and for what purpose the solar farm is used during the period of use because those decisions are predetermined by the design of the asset (that is, the design of the solar farm has, in effect, programmed into the asset any relevant decision-making rights about how and for what purpose the solar farm is used throughout the period of use). Customer does not operate the solar farm; Supplier makes the decisions about the operation of the solar farm. However, Customer’s design of the solar farm has given it the right to direct the use of the farm (as described in paragraph 842-10-15-20(b)(2)). Because the design of the solar farm has predetermined how and for what purpose the asset will be used throughout the period of use, Customer’s control over that design is substantively no different from Customer controlling those decisions.
Case B — Contract Does Not Contain a Lease
55-112 Customer enters into a contract with Supplier to purchase all of the power produced by an explicitly specified power plant for three years. The power plant is owned and operated by Supplier. Supplier is unable to provide power to Customer from another plant. The contract sets out the quantity and timing of power that the power plant will produce throughout the period of use, which cannot be changed in the absence of extraordinary circumstances (for example, emergency situations). Supplier operates and maintains the plant on a daily basis in accordance with industry-approved operating practices. Supplier designed the power plant when it was constructed some years before entering into the contract with Customer; Customer had no involvement in that design.
55-113 The contract does not contain a lease.
55-114 There is an identified asset because the power plant is explicitly specified in the contract, and Supplier does not have the right to substitute the specified plant.
55-115 Customer has the right to obtain substantially all of the economic benefits from use of the identified
power plant over the three-year period of use. Customer will take all of the power produced by the power plant
over the three-year term of the contract.
55-116 However, Customer does not have the right to control the use of the power plant because it does not
have the right to direct its use. Customer does not have the right to direct how and for what purpose the plant
is used. How and for what purpose the plant is used (that is, whether, when, and how much power the plant will
produce) are predetermined in the contract. Customer has no right to change how and for what purpose the
plant is used during the period of use, nor does it have any other decision-making rights about the use of the
power plant during the period of use (for example, it does not operate the power plant) and did not design the
plant. Supplier is the only party that can make decisions about the plant during the period of use by making the
decisions about how the plant is operated and maintained. Customer has the same rights regarding the use of
the plant as if it were one of many customers obtaining power from the plant.
Case C — Contract Contains a Lease
55-117 Customer enters into a contract with Supplier to purchase all of the power produced by an explicitly
specified power plant for 10 years. The contract states that Customer has rights to all of the power produced
by the plant (that is, Supplier cannot use the plant to fulfill other contracts).
55-118 Customer issues instructions to Supplier about the quantity and timing of the delivery of power. If the
plant is not producing power for Customer, it does not operate.
55-119 Supplier operates and maintains the plant on a daily basis in accordance with industry-approved
operating practices.
55-120 The contract contains a lease. Customer has the right to use the power plant for 10 years.
55-121 There is an identified asset. The power plant is explicitly specified in the contract, and Supplier does not
have the right to substitute the specified plant.
55-122 Customer has the right to control the use of the power plant throughout the 10-year period of use
because:
- Customer has the right to obtain substantially all of the economic benefits from use of the power plant over the 10-year period of use. Customer has exclusive use of the power plant; it has rights to all of the power produced by the power plant throughout the 10-year period of use.
- Customer has the right to direct the use of the power plant. Customer makes the relevant decisions about how and for what purpose the power plant is used because it has the right to determine whether, when, and how much power the plant will produce (that is, the timing and quantity, if any, of power produced) throughout the period of use. Because Supplier is prevented from using the power plant for another purpose, Customer’s decision making about the timing and quantity of power produced, in effect, determines when and whether the plant produces output.
55-123 Although the operation and maintenance of the power plant are essential to its efficient use, Supplier’s
decisions in this regard do not give it the right to direct how and for what purpose the power plant is used.
Consequently, Supplier does not control the use of the power plant during the period of use. Instead, Supplier’s
decisions are dependent on Customer’s decisions about how and for what purpose the power plant is used.
3.7.10 Example 10 — Contract for Network Services
ASC 842-10
Example 10 — Contract for Network Services
Case A — Contract Does Not Contain a Lease
55-124 Customer enters into a contract with a telecommunications company (Supplier) for network services for two years. The contract requires Supplier to supply network services that meet a specified quality level. To provide the services, Supplier installs and configures servers at Customer’s premises; Supplier determines the speed and quality of data transportation in the network using the servers. Supplier can reconfigure or replace the servers when needed to continuously provide the quality of network services defined in the contract. Customer does not operate the servers or make any significant decisions about their use.
55-125 The contract does not contain a lease. Instead, the contract is a service contract in which Supplier uses the equipment to meet the level of network services determined by Customer.
55-126 Customer does not control the use of the servers because Customer’s only decision-making rights relate to deciding on the level of network services (the output of the servers) before the period of use — the level of network services cannot be changed during the period of use without modifying the contract. For example, even though Customer produces the data to be transported, that activity does not directly affect the configuration of the network services and, thus, it does not affect how and for what purpose the servers are used. Supplier is the only party that can make decisions about the use of the servers during the period of use. Supplier has the right to decide how data are transported using the servers, whether to reconfigure the servers, and whether to use the servers for another purpose. Accordingly, Supplier controls the use of the servers in providing network services to Customer. There is no need to assess whether the servers are identified assets because Customer does not have the right to control the use of the servers.
Case B — Contract Contains a Lease
55-127 Customer enters into a contract with an information technology company (Supplier) for the use of an identified server for three years. Supplier delivers and installs the server at Customer’s premises in accordance with Customer’s instructions and provides repair and maintenance services for the server, as needed, throughout the period of use. Supplier substitutes the server only in the case of malfunction. Customer decides which data to store on the server and how to integrate the server within its operations. Customer can change its decisions in this regard throughout the period of use.
55-128 The contract contains a lease. Customer has the right to use the server for three years.
55-129 There is an identified asset. The server is explicitly specified in the contract. Supplier can substitute the server only if it is malfunctioning.
55-130 Customer has the right to control the use of the server throughout the three-year period of use because:
- Customer has the right to obtain substantially all of the economic benefits from use of the server over the three-year period of use. Customer has exclusive use of the server throughout the period of use.
- Customer has the right to direct the use of the server. Customer makes the relevant decisions about how and for what purpose the server is used because it has the right to decide which aspect of its operations the server is used to support and which data it stores on the server. Customer is the only party that can make decisions about the use of the server during the period of use.