In short
A contract contains a lease if it conveys the right to control the use of an identified asset for a period in exchange for consideration. Control means the right to get substantially all the asset's economic benefits and to direct its use.
Key takeaways
- If the supplier has a substantive right to substitute the asset, there is no identified asset.
- A capacity portion of an asset, such as part of a pipeline, is generally not an identified asset unless it is substantially all of it.
- Service contracts, such as many cloud arrangements, often contain no lease.
Where it's tested
FAR: Leases — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A lessee enters into a 4-year lease for equipment with a 10-year remaining economic life. There is no purchase option and ownership does not transfer. The present value of lease payments is 55% of the equipment's fair value. How should the lessee classify this lease?