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ACCA Strategic Professional · Strategic Business Reporting (International) · Leases

Brava Co contracts with a data centre operator for 500 terabytes of storage capacity in a facility for four years. The operator may at any time move Brava's data to any servers in its facilities, and doing so costs the operator very little. Brava decides what data is stored. How should Brava treat the contract under IFRS 16?

It is a service contract. The operator can freely and cheaply substitute the servers used, which is a substantive substitution right, so there is no identified asset. Without an identified asset, IFRS 16 does not treat the arrangement as a lease, whatever Brava decides about the data stored.

  1. AAs a lease, because Brava directs what data is stored on the capacity
  2. BAs a lease, because the capacity is specified in the contract and the term is four years
  3. CAs a lease of the building housing the servers
  4. DAs a service contract, because the operator has a substantive substitution right so there is no identified assetCorrect

Explanation

A supplier's substitution right is substantive when the supplier can practically substitute the asset and would benefit economically from doing so. Here the operator can move data freely at low cost, so no asset is identified. Without an identified asset, the contract is a service, even though Brava decides what is stored.

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