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ACCA Applied Skills · Financial Reporting · Leasing

Kestrel Co contracts with Ardent Freight for the transport of 5,000 tonnes of goods over three years. Ardent uses any of its fleet of 40 similar trucks, chosen at its discretion, and can substitute trucks at negligible cost, with a substantive benefit to it. Which treatment is correct for Kestrel under IFRS 16?

The contract is a service contract and no right-of-use asset is recognised. The supplier can substitute trucks at negligible cost and benefits from doing so, so the substitution right is substantive. Therefore there is no identified asset, and a lease does not exist.

  1. ARecognise a right-of-use asset for the trucks Ardent uses
  2. BTreat as a lease because the contract lasts three years
  3. CTreat as a lease of the whole fleet of 40 trucks
  4. DTreat as a service contract with no right-of-use assetCorrect

Explanation

Ardent has a substantive substitution right (practical ability and economic benefit), so there is no identified asset. Without an identified asset the contract is not a lease, so Kestrel accounts for a service expense. Contract length alone does not create a lease.

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