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CA Final · Financial Reporting · Ind AS 116 Leases

Sagar Logistics Ltd signs a contract with a vendor for storage services. The contract states that Sagar gets space in a facility for 5 years for a fixed fee, but the vendor may substitute any other facility at its discretion. Considering the definition of a lease in Ind AS 116, which is the best approach to assess whether the contract contains a lease?

The contract must convey the right to use an underlying asset for a period of time in exchange for consideration. Where the vendor can freely substitute the facility, Sagar has no identified asset to use, so the contract is not a lease on these facts, despite the fixed five-year fee.

  1. AIt is a lease, since a fixed fee is payable for five years
  2. BIt is a lease only if the fee exceeds the fair value of the facility
  3. CAssess whether the contract conveys the right to use an identified asset for a period of time in exchange for consideration; if the vendor can freely substitute the asset, there is no identified asset to use and the contract is not a lease on that basisCorrect
  4. DIt is not a lease because storage is a service and services are always excluded

Explanation

A lease is 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. Payment of consideration over time is not sufficient; there must be an identified asset to which the right of use relates. Where the vendor can substitute freely, the contract lacks that, so it is not a lease on these facts. Services are not automatically excluded.

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