ACCA Strategic Professional · Strategic Business Reporting (International) · Leases
Vega Co enters a contract with Rho Co to receive 100% of the output of a solar farm for 20 years, at a price per unit fixed in the contract. Rho owns and operates the farm, and the design of the farm predetermined how it generates output. Vega obtains substantially all the economic benefits. Which factor most clearly indicates whether Vega controls the use of the farm?
The key factor is whether Vega was involved in designing the farm so that its use was predetermined. Under IFRS 16, designing the asset can give the customer the right to direct its use. Fixed pricing, legal ownership and contract length do not decide control.
- AWhether Vega or Rho designed the farm in a way that predetermined how and for what purpose it is used, with Vega involved in that designCorrect
- BWhether the price per unit is fixed
- CWhether Rho holds the legal title to the farm
- DWhether the contract term exceeds 12 months
Explanation
Right to direct use may arise where the customer designed the asset, or specific aspects of it, so that use is predetermined. Fixed pricing, legal title and contract length do not determine control of use. The decisive question is who determined how and for what purpose the farm would be used.
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