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

Zeta Co enters a five-year contract with a logistics provider for the transport of goods. The provider owns a fleet of 40 identical trucks and may use any truck to fulfil the contract, and substituting trucks costs the provider almost nothing. Zeta has no right to direct which truck is used. How should Zeta treat the arrangement under IFRS 16?

The arrangement is a service contract. The supplier can substitute any of its identical trucks at negligible cost and would benefit from doing so, so the substitution right is substantive. Without an identified asset there is no lease under IFRS 16, whatever the contract length or payment pattern.

  1. AAs a lease, because the contract is for more than 12 months
  2. BAs a lease, because Zeta benefits from the trucks throughout the term
  3. CAs a service contract, because the supplier has a substantive substitution right and no asset is identifiedCorrect
  4. DAs a lease only if Zeta pays a fixed annual fee

Explanation

A lease needs an identified asset. Where the supplier has a practical ability to substitute the asset and would benefit economically from doing so, the right is substantive and no asset is identified. The contract term and fee structure do not override this, so the arrangement is a service contract.

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