Question

Customer Ltd enters into a 10-year contract with Supplier Ltd for the right to use two specified physically distinct dark fibres within a larger cable connecting Hong Kong to Tokyo. Customer Ltd makes the decisions about the use of the fibres by connecting each end of the fibres to its electronic equipment (i.e., Customer ‘light’ the fibres and decides what data and how much data to transfer). If the fibres are damaged, Supplier Ltd is responsible for the repairs and maintenance. Supplier Ltd owns extra fibres but can substitute those for Customer Ltd’s fibres only for reasons of repairs, maintenance or malfunction.

REQUIRED: Determine whether the contract contains a lease. Please explain and justify your conclusion according to AASB 16.

Answer 1

As per AASB 16, the right to use an asset for a limited period of time is termed as an operating lease. In the case of the operating lease, the repair and maintenance of the right to use asset lie with the lessor. In the present case, the Customers Ltd enters in contract with Suppliers Ltd to use the physically distinct dark fiber connecting Hongkong to Tokyo for a period of 10 years. And suppliers Ltd will repair the fiber in case of damage. If the machinery is not working properly and having technical issues and the substitute upgrade is available with the supplier, in that case, it is the supplier's obligation to upgrade it. The explanation that the repair and maintenance expense lies with the lessor (Suppliers Ltd) is in conjugation with the provisions of AASB 16. Hence the conclusion derived is correct.