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Scope

pole to be used by a third party generally cannot be physically or mechanically separated from the
remainder of the pole. Further, the primary use of a utility pole is to support electrical wires and
transport electricity (i.e., to permit the utility company to provide its core service). As the primary
purpose is not to serve as a hosting device for third-party assets, it may be reasonable to conclude that
the utility pole attachments would not be considered physically distinct.

2.3.1.4 Substantive substitution rights

The existence of substitution rights may result in the determination that a specific asset has not been
identified. If an asset is implicitly specified because the supplier does not have any alternative assets
available to fulfill the contract, substitution rights do not exist. If, however, an asset is explicitly
specified in a contract, but the supplier has a contractual right to substitute that asset, the entities
would need to evaluate the criteria in ASC 842-10-15-10 to determine if the substitution rights are
substantive.

ASC 842-10-15-10

Even if an asset is specified, a customer does not have the right to use an identified asset if the supplier
has the substantive right to substitute the asset throughout the period of use. A supplier’s right to
substitute an asset is substantive only if both of the following conditions exist:

a. The supplier has the practical ability to substitute alternative assets throughout the period of use
(for example, the customer cannot prevent the supplier from substituting an asset, and alternative
assets are readily available to the supplier or could be sourced by the supplier within a reasonable
period of time).

b. The supplier would benefit economically from the exercise of its right to substitute the asset (that
is, the economic benefits associated with substituting the asset are expected to exceed the costs
associated with substituting the asset).

When both of these criteria are met, the asset is not an identified asset irrespective of whether it is
specified in the underlying contract.

Provisions that permit an alternative means for fulfilling a contract under certain circumstances may
indicate that the customer does not have the right to use an identified asset. For example, a large
manufacturing entity may enter into an agreement with a customer that specifies a particular model of
equipment to be used to fulfill the contact. Although the model number is specified, if the
manufacturer has several interchangeable pieces of equipment and can use any one of them to satisfy
its obligations under the contract, the arrangement may not include an identified asset. Similarly, a
contract that permits a supplier to outsource its obligation to deliver a product or service may not meet
the identified asset criterion.

As discussed in ASC 842-10-15-14, a supplier’s right to replace a specified asset during the term of an
arrangement if it is not working properly or becomes defective is not considered a substantive
substitution right (i.e., an identified asset would still exist) and would not by itself preclude the
arrangement from being considered a lease. Likewise, a provision that contractually permits or
requires a supplier to substitute other assets on or after a specified date does not preclude the
arrangement from being considered a lease prior to the substitution date.

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