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Scope

If the customer in the contract is a joint operation or a joint arrangement, an entity shall consider
whether the joint operation or joint arrangement has the right to control the use of an identified asset
throughout the period of use.

Utilizing all of an asset’s output may indicate that the customer is obtaining substantially all of the
economic benefit; however, this alone is not enough to demonstrate control of the asset. The customer
must also have the right to direct the use of the asset. Both criteria must be met to qualify for lease
accounting.

The assessment of whether a reporting entity has control over an asset should consider the period of
use of that asset. The period of use is defined in the ASC 842 Glossary as follows.

Definition from the ASC 842 Glossary

Period of Use: The total period of time that an asset is used to fulfill a contract with a customer
(including the sum of any nonconsecutive periods of time).

Control over use of an asset can be for a consecutive period, nonconsecutive periods, or a portion of
the term of the contract. Example 2-14 illustrates an arrangement in which control is obtained in
nonconsecutive periods. In that example, a facility is used for two months each year over a five-year
period; the period of use refers to those specified time periods within the year, not the entire year. ASC
842-10-15-5 provides guidance on a customer obtaining control for a portion of the term of a contract.

ASC 842-10-15-5
If the customer has the right to control the use of an identified asset for only a portion of the term of
the contract, the contract contains a lease for that portion of the term.

Determining the portion of the term of the contract during which a customer has the right to control
the use of the identified asset may be more challenging when a substantive substitution right exists for
a portion of the contract term. ASC 842-10-15-13 provides guidance on this situation.

ASC 842-10-15-13
If the supplier has a right or an obligation to substitute the asset only on or after either a particular
date or the occurrence of a specified event, the supplier does not have the practical ability to substitute
alternative assets throughout the period of use.

EXAMPLE 2-5

Supplier with substantive substitution right for a portion of contract term

Consider the same facts as in Example 2-3, except assume that Warehousing Corp only had the ability
to shift Manufacturing Corp’s inventory to another location within its warehouse for the first year of
the agreement (instead of during the full three year term).

Does Warehousing Corp have a substantive substitution right?

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