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Scope

Analysis

In this case, the substantive substitution right does not exist throughout the period of use. As such,
Manufacturing Corp could have a lease of the warehouse space beginning in year two of the
agreement, provided the other criteria are met.

2.3.2.1 The right to obtain substantially all of the economic benefits

The first criterion in the control assessment is the right to the economic benefits derived from the
asset. To be a lease, the arrangement must convey the right to obtain substantially all of the potential
economic benefits that can be obtained from directing the use of the asset throughout the period of
use. As discussed in LG 2.3.2, the period of use could be consecutive or nonconsecutive periods of
time. A customer would not control an asset if another party has the right to more than an
insignificant portion of the potential economic benefits. This is not a probability analysis as to who is
likely to receive the benefits; the assessment should focus on the contractual rights of the respective
parties. Specifically, the rights to the output and other economics derived from use of the asset should
be considered. For example, if an electronic billboard is used by multiple advertisers it is likely that
control rests with the billboard owner because none of the advertisers obtain substantially all of the
economic benefits. If a customer does not have contractual rights to all of the existing capacity of the
asset, and the arrangement does not grant the customer an option to acquire any additional capacity,
the arrangement is unlikely to be a lease. However, if the customer has the option to increase the
volume of the output it consumes before it is given to additional customers (right of first refusal), the
arrangement likely meets this criterion.

If the asset produces more than one type of output or benefit, this assessment should be made based
on the fair value of the contractual rights. In other words, the assessment should be performed based
on the potential economic returns associated with those contractual rights. The assessment should be
based on the asset as it exists at the time of entering into the arrangement by considering the capacity
level at which the asset is expected to operate, maintenance schedules, and type of physical asset. The
standard does not define “economic benefits” but it does provide examples of ways the benefits can be
obtained.

Excerpt from ASC 842-10-15-17
A customer can obtain economic benefits from use of an asset directly or indirectly in many ways, such
as by using, holding, or subleasing the asset.

A customer may derive economic benefits from its use of an asset by producing goods for its own use
or resale, providing services, or enhancing the value of other assets. The parties to the contract should
consider the economic benefits that can be derived from the use of the asset but not benefits that are
derived solely from ownership of the asset (e.g., proceeds from the sale of the asset).

A customer that contracts for the right to use an asset generally has a specific purpose or use of the
asset in mind. However, assets can often function and produce various outputs during their operation
in addition to what was initially contracted. Economic benefits should include cash flows derived from
both the primary outputs and by-products. For example, a supplier that owns equipment to produce
customized parts for its customer (an automobile company) may simultaneously sell the scrap metal to
a third party. When evaluating whether it is obtaining substantially all of the economic benefits from

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