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Scope

Specify the output

A customer’s right to specify the terms of the output of the contract (i.e., the product itself and timing
of delivery) does not necessarily determine whether the customer has the ability to direct the use of the
underlying asset. A contract for the delivery of goods or services, even if reliant on an identifiable
asset, is normally a supply arrangement and not a lease. However, when the ability to specify the
output is combined with involvement in the design or decision making in the operation of an
underlying asset, it may indicate that the customer is directing the use of the asset.

Predetermined operations

If the contract explicitly states how and for what purpose an asset will be used throughout the term of
the arrangement, and neither party can change the purpose, then other factors should be considered to
determine which party is directing the use of the asset as discussed in ASC 842-10-15-20(b).

Excerpt from ASC 842-10-15-20
A customer has the right to direct the use of an identified asset throughout the period of use in either
of the following situations:

a. . . .

b. The relevant decisions about how and for what purpose the asset is used are predetermined (see
paragraph 842-10-15-21) and at least one of the following conditions exists:

1. The customer has the right to operate the asset (or to direct others to operate the asset in a
manner that it determines) throughout the period of use without the supplier having the right to
change those operating instructions.

2. The customer designed the asset (or specific aspects of the asset) in a way that predetermines how
and for what purpose the asset will be used throughout the period of use.

If the supplier has the ability to alter the predetermined decisions, then the customer does not have
the right to direct the use of the asset.

Design of the asset

In certain industries and with certain types of assets, the design of the asset is the primary factor in
determining the resulting economics. This is especially true when the design establishes how and
when an asset is to be used. For example, a customer that contracts to buy electricity from a supplier’s
windfarm that is responsible for locating the site and the number of turbines to be used to generate the
electricity it purchases, may have the right to direct the use of the asset because the supplier cannot
have a significant impact on the economic benefits to be derived during the period of use (i.e., because
the electrical output is dependent on how often the wind blows in a location selected by the customer).
How the asset is to be used and for what purpose has been predetermined through the selection of the
site and design of the asset.

In certain cases, the level of a customer’s involvement in the design of the asset may be unclear. In that
case, whether the customer was the sole decision maker for the most significant decisions should be

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