a production company the purchaser enters into an arrangement with a third party the 612459

An arrangement that contains a lease

A production company (the purchaser) enters into an arrangement with a third party (the supplier) to supply a minimum quantity of gas needed in its production process for a specified period of time. The supplier designs and builds a facility near to the purchaser’s plant to produce the gas and maintains ownership and control over all significant aspects of operating the facility. The agreement provides for the following:

• The facility is explicitly identified in the arrangement, and the supplier has the contractual right to supply gas from other sources, although supplying gas from other sources is not economically feasible or practicable;
• The supplier has the right to provide gas to other customers and to remove and replace the facility’s equipment and modify or expand the facility to enable the supplier to do so. However, at inception of the arrangement, the facility is designed to meet only the purchaser’s needs and the supplier has no plans to modify or expand the facility. ;
• The supplier is responsible for repairs, maintenance and capital expenditures;
• The supplier must stand ready to deliver a minimum quantity of gas each month;
• On a monthly basis, the purchaser will pay a fixed capacity charge and a variable charge based on actual production taken. The purchaser must pay the fixed capacity charge irrespective of whether it takes any of the facility’s production. The variable charge includes the facility’s actual energy costs, which comprise approximately 90 per cent of the facility’s total variable costs. The supplier is subject to increased costs resulting from the facility’s inefficient operations;
• If the facility does not produce the stated minimum quantity, the supplier must return all or a portion of the fixed capacity charge.

The arrangement contains a lease within the scope of IAS 17. An asset (the facility) is explicitly identified in the arrangement and fulfilment of the arrangement is dependent on the facility. While the supplier has the right to supply gas from other sources, its ability to do so is not substantive. The purchaser has obtained the right to use the facility because, on the facts presented – in particular, that the facility is designed to meet only the purchaser’s needs and the supplier has no plans to expand or modify the facility – it is remote that one or more parties other than the purchaser will take more than an insignificant amount of the facility’s output and the price the purchaser will pay is neither contractually fixed per unit of output nor equal to the current market price per unit of output as of the time of delivery of the output.