a purchaser enters into a take or pay contract to buy industrial gases from a suppli 612460

Arrangements that do not contain leases

(a) Take-or-pay contract that does not depend on a specific asset

A purchaser enters into a take-or-pay contract to buy industrial gases from a supplier. The supplier is a large company operating similar plants at various locations. The amount of gas that the purchaser is committed to buy is roughly equivalent to the total output of one of the plants. Because a good distribution network is available, the supplier is able to provide gas from various locations to fulfil its supply obligation.

In this example, the arrangement does not depend on a specific asset. This is because it is economically feasible and practical for the supplier to fulfil the arrangement by providing use of more than one plant. A specific asset has therefore not been identified either explicitly or implicitly.

Payments under the contract may be unavoidable because it is a take-or-pay arrangement and the purchaser may in fact take all of the output of a single plant but the arrangement does not convey a right to use the asset. The purchaser does not have the right to control the use of the underlying asset. It does not have the ability or right to operate the asset in a manner it determines (or to direct others to do so on its behalf), and it does not control physical access. The arrangement does not contain a lease.

(b) The right to control the use of an underlying asset is not conveyed

A manufacturing company (the purchaser) enters into an arrangement with a third party (the supplier) to supply a specific component part of its manufactured product for a specified period of time. The supplier designs and constructs a plant next to the purchaser’s factory to produce the component part. The designed capacity of the plant exceeds the purchaser’s current needs, and the supplier maintains ownership and control over all significant aspects of operating the plant.

The supplier’s plant is explicitly identified in the arrangement, but the supplier has the right to fulfil the arrangement by shipping the component parts from another plant owned by the supplier. However, to do so for any extended period of time would be uneconomical. The supplier must stand ready to deliver a minimum quantity. The purchaser is required to pay a fixed price per unit for the actual quantity taken. Even if the purchaser’s needs are such that they do not need the stated minimum quantity, they still pay only for the actual quantity taken.

The supplier has the right to sell the component parts to other customers and has a history of doing so by selling in the replacement parts market, so it is expected that parties other than the purchaser will take more than an insignificant amount of the component parts produced at the supplier’s plant.

The supplier is responsible for repairs, maintenance, and capital expenditures of the plant.

This arrangement does not contain a lease. An asset (the plant) is explicitly identified in the arrangement and fulfilment of the arrangement is dependent on the facility. While the supplier has the right to supply component parts from other sources, the supplier would not have the ability to do so because it would be uneconomical. However, the purchaser has not obtained the right to use the plant because it does not control it, for the following reasons:

(a) the purchaser does not have the ability or right to operate or direct others to operate the plant or control physical access to the plant; and

(b) the likelihood that parties other than the purchaser will take more than an insignificant amount of the component parts produced at the plant is more than remote, based on the facts presented.

(c) the price paid by the purchaser is fixed per unit of output taken but see below where this is discussed further.