Lease And No Lease – Fibre-optic Cable – FAQ | IFRS

Lease and No lease – Fibre-optic cable

The case 1: Lease  – Fibre-optic cable Lease and No lease – Fibre-optic cable

Customer enters into a 15-year contract with a utilities company (Supplier) for the right to use three specified, physically distinct dark fibres within a larger cable connecting Hong Kong to Tokyo. Customer makes the decisions about the use of the fibres by connecting each end of the fibres to its electronic equipment (ie Customer “lights” the fibres and decides what data, and how much data, those fibres will transport). If the fibres are damaged, Supplier is responsible for the repairs and maintenance. Supplier owns extra fibres, but can substitute those for Customer’s fibres only for reasons of repairs, maintenance or malfunction (and is obliged to substitute the fibres in these cases).

The contract contains a lease of dark fibres. Customer has the right to use the three dark fibres for 15 years.

The reasoning: Lease and No lease – Fibre-optic cable

There are three identified fibres. The fibres are explicitly specified in the contract and are physically distinct from other fibres within the cable. Supplier cannot substitute the fibres other than for reasons of repairs, maintenance or malfunction see Identified assetThe supplier’s right or obligation to substitute the assets for repairs and maintenance).

Customer has the right to control the use of the fibres throughout the 15-year period of use because:

  1. Customer has the right to obtain substantially all of the economic benefits from use of the fibres over the 15-year period of use. Customer has exclusive use of the fibres throughout the period of use.
  2. Customer has the right to direct the use of the fibres because the conditions in Identified assets, Substantive substitution rights sub (a) exist. Customer makes the relevant decisions about how and for what purpose the fibres are used by deciding:
    1. when and whether to light the fibres, and
    2. when and how much output the fibres will produce (ie what data, and how much data, those fibres will transport). Customer has the right to change these decisions during the 15-year period of use.

Although Supplier’s decisions about repairing and maintaining the fibres are essential to their efficient use, those decisions do not give Supplier the right to direct how and for what purpose the fibres are used. Consequently, Supplier does not control the use of the fibres during the period of use.

The case 2: Not a lease – Portion of assets – Fibre-optic cableIFRS 17 Insurance contracts Contents

Customer enters into a 15-year contract with Supplier for the right to use a specified amount of capacity within a cable connecting Hong Kong to Tokyo. The specified amount is equivalent to Customer having the use of the full capacity of three fibre strands within the cable (the cable contains 15 fibres with similar capacities). Supplier makes decisions about the transmission of data (ie Supplier lights the fibres, makes decisions about which fibres are used to transmit Customer’s traffic and makes decisions about the electronic equipment that Supplier owns and connects to the fibres).

The contract does not contain a lease. Lease and No lease – Fibre-optic cable

The reasoning: Lease and No lease – Fibre-optic cable

Supplier makes all decisions about the transmission of its customers’ data, which requires the use of only a portion of the capacity of the cable for each customer. The capacity portion that will be provided to Customer is not physically distinct from the remaining capacity of the cable and does not represent substantially all of the capacity of the cable (see Identified asset, Portions of assets). Consequently, Customer does not have the right to use an identified asset.

Lease and No lease – Fibre-optic cable

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