Not a lease – Rail cars

Compare this case with Lease – Rail cars, the difference will give you a lesson!!!!

The case:

The contract between Customer and Supplier requires Supplier to transport a specified quantity of goods by using a specified type of rail car in accordance with a stated timetable for a period of five years. The timetable and quantity of goods specified are equivalent to Customer having the use of 10 rail cars for five years. Supplier provides the rail cars, driver and engine as part of the contract.

The contract states the nature and quantity of the goods to be transported (and the type of rail car to be used to transport the goods). Supplier has a large pool of similar cars that can be used to fulfil the requirements of the contract. Similarly, Supplier can choose to use any one of a number of engines to fulfil each of Customer’s requests, and one engine could be used to transport not only Customer’s goods, but also the goods of other customers. The cars and engines are stored at Supplier’s premises when not being used to transport goods.

Not a lease – Rail cars Not a lease – Rail cars Not a lease – Rail cars

The contract does not contain a lease of rail cars or of an engine.

The reasoning:

The rail cars and the engines used to transport Customer’s goods are not identified assets. Supplier has the substantive right to substitute the rail cars and engine because:

  1. Supplier has the practical ability to substitute each car and the engine throughout the period of use (see Identified assets, Substantive substitution rights sub (a). Alternative cars and engines are readily available to Supplier and Supplier can substitute each car and the engine without Customer’s approval.
  2. Supplier would benefit economically from substituting each car and the engine (see Identified assets, Substantive substitution rights sub (b). There would be minimal, if any, cost associated with substituting each car or the engine because the cars and engines are stored at Supplier’s premises and Supplier has a large pool of similar cars and engines. Supplier benefits from substituting each car or the engine in contracts of this nature because substitution allows Supplier to, for example:
    1. use cars or an engine to fulfil a task for which the cars or engine are already positioned to perform (for example, a task at a rail yard close to the point of origin), or
    2. use cars or an engine that would otherwise be sitting idle because they are not being used by a customer.

Accordingly, Customer does not direct the use, nor have the right to obtain substantially all of the economic benefits from use, of an identified car or an engine. Supplier directs the use of the rail cars and engine by selecting which cars and engine are used for each particular delivery and obtains substantially all of the economic benefits from use of the rail cars and engine. Supplier is only providing freight capacity.

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