Right to control the use of the identified asset

A contract conveys the right to control the use of an identified asset for a period of time if, throughout the period of use, the customer has the right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. Right to control the use of the identified asset

Right to obtain substantially all of the economic benefits from use of the identified asset

A customer can obtain economic benefits either directly or indirectly (e.g., using, holding or subleasing the asset). Economic benefits include the asset’s primary outputs (i.e., goods or services) and any by-products (e.g., renewable energy credits that are generated through use of the asset), including potential cash flows derived from these items. Right to control the use of the identified asset

Economic benefits also include benefits from using the asset that could be realised from a commercial transaction with a third party (e.g., subleasing the asset). However, economic benefits arising from construction or ownership of the identified asset (e.g., tax benefits related to excess tax depreciation and investment tax credits) are not considered economic benefits derived from the use of the asset.

Right to direct the use of the identified asset

A customer has the right to direct the use of an identified asset throughout the period of use when either:

  1. The customer has the right to direct how and for what purpose the asset is used throughout the period of use
    Or Right to control the use of the identified asset
  2. The relevant decisions about how and for what purpose the asset is used are predetermined and the customer either: (1) has the right to operate the asset, or 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; or (2) 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.

When evaluating whether a customer has the right to change how and for what purpose the asset is used throughout the period of use, the focus is on whether the customer has the decision-making rights that will most affect the economic benefits that will be derived from the use of the asset. Those rights can be viewed as similar to decisions made by a board of directors. The decision making rights that are most relevant are likely to depend on the nature of the asset and the terms and conditions of the contract.

IFRS 16 provides the following examples of decision-making rights that grant the right to change how and for what purpose an asset is used:

  1. The right to change the type of output that is produced by the asset
  2. The right to change when the output is produced
  3. The right to change where the output is produced
  4. The right to change whether the output is produced and the quantity of that output

IFRS 16 also provides the following examples of decision-making rights that do not grant the right to change how and for what purpose an asset is used:

  • Maintaining the asset Right to control the use of the identified asset
  • Operating the asset Right to control the use of the identified asset

Although the decisions about maintaining and operating the asset are often essential to the efficient use of that asset, the right to make those decisions, in and of itself, does not result in the right to change how and for what purpose the asset is used throughout the period of use.

The customer does not need the right to operate the underlying asset to have the right to direct its use. That is, the customer may direct the use of an asset that is operated by the supplier’s personnel. However, as discussed below, the right to operate an asset will often provide the customer with the right to direct the use of the asset if the relevant decisions about how and for what purpose the asset is used are predetermined. See Leases – Contract for shirts for an example of the evaluation of whether a customer controls the use of the factory when the customer enters into a contract with a manufacturer to purchase a particular type, quality and quantity of shirts.

Evaluating whether a consumer products entity or a retailer has the right to direct the use of an identified asset will be straightforward in most arrangements. However, evaluating certain arrangements may require more judgement. For example, a customer in a contract manufacturing arrangement may need to evaluate whether it has the right to direct the use of any identified asset (e.g., the production facility, a dedicated production line) by considering, among others, whether it decides what type of output will be produced (e.g., different sizes or colours of shirts), the timing and quantity of the production and whether it has the right to make changes to these decisions throughout the period of use.

Similarly, a customer’s contract with a logistics service provider to transport goods by truck may need to be evaluated to determine whether the customer has the right to direct the use of each truck. The customer might consider whether it decides the types and quantity of goods to be transported (within the defined scope of the arrangement), when the truck is used (e.g., the timing for loading or unloading the goods), the routes (e.g., the collection point, stops and the final destination) and whether it has the right to make changes to these decisions throughout the period of use. Right to control the use of the identified asset

In some cases, it may not be clear whether the customer has the right to direct the use of the identified asset. This could be the case when the most relevant decisions about how and for what purpose an asset is used are predetermined by contractual restrictions on the use of the asset (e.g., the decisions about the use of the asset are agreed to by the customer and supplier in negotiating the contract, and those decisions cannot be changed). This could also be the case when the most relevant decisions about how and for what purpose an asset is used are, in effect, predetermined by the design of the asset. Decisions about how and for what purpose an asset is used are expected to be predetermined only in few cases.

Judgment may be required to assess whether a 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. Also see Short-term lease – Truck rental for an example of the evaluation of whether a customer has the right to direct the use of an identified asset when how and for what purpose an identified asset will be used is predetermined in the contract.

Specifying the output of an asset before the period of use

If a customer can only specify the output from an asset before the beginning of the period of use and cannot change that output throughout the period of use, the customer does not have the right to direct the use of that asset unless it has the right to operate the asset (or to direct others to operate the asset in a manner that it determines) or it designed the asset (or specific aspects of the asset), as contemplated in IFRS 16. If the customer did not design the asset or aspects of it, the customer’s ability to specify the output in a contract that does not give it any other relevant decision-making rights relating to the use of the asset (e.g., the ability to change when, whether and what output is produced) gives the customer the same rights as any customer that purchases goods or services in an arrangement (i.e., a contract that does not contain a lease). Right to control the use of the identified asset

Protective rights

A supplier’s protective rights, in isolation, do not prevent the customer from having the right to direct the use of an identified asset. Protective rights typically define the scope of the customer’s right to use the asset without removing the customer’s right to direct the use of the asset. Protective rights are intended to protect a supplier’s interests (e.g., interests in the asset, its personnel, compliance with laws and regulations) and might take the form of a specified maximum amount of asset use, a restriction on where an asset may be used or a requirement to follow specific operating instructions.

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