Lease Identification

Objective:

This case introduces students to the accounting for leases under ASC 842, specifically with regard to determining whether a contract contains a lease. For an arrangement to be a lease or contain a lease, the contract must (1) contain an identified asset and (2) convey to the customer the right to control the use of the asset.

Instructions:

Consider multiple alternatives to the issues in the scenario presented below.  Then, using the IFRAC method prepare a solution to the case.  The solution should be presented using a “memo to file” format.  Use the FASB Codification to find and state the appropriate accounting pronouncements.  You may need to visit the FASB website to access the Concept Statements where appropriate.  Be sure to copy and paste the exact content/code as the rule.  Then apply the rules to the facts of the case choosing the best course of action.  You may have a conclusion for each case issue 

Facts:

Best Cars Inc. (Best Cars) is a company based in New York that manufactures automobiles and exports the finished vehicles to Europe. Best Cars manufactures two models; the most popular model is a four-door sedan (Sedan), and the other is a less common, highly customizable luxury sports car (Luxury Car). Best Cars contracts Trans-Atlantic Inc. (Atlantic) to ship its products to Europe. Atlantic has a fleet of 10 multi-use shipping vessels, each with capacity for 2,000 vehicles 

The terms of the shipping contracts are as follows:

• Sedan contract terms:
  • The term is five years.
  • MV Manhattan, a ship in Atlantic’s fleet, is dedicated to shipping Best Car’s Sedans for the term of the contract.
  • Best Cars determines (1) which European ports receive shipments and (2) the order in which deliveries are made to the ports; Best Cars instructs Atlantic accordingly.
  • Best Cars has the option to send the ship below capacity. If the ship is below capacity, Atlantic cannot use the excess capacity to ship products of its other customers.

• Luxury Car contract terms:
  • The term is five years.
  • Atlantic is required to deliver shipments of Luxury Cars within five weeks of notification from Best Cars that an order of Luxury Cars is ready for shipping.
  • Atlantic may choose any ship from its fleet to complete the request.
  • Best Cars may provide 250 to 2,000 Luxury Cars in a single request; however, shipping requests of Luxury Car generally do not exceed 500 vehicles in a single request because of the lower production volume and longer manufacturing time of Luxury Car.
  • Atlantic has the option to use excess capacity to ship products of its other customers.
  • After notification from Best Cars that Luxury Cars are ready to ship, Atlantic determines when within the five-week period to ship the cars, as well as the shipping route 

Best Car’s CFO understands that the new leasing standard has certain provisions that may affect how the company treats contracts of this nature.

Issues:

Analyze the above and prepare a memorandum addressing the impact (if any) of the new

leasing standard on Best Car’s shipping arrangements for the following considerations:

1. Determine whether each of Best Car’s contracts with Atlantic for Sedan and Luxury Car contains an identified asset.
2. Determine whether each contract conveys the right to control the use of the identified asset to the lessee.