Pipeline Capacity Lease Agreement

Therefore, two conditions must be met for a contract to be a lease: however, if part of the capacity of a larger asset is not physically separated, it is an identified asset only if the share represents “essentially the whole” of the asset`s capacity. This gives the client the right to obtain essentially all the economic benefits of using the asset. If the contract does not explicitly identify the different strands, this is an example of a lease only if the customer has the right to obtain essentially the entire capacity of the fibre optic cable. Although CSA 842 does not define “essentially all,” most audit firms have interpreted it as 90% or more. The client (tenant) enters into a 15-year contract with a supply company (supplier/renter) regarding the right to use a certain capacity inside a cable connecting Hong Kong to Tokyo. The amount shown is the customer using the full capacity of 3 strands inside the cable (the cable contains 15 fibers of similar capacity). The supplier makes decisions about data transfer (i.e. the supplier turns on the fibers and decides which fibers are used for customer transfer and which electronic devices the supplier owns and connects the fibers). How are leasing items such as sublease, unbilled days, billing based on their use or volume, and escalating transportation and warehousing payments tracked and reported to the new accounting standards? The provider makes all decisions regarding the transmission of its customers` data, which requires the use of only part of the cable capacity for each customer. The portion of capacity available to the customer is not physically different from the remaining capacity of the cable and does not essentially represent the entire capacity of the cable. The client is not allowed to use an identified asset. If the contract imposes provisions that would prevent the client from reaping all the economic benefits of using the asset, the contract is not a lease agreement. For example, physical replacement rights of the lessor or lessor, which prevent the client from subleting the assets to another party.

In our example, we must determine whether the two conditions of a lease are met: take a look at some examples listed in CSA 842-10-55-55 to 55-62 to determine when a fibre optic contract would include a lease and when it would not.