A Contract conveys the right to control the
use of an identified assets for a period of time in the exchange for
consideration.
1. Identified
Assets
The asset which is specified in the
contract.
The only asset which is implicitly possible
to complete the terms of contract.
Asset
Substitution:
Asset substitution should be in future date
or on specific event or for repair and upgrade.
If the substitution is at customer premises
or any place, it costs more.
substantial
substitution right (This is not allowed for lease):
Asset Substitution should be available to whole periods and economic
benefit from it should be more than the cost of substitution in this case.
(This is called substantial substitution right).
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2. Right to
control
Contract should have right to
·
Get economic benefit throughout
the period.
·
Direct the use of asset
Economic benefit throughout the year:
·
It is restricted to the scope
of the customer’s right to use the asset
·
Consideration (Benefit) can be
the portion of cash outflow from the asset or joint product from it or by
product or output from it.
·
Benefit should be throughout
the year.
Direct the use of asset:
·
How to use and for what purpose
to use should be decided in the direction.
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3. Components
There
are three components.
·
One identified asset
·
Separate lease component
(Underlying assets)
·
Non - Lease component
Separate lease components:
There will be more than one lease assets for
the same contracts then that will be a separate lease component. The component
should be put in use independently or with other available resource which can
come from separate lease or suppliers.
Example:
For a
construction we need JCB, Lorry. Both can operate separately. They are the
separate lease component.
Non- Lease component.
The
maintenance and other incidental charges of an identified or underlaying assets
are covered as non-lease component.
Pricing for component:
There are two ways.
·
Stand alone price of lease
component is decided separately and component of non-lease component is decided
separately.
·
If price expedient is used,
combined it is used.
·
Lessee can account it in the
way of standalone price separately for lease and non-lease in books.
·
Lessee can account combinedly
in books
·
Lessor should consider by
standalone sperate price only in books
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4. Term
Non-cancelling period of contract is the
term.
Lessee is having the below options:
·
Use ‘’Exercise to option’’ to
extend the term
·
Use ‘’Not exercise option’’ to
terminate the term
·
Use exercise to option to
purchase the assets
Lessor is having the right to terminate the
term at any time with limited rights.
Commencement Date:
The
date on which asset is put in use in contract and physical also is the
commencement date.
Inception Date:
The
date of signing of contract.
All
contract act, 1872 provision will apply with this act’s overrides.
5. Payments
Below are the payments modes and methods:
·
Fixed payment
·
Variable payment
·
Penalty for termination
·
Residual value guarantee
Fixed
Payment:
When
we make the contract, we will decide the payment or consideration. This may be
periodic also.
Variable
Payment:
The payment will variable as per below
condition.
·
Payment will be variable by
price index
·
The revenue earned by the
assets
·
Use of the underlaying assets
Exmaples:
Price index:
The Market rate for the land’s usage is the
price.
Revenue earned by assets
The production machine’s price which is
used to produce goods
Use
of underlaying assets
The truck or lorry’s price which is based
on the usage.
Penalty:
If lessee terminates within the contract
period, he needs to pay penalty.
Guarantee:
In
this case, lessee will pay guaranty as deposit.
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