Question

Examine the contract below and determine whether the contract contains a lease. All information in this case study is hypothetical.

Q Airway enters into a contract with Flybus Ltd for the use of an explicitly specified cargo aircraft (i.e. a freight aircraft for the carriage of cargo only) for a two-year period. The contract details the exterior and interior specifications of the aircraft. Flybus is responsible for operating the aircraft, using its own crew. Q Airway is prohibited from hiring another operator for the aircraft or operating the aircraft itself during the period ofuse.

There are also contractual and legal restrictions in the contract on where the aircraft can fly. Subject to the restrictions, Q Airway will fly in accordance with a predetermined flight schedule which details when and where the aircraft will fly in the next two years, as well as what products/cargos will be loaded onto each flight. This schedule was negotiated between Flybus, Q Airway, and Q Airway’s customers WMB Cars (a high-end car company whose headquarter is in Germany but its production is scattered across a number of countries inEurope and Asia) and TC Equip (one of world’s largest medical equipment developer and manufacturer whose headquarter is in Australia but its production is based in China). Q Airway will use the aircraft exclusively for transporting the WMB cars and the cargoscontaining a variety of TC Equip’s medical equipment around the world in accordance with the schedule.

The contract permits Flybus to substitute the aircraft at any time during the two-yearperiod and must substitute the aircraft if it is not working. Any substitute aircraft must be the same model (i.e. model F050) as the originally specified aircraft, and meet the same exterior and interior specifications mandated in the contract. Flybus has a fleet of F050 planes and multiple sets of crew members available, and its customers also include a number of other air freight businesses.

Answer 1

Is the asset (aircraft) identified?

• We know the aircraft for Q Airway’s use is explicitly specified in the contract (i.e. asset is specified);
• - We know Flybus has NO substantive substitution right with regards to the aircraft because substitution is only allowed for fixing and maintenance (i.e. supplier does NOT have the practical ability to do so);
• - Also, the cost of repainting the exterior and reconfiguring/refitting the interior (of the substitute) will be borne by Flybus according to the contract. The cost of substitution is very significant (including an internal modification), and doing sis unlikely to benefit Flybus economically. Therefore there is an absence of supplier SSR. We need to examine whether Q Airway has control over the actual use of the aircraft next.

Does the customer have the right to CONTROL the use of the aircraft? –

• Q Airway has an exclusive right to use the aircraft during the two-year period, which means that it will receive substantially all the economic benefits from the use of the aircraft. This primarily includes the revenue i.e. flight fare paid by the passengers of each flight. –
• Does Q Airway have the right to direct the actual use of the aircraft? It does NOT get to decide when/how frequent to fly; and the destinations. All relevant details were predetermined in the flight schedule that Q Airway needs to adhere to. –
• When decisions around “how and for what purpose” the asset will be used are predetermined, we need to consider whether the customer has the right to operate the asset without supplier intervention throughout the period of use (if so, the customer still has the right of control). In this case, NO as Flybus operates and supplies the crew for the aircraft. However, Flybus has to operate in accordance with the predetermined schedule agreed in the contract between Flybus and Q Airway. –
• Further Q Airway has designed the aircraft in a way that predetermines how and for what purpose it will be used for the two years (i.e. effectively controlling the use of the aircraft). It designed the aircraft to be a new and luxurious model to fit the international routes Melbourne – London – LA. It also gets to decide which passengers to have on board on each flight. –
• Q Airway has the right to control the use of the aircraft in this case. –
• Therefore, having both the identified asset and the right to control the use of the asset, this contract contains a lease for the purpose of AASB 16.