Joyful enters into a contract with a MTR Limited (MTR) to rent Retail shop M9 (R
ID: 2517659 • Letter: J
Question
Joyful enters into a contract with a MTR Limited (MTR) to rent Retail shop M9 (RSM9) located in Mongkok station for two-years. RSM9 is one of many MTR station shops. Joyful is granted the right to use RSM9. MTR can require Joyful to relocate to another retail unit, In that case, MTR is required to provide Joyful with a retail unit of similar quality and specifications to RSM9 and to pay for Joyful's relocation costs. MTR would benefit economically from relocating Joyful only if a major new tenant were to decide to occupy a large amount of retail space at a rate sufficiently favourable to cover the costs of relocating Joyful and other tenants in the retail space. However, although it is possible that those circumstances will arise, at inception of the contract, it is not likely that those circumstances will arise. The contract requires Joyful to use RSM9 to sell its renowned cookie products between 08:0 to 21:00 hours. Joyful makes all of the decisions about the use of the retail unit during the period of use. For example, Joyful decides on the mix of cookie sold from the unit, the sellin price of goods sold and the quantities of inventory held. Joyful also controls physical access to the unit throughout the two-year period of use. The contract requires Joyful to make fixed payments to MTR, as well as variable payments that are a percentage of sales from RSM9 MTR provides cleaning and security services, as well as advertising services, as part of the contract Required: Assess the contract to determine whether it contains a lease. Justify your answer.Explanation / Answer
When Joyful enters into a contract with MTR Ltd to rent a retail shop, they enters into a contract. As per the contract joyful is granted the right to use. But it also involves a condition that MTR can require joyful to relocate to another retail unit, which depends on certain conditions which will economically benefit MTR. For a contract to be a lease contract there is a prime requirement that, the asset in the contract must be identified. But as per IFRS, if there is a clause in contract that the supplier has substantive right to substitute the asset for a alternative asset throughout the period. Then there is no identified asset.
A supplier’s substitution right is ‘substantive’ if the supplier:
–has the practical ability to substitute the asset throughout the period of use; and
–would benefit economically from exercising its right to substitute the asset.
Hence the prime requirement of lease contract is not fulfilled and we can say this contract does not involves lease.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.