To: Employees of Auto Company
From: Manager of Auto
Date: November 20, 2022
Dear Auto Company,
Here at Auto, we are excited to have every one of you involved in the tasks and operations of the organization concerning the shipment of our brands to various parts of the world. According to an assessment of the new standards of FASB, the company’s consignment will significantly influence Auto’s ability to complete its request to various destinations in Europe. Case 1 scenario emphasizes that both contracts involving a lease must have an identified asset, which will allow the organization to deliver only the defined commodity to the destinations. Additionally, the new standards certify that leasing only ensues when there is an identified asset between the parties involved (Taylor, 84). Consequently, this will considerably affect the shipping plan of Auto largely when considering a leasing contract with Atlantic.
Case 2 scenario evaluated the existence of the right to control using the identified asset to the lessee. The lessee often has the right to control some of the identified assets in a contract. Subsequently, Auto will have right to control the delivery of Sedan Car by the recognized asset to the destination. The company will determine the ports in Europe to receive the consignment as well as the order of delivering the cars. However, Auto cannot use the remaining space for its economic benefits because Atlantic cannot carry any other commodity other than Sedan Cars. In Scenario 2, Auto will have no right to control the identified asset in delivering the Luxury Car because it (Atlantic) can determine which day to complete the request within the time range. Besides, the lessor can maximize the excess capacity to deliver some of its goods to customers.
A lease is a contract signed between two parties outlining the terms regulating the operations and involvement of each side when renting an asset owned by another party (property owner). The agreement allows the tenant (lessee) to use the property and offer regular payment to the lessor for a specified period as defined by the contract. Nonetheless, both the tenant and property owner face the penalties when they fail to preserve the terms of the agreement. The IASB and FASB have suggested recommendations that require lessees to acknowledge property and liabilities that arise from their involvement in the leases.
According to the FASB, there is need to focus on identification of whether a contract ought to cover a lease, given that all agreements will be recordable on a balance sheet of the lessee. Currently, many organizations in the business world have pacts that encompass both an operating lease and a service; that rarely isolates the operating lease component. Under the current and newly established standards of the FASB, the consideration of the two elements will be different. A lessee may deliberate on a practical convenience by employing a class of underlying asset by not isolating non-lease aspects (services) from lease components.
However, the lessee may decide to apply the exception on each lease element, and another associated non-lease component is accountable for in the single lease element. Consequently, either the service component will be isolated, or the whole agreement can be treatable as a lease. Additionally, the FASB asserts that a contract will entail a lease when there is an identified asset as well as the right to control the use of the designated asset within the time range. An identified asset can be identifiable either implicitly or explicitly during the extension of the contract. In case of an explicit definition, the contract specifies the asset while in implicit, the asset remains unmentioned. However, in both cases, the parties can identify the asset.
Case 1: Determine whether each of Auto’s contracts with Atlantic for Sedan and Luxury Car Contains an identified.
- Sedan Contract
According to the FASB new standards, an identified asset must exist for a lease to ensue. The MV Manhattan ships Auto’s Sedan Car to various ports of the destination per the contract. Furthermore, Auto Company has the responsibility to instruct the lessor accordingly. The identified asset, in this case, is the Atlantic that delivers Sedan to European ports as well as receiving the shipment. Besides, Auto, as the lessee, determines the order of delivery to the harbors. The contract allows the lessee to have the ability to ship items below the capacity and prohibits the property owner from using the excess capacity to carry commodities to their clients. If in case Atlantic does send its products to their consumer by utilizing the surplus space, it will be a breach of contract. Therefore, face the penalties for contract breach, which may range from small to great fines affecting the property owner.
- Luxury Car Contract
The contract contains an identified asset. Auto as the lessee requires Atlantic to ship Luxury Cars to the designated regions within a stipulated period (five weeks) after receiving a notification to complete the shipping process. The Atlantic has the power to select any ship to complete the consignment process. Moreover, the property owner has the honor to utilize the excess capacity to carry products of other customers to the same destination.
In both cases, the parties have identified the assets explicitly to allow for observance of the terms and conditions of the agreement. Identification of assets helps both sides to understand the significance and responsibility of each in the deal.
Case 2: The Customer’s right to control the use of the Identified asset to the lessee.
- Sedan Car Contract
In this contract term, the lessee has right to control the use of the asset identified for the process. For instance, Auto has the sole responsibility of determining which of the European ports will receive shipments and the order in which the Atlantic makes deliveries to the seaports. Consequently, Atlantic has no rights in controlling the use of the assets in the lease contract. Moreover, Auto Company has a right to either ship below or at full capacity. However, if the delivery is below the ability, the property owner cannot use the space to transport commodities to its other customers. Accordingly, this contract bestows all the rights of control to the lessee for as long as it still exists.
- Luxury Car Contract
In this contract, Atlantic has the responsibility of delivering the shipment of Luxury Cars within five weeks after Auto Company gives them a notification of the shipping process. One single request for Auto’s Luxury Car cannot exceed 500 automobiles, and therefore, excess capacity is always experienced. Auto has no right to control the identified assets. Furthermore, Atlantic can determine when to ship the cars within the five-week period besides the shipping route.
In conclusion, a lease is a bond existing between two groups; delineating the terms regulating the actions and association of each party when renting an asset owned by another party. The agreement allows the lessee to use the asset and offer steady compensation to the lessor for a specified period as demarcated in the contract. An identified asset is the fundamental aspect of leasing and parties involved must often define it explicitly or obliquely. A lease allows the right of control on the use of the identified assets in the contract by the customer. However, the customer may lack the right to control the recognized asset. For instance, in Luxury Car contract, Atlantic can decide when to ship the cars within the five-week period besides selecting the shipping route hence Auto has no control over its delivery process.
Taylor, Jeffrey. Selling Leasing in a Tough Economy. Bountiful, Utah: Global Lease Training, 2003. Print.