Practice Activity 15.4 Identification of the components within a contract with a customer (including

Practice Activity 15.4 Identification of the components within a contract with a customer (including a lease element)

Mr. Igwe enters into a contract with a ship owner, Steering Shipping Business Limited. The contract terms are as follows:

i. The Steering Shipping Business Limited will provide transportation services to Mr. Igwe for four years.

ii. The ship that will be provided for Mr. Igwe is Steering NG.

iii. Steering Shipping Business Limited cannot replace Steering NG with any other ship when providing for Mr. Igwe.

iv. Steering Shipping Business Limited is responsible for the ship’s operation, maintenance, and insurance. The Company is responsible for the cleaning of the ship during the four-year period.

v. Mr. Igwe will provide the travel time, day, month, year, place of arrival, and departure respectively.

vi. The Company cannot use the ship for any other purpose when it is not used by Mr. Igwe.

vii. Mr. Igwe will pay Steering Shipping Business Limited the following amounts:

• A fixed amount per day for the charterparty;

• A fixed amount per month for communication, victuals, and entertainment; and

• A fixed amount for each cleaning service provided.

Required: Identify the components in this contract between Steering Shipping Business Limited and Mr. Igwe. Which aspects of the contract do not represent separate goods or service based on IFRS 16?

See the suggested answers to practice activity 15.4 here.

Suggested answers to practice activity 15.4

The contract betwwen Steering Shipping Business Limited and Mr. Igwe comprises:

1. One lease component; and

2. Two non-lease components.

The lease component: The lease element is the lease of Steering NG by Mr. Igwe.

The non-lease components are:

i. The operational services by Steering Shipping Business Limited.

ii. The cleaning services by Steering Shipping Business Limited.

Components that do not represent a separate good or service include:

Insurance: The reason for the exclusion is that insurance is included in the element of the fixed daily payment for chartering Steering NG. The fixed payment includes Steering NG’s insurance and is not a separate component of the contract. The insurance payment is embedded in the contract sum that will be allocated to the lease and non-lease components.