ASC 842

Case 2019.1‐09 Blake’s Logistics Inc.

Blake’s Logistics Inc. (Blake’s Logistics or the “Company”) provides transportation and logistics
services to customers throughout a network of offices around the world. The Company contrac
ts fleets of shipping vessels, trucks, and aircraft to provide regional, long‐
haul, and international shipments of customer goods. In addition, the Company contracts ware
house operators across North America for use of their facilities as distribution centers that temp
orarily store goods in transit. The Company has entered into the following contracts with the ve
ndors identified below.

Blake’s Logistics enters into a contract with We‐Ship‐

It to use its shipping vessels to transport customer goods from North America to England. We‐
Ship‐It has a fleet of 25 multi‐
use shipping vessels, each of which has the capacity to hold 1,000 shipping containers.

Blake’s Logistics enters into a contract with We‐Fly‐

It to use its aircraft to transport customer goods from South America to North America. We‐Fly‐
It has a fleet of 50 multi‐
use aircraft, each of which has the capacity to hold 500 shipping pallets of customer goods.

Blake’s Logistics enters into a contract with We‐Truck‐

It to use its trucks to transport customer goods from distribution centers to retail stores across N
orth America. We‐Truck‐It has a fleet of 1,500 multi‐ use long‐
haul trucking carriers, each of which has the capacity to hold 100 shipping pallets of goods.

Blake’s Logistics enters into a contract with We‐Hold‐

It to store up to 18,000 shipping pallets of customer goods at one of We‐Hold‐
It’s locations. We‐Hold‐It has the capacity to store 20,000 shipping pallets of goods.

The terms of the shipping contracts are as follows:

I. We‐Ship‐It
oThe contract term is for the voyage to transport Blake’s Logistics’ cargo from Los Angeles to
England. Blake’s Logistics does not have discretion to change the departure or arrival ports wit
hout a renegotiation of the contract fees.
o MS Wolverhampton, a commercial shipping vessel in We‐Ship‐
It’s fleet, is dedicated to delivering Blake’s Logistics’ cargo for the term of the contract. We‐
Ship‐It cannot substitute MS Wolverhampton with another vessel in its fleet.

oThe contract identifies the shipping containers and acceptable cargo (e.g., semiconductors) to
be transported on the ship as well as the transportation route. Blake’s Logistics does not have
discretion to change the identified cargo without renegotiating the contract fees.
o
WeShipIt is responsible for the safe passage of the cargo, as well as operation and maintenanc
e of MS Wolverhampton. The crew determines the ship’s route, speeds, and date of departure
from Los Angeles. In addition, Blake’s Logistics cannot, under any circumstances, replace We‐
Ship‐It’s crew.
1.
a. The asset is explicitly specified as the MS Wolverhampton.
b. The MS Wolverhampton is a physically distinct shipping vessel.
c. Blake’s Logistics cannot replace the MS Wolverhampton with another
vessel in its fleet. We-Ship-It has no substantive right of substitution.
The MS Wolverhampton is an identified asset.
2.
a. Blake’s Logistics will have the right to income generated from shipments of
semiconductors.
b. Blake’s Logitics does not have the right to direct the use of the shipping
vessel. BL does not have discretion to change the departure or arrival
ports. BL is only allowed to ship pre-approved cargo. BL cannot determine
the travel routes nor replace the ship’s crew.
Blake’s Logistics does not possess right to control.
II. We‐Fly‐It
o The contract term is five years.
o Wolves8, a commercial aircraft in We‐Fly‐
it’s fleet, is dedicated to delivering Blake’s Logistics’ shipping pallets during the term of the cont
ract.

oBlake’s Logistics determines (1) the airports from and to which goods are shipped and receive
d and (2) the order in which deliveries are made to the airports. We‐Fly‐
It provides the aircraft’s pilot and crew, and Blake’s Logistics instructs We‐Fly‐It accordingly.

oWhile Blake’s Logistics determines what cargo will be transported throughout the term of the c
ontract, certain restrictions prevent the Company from shipping flammable materials.
oBlake’s Logistics has the right to send the aircraft regardless of whether its cargo levels meet t
he full storage capacity of the aircraft. If Wolves8 is below capacity, We‐Fly‐
It cannot use the excess storage space to ship products of its other customers.
1.
a. The asset is explicitly stated as the commercial aircraft Wolves8.
b. Wolves8 is a physically distinct aircraft and the cargo capacity is only for
Blake’s Logistics products.
c. Supplier provides the pilot and crew, but Supplier does not have
substantive right of substitution in regards to Wolves8.
Aircraft is an identified asset.
2.
a. Blake’s Logistics has the right to all economic benefit for shipping its
cargo.
b. Blake’s Logistics has control in determining the airports for shipment and
receiving. They have control over delivery logistics. BL has the right the
dispatch aircraft, regardless of storage capacity.
Blake’s Logistics possesses right to control.

 We‐Truck‐It
o The contract term is five years.
o We‐Truck‐
It must deliver Blake’s Logistics’ shipments within three weeks of the Company’s notification tha
t it has pallets of customer goods ready for shipping.
o We‐Truck‐It may choose any truck from its fleet to fulfill the shipping request.
o
Blake’s Logistics may request shipment of 25 to 100 shipping pallets of goods in a single reques
t. (Individual shipping requests generally do not exceed 50 shipping pallets.)
o We‐Truck‐
It has the right to use any excess storage space to ship products of its other customers.
o We‐Truck‐It determines the shipment’s delivery date (within the three‐
week period), as well as the shipping route.
1.
a. The contract implicitly states that any truck may be used for the shipping
request.
b. We-Truck it has the right to use any excess storage space for other
customers. However, Blake’s Logistics shipments will use substantially all
capacity of each truck at 50 shipping pallets, which means more than likely
the truck is physically distinct.
c. Supplier does have substantive right of substitution. Supplier has the
practical ability to change the truck, from any in its fleet and its would
benefit economically from substituting the space for other customers.
The truck is not an identified asset.
2. Blake’s Logistics possesses all economic benefit from goods shipped via truck.
a. We-Truck-It determines the shipment delivery date and shipping route, not
BL.
BL does not posses right to control.

 We‐Hold‐It
o The contract term is 10 years.
 o Blake’s Logistics can store up to 18,000 shipping pallets at one specified We‐Hold‐
It location. Blake’s Logistics will be charged for storage of 18,000 shipping pallets, regardless
of the actual number of pallets stored, and We‐Hold‐
It cannot use any of Blake’s Logistics’ unused storage space for other storage needs.
o We‐Hold‐It can use the remaining space in its warehouse for other storage needs.
o We‐Hold‐It cannot relocate Blake’s Logistics’ inventory to another facility.
oBlake’s Logistics has the right to decide which shipping pallets are placed in storage and wh
en they can be removed.
oWeHoldIt provides the loading and unloading services for the warehouse activities, both of whi
ch are dependent on Blake’s Logistics’ decisions about which shipping pallets are placed in stor
age and when they can be removed. Mr. Haupt, the CFO of Blake’s Logistics has asked you t
1.
a. The We-Hold-It location is explicitly specified in the contract.
b. The capacity portion of the warehouse is physically distinct and the unused
storage space is exclusively for Blake’s Logistics.
c. Blake’s Logistics cannot relocated Blake’s Logistics Inventory to another
facility, thus the supplier does not have a substantive right of substitution.
The Warehouse is an identified asset.
2.
a. Blake’s Logistics has full control over the inventory in its storage facility.
b. Blake’s Logistics decides where shipping pallets are stored and when they
can be removed.
Blake’s Logistics has right to control.
o prepare an analysis of the impact of the new leasing standard on the way the Company treats
contracts these contracts. Mr. Haupt has asked you for a written report and a short (maximum o
f 3 minutes) presentation.

Required: Analyze the information above, and prepare a memorandum addressing the impact (
if any) of the new leasing standard on Blake’s Logistics’ contracts focusing on the following cons
iderations:
1. Determine whether each of Blake’s Logistics’ vendor contracts contains an identified
asset.
2.Determine whether each contract conveys the right to control the use of the identified
asset to the lessee.
You do not need to offer alternatives for this report; instead prepare an analysis to conclude on
the questions for each of the contracts.

As the auditor we are responsible for determining the accounting treatment

for the four separate cases under the leasing standards ASC 842. A lease is
defined as a contract, or part of a contract, that conveys the right to control
the use of identified property, plant or equipment (an identified asset) for a
period of time in exchange for consideration. The two key elements of a
lease are Right to Control and Identified Asset. Both elements must be met
to fufill the definition of a lease. In order to avoid redundancies in stating
accounting codifications, this chart will outline the codification and the
criterea.
Element Codification Analysis
Right to Control ASC 842-10-15-4  Right to
substantially all
economic benefits
from the use of the
identified asset
 Right to direct the
use of an
unidentified asset

ASC 842-10-15-17 Right to obtain

substantially all of the
economic benefits from
use of the asset
throughout the period of
use
ASC 842-10-15-20  a. The customer has the
right to direct how and
for what purpose the
asset is used throughout
the period of use

 b. The relevant decisions

about how and for what
purpose the asset is used
are predetermined

o 1. The customer has the

right to operate the asset
(or to direct others to
operate the asset in a
manner that it
determines) throughout
the period of use without
the supplier having the
right to change those
operating instructions.
o 2. The customer
designed the asset (or
specific aspects of the
asset) in a way that
predetermines how and
for what purpose the
asset will be used
throughout the period of
use.
Identified Asset ASC 840-10-15-9 -Explicitly or Implicitly
Identified
-
ASC 840-10-15-16 -Asset is Physically
Distinct

ASC 840-10-15-10 - Supplier does not

have substantive right
of substititution
 ASC15-4
Pending Content:
Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1
To determine whether a contract conveys the right to control the use of an
identified asset (see paragraphs 842-10-15-17 through 15-26) for a period of time,
an entity shall assess whether, throughout the period of use, the customer has
both of the following:
 a. The right to obtain substantially all of the economic benefits from use of the
identified asset (see paragraphs 842-10-15-17 through 15-19)

 b. The right to direct the use of the identified asset (see paragraphs 842-10-15-
20 through 15-26).

If the customer in the contract is a joint operation or a joint arrangement, an entity

shall consider whether the joint operation or joint arrangement has the right to
control the use of an identified asset throughout the period of use.

>> Right to Control the Use of the Identified Asset

> > > Right to Obtain the Economic Benefits from the Use of the
Identified Asset
15-17
Pending Content:
Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1
To control the use of an identified asset, a customer is required to have the right to
obtain substantially all of the economic benefits from use of the asset throughout
the period of use (for example, by having exclusive use of the asset throughout
that period). A customer can obtain economic benefits from use of an asset directly
or indirectly in many ways, such as by using, holding, or subleasing the asset. The
economic benefits from use of an asset include its primary output and by-products
(including potential cash flows derived from these items) and other economic
benefits from using the asset that could be realized from a commercial transaction
with a third party.

>> Identified Asset

15-9
Pending Content:
Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1
 An asset typically is identified by being explicitly specified in a contract. However,
an asset also can be identified by being implicitly specified at the time that the
asset is made available for use by the customer.

>>> Substantive Substitution Rights

15-10

Pending Content:
Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1

Even if an asset is specified, a customer does not have the right to use an identified
asset if the supplier has the substantive right to substitute the asset throughout the
period of use. A supplier’s right to substitute an asset is substantive only if both of
the following conditions exist:

 a. The supplier has the practical ability to substitute alternative assets throughout
the period of use (for example, the customer cannot prevent the supplier from
substituting an asset, and alternative assets are readily available to the supplier or
could be sourced by the supplier within a reasonable period of time).

 b. The supplier would benefit economically from the exercise of its right to
substitute the asset (that is, the economic benefits associated with substituting the
asset are expected to exceed the costs associated with substituting the asset).

55-50

Pending Content:
Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1

The rail cars and the engines used to transport Customer’s goods are not identified
assets. Supplier has the substantive right to substitute the rail cars and engine
because:

 a. Supplier has the practical ability to substitute each car and the engine
throughout the period of use. Alternative cars and engines are readily available to
Supplier, and Supplier can substitute each car and the engine without Customer’s
approval.

 b. Supplier would benefit economically from substituting each car and the engine.
There would be minimal, if any, cost associated with substituting each car or the
engine because the cars and engines are stored at Supplier’s premises and Supplier
 has a large pool of similar cars and engines. Supplier benefits from substituting
each car or the engine in contracts of this nature because substitution allows
Supplier to, for example, (1) use cars or an engine to fulfill a task for which the
cars or engine are already positioned to perform (for example, a task at a rail yard
close to the point of origin) or (2) use cars or an engine that would otherwise be
sitting idle because they are not being used by a customer.

55-54

Pending Content:
Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1

Although the amount of space Customer uses is specified in the contract, there is
no identified asset. Customer controls its owned kiosk. However, the contract is for
space in the airport, and this space can change at the discretion of Supplier.
Supplier has the substantive right to substitute the space Customer uses because:

 a. Supplier has the practical ability to change the space used by Customer
throughout the period of use. There are many areas in the airport that meet the
specifications for the space in the contract, and Supplier has the right to change the
location of the space to other space that meets the specifications at any time
without Customer’s approval.

 b. Supplier would benefit economically from substituting the space. There would be
minimal cost associated with changing the space used by Customer because the
kiosk can be moved easily. Supplier benefits from substituting the space in the
airport because substitution allows Supplier to make the most effective use of the
space at boarding areas in the airport to meet changing circumstances.

 >>>> Case B—Contract Does Not Contain a Lease

 55-60
 Pending Content:
 Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1
 Customer enters into a 15-year contract with Supplier for the right to use a
specified amount of capacity within a cable connecting Hong Kong to
Tokyo. The specified amount is equivalent to Customer having the use of
the full capacity of 3 strands within the cable (the cable contains 15 fibers
with similar capacities). Supplier makes decisions about the transmission of
data (that is, Supplier lights the fibers and makes decisions about which
fibers are used to transmit Customer’s traffic and about the electronic
equipment that Supplier owns and connects to the fibers).

 55-61
 Pending Content:
 Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1
 The contract does not contain a lease.

 55-62
 Pending Content:
 Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1
 Supplier makes all decisions about the transmission of its customers’ data,
which requires the use of only a portion of the capacity of the cable for
each customer. The capacity portion that will be provided to Customer is
not physically distinct from the remaining capacity of the cable and does
not represent substantially all of the capacity of the cable. Consequently,
Customer does not have the right to use an identified asset.
 55-76
 Pending Content:
 Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1
 There is an identified asset. The truck is explicitly specified in the contract,
and Supplier does not have the right to substitute the truck.
 55-82
 Pending Content:
 Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1
 There is an identified asset. The ship is explicitly specified in the contract,
and Supplier does not have the right to substitute that specified ship.
 55-83
 Pending Content:
 Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1
 Customer has the right to obtain substantially all of the economic benefits
from use of the ship over the period of use. Its cargo will occupy
substantially all of the capacity of the ship, thereby preventing other
parties from obtaining economic benefits from use of the ship.
 55-84
 Pending Content:
 Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1
 However, Customer does not have the right to control the use of the ship
because it does not have the right to direct its use. Customer does not
have the right to direct how and for what purpose the ship is used. How
and for what purpose the ship will be used (that is, the transport of
specified cargo from Rotterdam to Sydney within a specified time frame)
are predetermined in the contract. Customer has no right to change how
and for what purpose the ship is used during the period of use. Customer
has no other decision-making rights about the use of the ship during the
period of use (for example, it does not have the right to operate the ship)
and did not design the ship. Customer has the same rights regarding the
 use of the ship as if it were one of multiple customers transporting cargo
on the ship.
 55-97
 Pending Content:
 Transition Date: (P) December 16, 2018; (N) December 16, 2019 Transition
Guidance: 842-10-65-1
 There is an identified asset. The aircraft is explicitly specified in the
contract, and although Supplier can substitute the aircraft, its substitution
right is not substantive. Supplier’s substitution right is not substantive
because of the significant costs involved in outfitting another aircraft to
meet the specifications required by the contract such that Supplier is not
expected to benefit economically from substituting the aircraft.