Accounting Of Underground Space Under Ind AS 116

Facts

Radiant Pipeline Limited, hereinafter referred to as “the company,” is engaged in the business of transportation of crude oil. The company enters into a long-term agreement with a private landowner for the purpose of laying and operating an oil pipeline. Under the agreement, the company is granted the right to use a specifically identified underground space beneath land for a period of 20 years. The contract clearly defines the exact geographical alignment, depth, length, width and technical dimensions of the underground space in which the pipeline is to be installed. The operator is required to pay fixed and periodic consideration to the landowner for the duration of the contract.

The agreement restricts the use of the identified underground space exclusively for the use of installation of pipeline. During the entire contractual period, the landowner does not have the right to access, excavate, substitute, relocate or otherwise modify the specified underground space. Thus, the landowner is contractually prohibited from undertaking any activity that may interfere with the presence, operation or safety of the pipeline.

While the underground space is contractually earmarked for the company, the landowner retains full rights over the surface of the land above the pipeline. The landowner may continue to use the surface land for agricultural, commercial, or other lawful purposes, provided such use does not affect the underground pipeline or breach the restrictions specified in the agreement.

Further, the company has the contractual right to enter the land at any time during the contract period to carry out inspection, monitoring, repairs, maintenance, replacement and safety-related activities in relation to the pipeline. These rights may be exercised at the company’s discretion and without requiring separate consent from the landowner for each instance of access. The agreement does not provide the landowner with any alternative underground space or substitution rights in lieu of the identified underground corridor. The underground space remains reserved for the company for the entire 20 year period, irrespective of the intensity or frequency of usage.

The contract is silent on any transfer of ownership of the land or underground space, and legal title to the land continues to remain with the landowner throughout the tenure of the arrangement. The management of the company while finalizing the account is in dilemma as to whether the right to use underground space shall be treated as lease and shall be accounted as per Ind AS 116.

Relevant Provision

Ind AS 116: Leases

Para B9 of Ind AS 116

To assess whether a contract conveys the right to control the use of anidentified asset 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

(b) the right to direct the use of the identified asset

Para B20 of Ind AS 116

A capacity portion of an asset is an identified asset if it is physically distinct (for example, a floor of a building). A capacity or other portion of an asset that is not physically distinct (for example, a capacity portion of a fibre optic cable) is not an identified asset, unless it represents substantially all of the capacity of the asset and thereby provides the customer with the right to obtain substantially all of the economic benefits from use of the asset.

Para B24 of Ind AS 116

A customer has the right to direct the use of an identified asset throughout the period of use only if either the relevant decisions about how and for what purpose the asset is used are predetermined andthe 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…….

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