LEADING THE WAY
Picture this scenario: A Thai production company (the purchaser) enters into an agreement with a gas supplier to supply a minimum quantity of gas needed in its production process for a specific period of time. The supplier designs and builds a gas production facility next to the purchaser's plant and maintains ownership and control over all significant aspects of operating the facility.
Securing gas from other sources is not economically feasible or practicable. Thus the purchaser commits to pay the supplier a fixed capacity charge and a variable charge based on actual production taken. The fixed capacity charge applies regardless of the actual production taken.
The production company is meticulous when doing the accounting for the production project. However, it makes a vital mistake in interpreting the agreement with the gas supplier. According the interpretation of Thai Financial Reporting Standards 4 (TFRIC 4), when it entered into the agreement to purchase gas, it inadvertently agreed to lease the gas supplier's facility. Not accounting properly for this "lease" results in an error on the financial statements.
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