Find the lease inside the contract

Cedar Trail's “managed packaging service” promises one production line in Bay 4 for 5 years. The supplier maintains it and can replace it after a failure. Cedar Trail chooses the products, production runs, shifts, and operating speed within safety limits. Service or lease?

Do not answer from the title. Build the rights map.

Gate 1: is property, plant, or equipment identified?

The line is explicitly specified and physically distinct. Now test substitution. Repair and emergency replacement are protective; they do not show that the supplier can substitute throughout the period and profit from doing so. Ask where substitute lines exist, whether moving one is practical, who bears the relocation cost, and whether the supplier benefits economically.

A serial number supplies evidence, not a conclusion. For data-center capacity, the same test may fail earlier: ten racks in a large fungible hall are not necessarily a physically distinct or substantially-all capacity portion.

Gate 2: who obtains the benefits from use?

Map products, by-products, output, sublease rights, and other economic benefits within the contract's defined scope. Cedar Trail receives the packaging output and decides when the line is idle. Supplier maintenance does not take those benefits away.

Gate 3: who directs how and for what purpose?

The decisions that most affect benefits are product, run size, schedule, and operating intensity. Cedar Trail makes them. The supplier's safety limits and maintenance rights protect its asset; they do not direct the line's economic use.

If those decisions were predetermined, use two separate tests. First, can Cedar Trail operate the asset throughout the period without the supplier changing the operating instructions? Second, did Cedar Trail, not the supplier, design the asset in a way that predetermined how and for what purpose it would be used? Either fact can support the customer's direction of use under the predetermined-purpose path; neither follows from physical possession alone.

Build the population beyond the rent account

Combine accounts payable, procurement systems, legal repositories, fixed-asset records, facility lists, and interviews. Search for exclusivity, dedicated capacity, minimum volume, substitution, take-or-pay, serial number, hosting, transportation, power, warehousing, and outsourced production. Record every screened contract, including no-lease conclusions and their evidence owner.

The 2025 FASB PIR identifies embedded-lease identification as a continuing challenge. A complete population is an internal-control problem as well as an accounting definition problem.

Exit check

For the packaging line, data-center capacity, and dedicated truck in the case, write one row for specification, substitution ability, substitution benefit, economic benefits, relevant decisions, protective rights, conclusion, and unresolved evidence. A yes/no answer without the row is not auditable.