Overview of Case

Fiorentina Logistics Inc. (Fiorentina) provides domestic and international shipping and systematization services to customers. The company contracts shipping vessels, truck and aircraft to provide regional, long-haul, and international shipment of customer goods. Fiorentina has entered the following contracts:

In March 2022, Fiorentina entered a revenue contract with a customer, Poseidon Electronics (Poseidon), in which Fiorentina would be the exclusive shipper of Poseidons products between Hamburg, Germany and Los Angeles, USA. Fiorentinas contract with Poseidon is effective on July 1, 2022. Before signing the contract with Poseidon, Fiorentina did not operate the Hamburg- Los Angeles route, and to satisfy the contract with Poseidon, in April 2022, Fiorentina leases a cargo ship from Chelsea Shipyards (Chelsea), which commences on July 1, 2022.

Because the shipping route is new, on July 1, 2022, (1) Fiorentina has no other customers to deliver goods on the Hamburg-Los Angeles route and (2) because of operational costs, Fiorentina does not have alternative uses for the leased cargo ship.

Fiorentina adopted ASC 842, Leases, on January 1, 2022. The following are relevant facts about Fiorentinas revenue contract with Poseidon, and

Fiorentinas lease with Chelsea.

Fiorentinas Revenue Contract with Poseidon

• The revenue contracts stated term with Poseidon is for one year.

• Poseidon can renew the contract annually for up to four additional years. Therefore, the

  revenue contract can extend to five full years.

• Poseidon pays a significant up-front nonrefundable fee for the initial one-year term; the

  same amount is due at the beginning of every renewal period.

• Poseidon can cancel at any time without incurring a penalty outside of forfeiting any up-

  front nonrefundable fees already paid or owed at the beginning of the initial contract term

  and any and each renewed period.

• Although the contract is new, Fiorentina and Poseidon have entered into similar

  arrangements with similar terms and historically, Poseidon has renewed for one or more

  years.

• Fiorentina appropriately conclude that (1) the revenue contract meets the scope of, and

  criteria in, ASC 606, Revenue from Contracts With Customers, and (2) the contract term for its revenue contract with Poseidon is one year.

  Fiorentinas Lease with Chelsea

• The contract between Fiorentina and Chelsea contains a lease under ASC 842.

• Rental payments are at market and fixed each year,

• To mitigate risks, Fiorentina negotiated the lease period and renewal options to mirror

  those of Fiorentinas revenue contract with Poseidon. As a result, the fixed, noncancelable term of the lease is one year, and Fiorentina can renew annually for four additional years (i.e, up to five full years).

1

Fiorentina believes that since Poseidon can terminate the revenue contract after one year (even though Poseidon may need to ship products for longer than a year and has historically renewed under other similarly structured contracts), it is uncertain whether Poseidon will renew the revenue contract. Because of this uncertainty, Fiorentina believes that the renewal options related to the lease are not reasonably certain at the commencement date of the lease.

As a result, Fiorentina concludes that the lease term for its lease contract with Chelsea is also one year.

Additional Facts:

On December 1, 2022, Fiorentina entered into a shipping contract with Tesla Inc. (Tesla) to ship Teslas products between Hamburg and Los Angeles. The contract with Tesla commences on January 2, 2023, and on the basis of Fiorentinas evaluation of it enforceable rights and obligations in the contract with Tesla, Fiorentina concludes that term of the revenue contract with Tesla is for a period of two years. Further, Fiorentina concludes, that (1) because of its contract with Poseidon and Tesla, it would not be operationally feasible to deploy the leased cargo vessel on other routes; (2) the cargo vessel will have sufficient capacity to service both Poseidon and Tesla; and (3) the leased asset is needed for Fiorentina to perform under its revenue contract with Tesla (because of economic reasons that would not allow Fiorentina to use another vessel).

3. Should Fiorentina reassess the lease term of the cargo vessel? If so, why?