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CS Professional · IFSCA - Regulations, Listing and Compliances · Banking Services and Finance Companies in IFSC

A GIFT IFSC lessor leases a ship to a shipping company for a period covering about 90% of the ship's economic life. The lessee has an option to buy the ship at the end for a nominal sum and must insure and maintain it. Which classification best reflects the substance of this lease?

It is a finance lease. The lease runs for most of the ship's economic life, the lessee has a nominal-price purchase option and bears maintenance and insurance, so substantially all risks and rewards pass to the lessee despite the lessor's legal title.

  1. AOperating lease, because the lessor remains the legal owner
  2. BFinance lease, because substantially all risks and rewards pass to the lesseeCorrect
  3. CShort-term charter, because insurance is borne by the lessee
  4. DSale to a third party, because the lessor has no interest in the ship

Explanation

A lease covering most of the asset's economic life, with a nominal-price purchase option and the lessee bearing maintenance and insurance, transfers substantially all risks and rewards. It is therefore a finance lease in substance, even though legal title stays with the lessor until the option is exercised. Legal ownership alone does not make it an operating lease.

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