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

Meridian Lease IFSC owns an aircraft and leases it to an airline for five years. The airline has no option to buy the aircraft, and Meridian bears the risk of the aircraft's value at the end of the term, taking it back for re-leasing. How is this arrangement best described?

This is an operating lease. The lessor keeps ownership, bears the residual value risk and takes back the aircraft for re-leasing, while the airline has no purchase option. A multi-year term alone does not convert it into a finance lease.

  1. AOperating lease, because ownership risks and rewards remain with the lessorCorrect
  2. BFinance lease, because the lease runs for several years
  3. CSale and leaseback, because the airline uses the aircraft
  4. DHire purchase, because periodic payments are made

Explanation

Where the lessor keeps the residual value risk, the lessee has no purchase option and the aircraft returns to the lessor, substantially all risks and rewards stay with the lessor, so it is an operating lease. Length of term alone does not make it a finance lease.

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