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CMA Final · Strategic Financial Management · Leasing Decisions

Under a finance lease as understood in lease evaluation, which feature most clearly distinguishes it from an operating lease?

A finance lease covers substantially the asset's economic life and transfers substantially all risks and rewards of ownership to the lessee. Operating leases are shorter, often cancellable, and leave obsolescence and maintenance risks with the lessor.

  1. AThe lessor bears the risk of obsolescence and maintenance throughout
  2. BThe lease is cancellable by the lessee at any time without penalty
  3. CThe lease covers substantially the whole economic life of the asset and transfers substantially all risks and rewards of ownership to the lesseeCorrect
  4. DThe lessor takes the asset back after each short rental period and re-leases it to others

Explanation

A finance lease is non-cancellable, runs for most of the asset's economic life and passes substantially all risks and rewards to the lessee. Operating leases are shorter, often cancellable, and the lessor retains obsolescence and maintenance risk, so options A, B and D describe operating leases.

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