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CMA Intermediate · Financial Accounting · Lease Accounting

Under AS 19 Leases, which description identifies a finance lease?

A finance lease is one that transfers substantially all the risks and rewards incident to ownership of the asset to the lessee. The test is economic substance, not legal title or lease length, so the lessee need not obtain title for the lease to qualify.

  1. AA lease that transfers substantially all the risks and rewards incident to ownership of an assetCorrect
  2. BA lease whose term is shorter than one year
  3. CA lease under which the lessor retains substantially all the risks and rewards of ownership
  4. DA lease under which the legal title must pass to the lessee at the end of the term

Explanation

AS 19 defines a finance lease by substance: it transfers substantially all the risks and rewards incident to ownership. Legal title need not pass, so the option on title transfer is wrong. Retention of risks and rewards by the lessor describes an operating lease.

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