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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

Which feature distinguishes a finance lease from an operating lease from the lessee's viewpoint?

In a finance lease the lessee bears substantially all the risks and rewards of ownership, and the lease is non-cancellable for most of the asset's economic life. Operating leases are the opposite: short terms, cancellable, with the lessor keeping the risks and often maintaining the asset.

  1. AThe lessor retains substantially all risks and rewards of ownership
  2. BThe lease term is usually short compared with the asset's economic life
  3. CThe lessee bears substantially all the risks and rewards of ownership, and the lease is non-cancellable for most of the asset's lifeCorrect
  4. DThe lessor is responsible for maintenance and insurance throughout
  5. The lessee can return the asset at any time without penalty

Explanation

In a finance lease the lessee in substance bears the risks and rewards of ownership, the lease runs for most of the asset's life and is non-cancellable. The other options describe operating lease features, where the lessor keeps the risks, the term is short and the lessor often maintains the asset.

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