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CA Intermediate · Financial Management and Strategic Management · Types of Financing

Which of the following is a feature of a finance lease, as distinguished from an operating lease?

In a finance lease the term covers most of the asset's economic life and the lessee bears substantially all risks and rewards of ownership. The other statements describe operating leases, where the lessor retains obsolescence and maintenance risk and cancellation is easy.

  1. AThe lessor bears the risk of obsolescence and maintenance of the asset
  2. BThe lease is generally cancellable at short notice by the lessee
  3. CThe lease term covers most of the economic life of the asset and the lessee bears substantially all risks and rewards of ownershipCorrect
  4. DThe lessor expects to recover the cost of the asset through repeated leasing to many lessees

Explanation

A finance lease transfers substantially all the risks and rewards of ownership to the lessee and is usually non-cancellable for a term covering most of the asset's life. The other options describe operating lease characteristics, where the lessor bears maintenance and obsolescence risk and leases the asset repeatedly.

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