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

Which of the following is a feature of a finance lease, as opposed to an operating lease?

In a finance lease the lessee bears substantially all the risks and rewards of ownership, and the agreement runs for most of the asset's economic life without being cancellable. Short, cancellable leases with lessor maintenance are operating leases.

  1. AThe lessor bears substantially all risks and rewards of ownership of the asset
  2. BThe lease term is usually short compared with the asset's economic life
  3. CThe lessor normally provides maintenance and the lessee may cancel at short notice
  4. DThe lessee bears substantially all risks and rewards of ownership and the lease is non-cancellable for most of the asset's lifeCorrect
  5. The asset is never recognised in the lessee's financial statements

Explanation

A finance lease transfers substantially all risks and rewards of ownership to the lessee, typically covers most of the asset's life and is non-cancellable. Options describing short terms, lessor maintenance and cancellation fit operating leases. Under finance lease treatment the asset and liability are recognised by the lessee.

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