Which statement best describes a Finance Lease?

Which statement best describes a Finance Lease?

• A. Net lease (cost paid by lessee) and lease over major portion of asset's useful life
• B. Lessor bears all maintenance
• C. It always transfers ownership at end
• D. It has nothing to do with taxes

Answer: (A)

A Finance Lease is a financing arrangement that effectively transfers most of the risks and rewards of ownership to the lessee. Because of that, the lease term tends to cover a major portion of the asset’s economic life, and the lessee typically bears most ongoing costs such as maintenance and other asset-related expenses. In practice, this is why it’s described as a net lease—the lessee pays the costs directly or through the lease payments—and the arrangement is accounted for on the lessee’s books as if they owned the asset, with a corresponding lease liability. This is why the statement describing a finance lease as a net lease (cost paid by the lessee) and covering a major portion of the asset’s useful life is the best fit. The other options don’t align with the nature of finance leases: maintenance isn’t always borne by the lessor, ownership at the end isn’t guaranteed in every finance lease, and taxes are usually relevant to the lessee, not something unrelated to the arrangement.

A Finance Lease is a financing arrangement that effectively transfers most of the risks and rewards of ownership to the lessee. Because of that, the lease term tends to cover a major portion of the asset’s economic life, and the lessee typically bears most ongoing costs such as maintenance and other asset-related expenses. In practice, this is why it’s described as a net lease—the lessee pays the costs directly or through the lease payments—and the arrangement is accounted for on the lessee’s books as if they owned the asset, with a corresponding lease liability.

This is why the statement describing a finance lease as a net lease (cost paid by the lessee) and covering a major portion of the asset’s useful life is the best fit. The other options don’t align with the nature of finance leases: maintenance isn’t always borne by the lessor, ownership at the end isn’t guaranteed in every finance lease, and taxes are usually relevant to the lessee, not something unrelated to the arrangement.