Finance lease
A finance lease usually involves the lessee (user of the asset) paying - over the life of the lease - the full cost of the asset plus a return on the finance effectively provided by the lessor.
The lessee-user effectively retains substantially all the risks and rewards of ownership. However, the lessee does not obtain legal title to the leased asset.
Accounting standards require finance leases to be accounted for 'on balance sheet' by the user of the asset.
This means that the liability to pay (the capital element of) the future lease instalments is recognised and disclosed on the face of the balance sheet.
The relevant international accounting standard is IAS 17.
In the UK many companies report under FRS 102, incorporating the practice contained in the former SSAP 21.
Finance leases are also known as capital leases, especially in the US.
See also
- Actuarial method
- ED 2010/9
- Finance charge
- Hire purchase
- IAS 17
- Implied rate of interest
- Lease
- Off-balance sheet finance
- Operating lease
- SSAP 21
