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.
Relevant accounting standards include Section 20 of FRS 102, and IFRS 16.
Finance leases are also known as capital leases, especially in the US.
- Actuarial method
- Finance charge
- Hire purchase
- IFRS 16
- FRS 102
- Implied rate of interest
- Off balance sheet finance
- Operating lease