In legal form a finance lease is just another lease –
the legal ownership of the asset lies with the lessor and the
lessee only has the right to use the asset.
However, in commercial terms, finance leasing is a method of
providing finance. In other words, in economic substance a finance
lease is a loan of money with the asset as security. The
‘economic’ ownership of the asset – the risks and
rewards of ownership – lies with the lessee. In substance the
finance lessee buys the asset with a loan from the finance lessor.
To put it another way, a finance lease may be viewed as an
arrangement under which one person (the lessor) provides the money
to buy an asset which is used by another (the lessee) in return for
an interest charge. The lessor has security because they own the
asset. The terms of the leasing arrangements aim to give the lessor
a banker's interest turn and no more or less – however good
or bad the asset proves to be for the end user.
The banker’s turn may be very small (a few tens of
basis points) for finance leases of very expensive assets (such as
ships and aircraft), but several percentage points for leases of
les expensive items (such as machine tools or photocopiers). The
generally very small turn for larger leases reflects the generally
very high credit rating of the lessees.
Guidance on
