Finance Leasing Manual - FLM10.27

Example 1: is this a finance lease?

The lease in Example 1 at FLM10.26 is a finance lease. One clue is that the lessee knows what the asset cost. By way of contrast, for a typical operating lease - for example, short term hire from a car rental firm - the lessee is unlikely to know how much the car cost the lessor. Other factors are that the lease term is more or less equal to the expected useful life of the asset, and that the lease consists of primary and secondary periods.

The rental terms (or repayment terms to give the transaction its true commercial meaning) are a crucial feature in this example. It is normally only possible to appreciate this by looking at all the terms of the agreement. For example there may be provisions specifying the implied interest rate. There will also be provisions for terminal rentals and terminal rebates if the asset is sold. In the case of a finance lease the broad effect of such provisions will be that the risks and rewards of ownership rest with the lessee (see FLM1.10).