Question

How are financial leases accounted for v/s operating leases?

Answer 1

Finance lease agreement, ownership of the property is transferred to the lessee at the end of the lease term. A finance lease is a way of providing finance – effectively a leasing company (the owner) buys the asset for the user (usually called the lessee) and rents it to them for an agreed period But, in operating lease agreement, the ownership of the property is retained during and after the lease term by the lessor. But, under an operating lease, the lessee does not have this option. Operating lease does not transfer substantially all of the risks and rewards of ownership to the lessee. It will generally run for less than the full economic life of the asset and the lessor would expect the asset to have a resale value at the end of the lease period – known as the residual value.