How does finance leasing treat ownership risks compared to operating lease?

How does finance leasing treat ownership risks compared to operating lease?

• A. Both lease types transfer risks to the lessor
• B. Finance leasing transfers risks to the lessee
• C. Operating lease transfers risks to the lessee
• D. Neither lease involves any risk transfer

Answer: (B)

In the context of finance leasing, ownership risks, such as the risk of asset depreciation and maintenance obligations, are transferred to the lessee. This is because a finance lease is structured to give the lessee control over the asset for the majority of its useful life, and they are often responsible for servicing, insuring, and maintaining the asset. This includes taking on risks associated with the asset's value over time, as the lessee typically has the option to purchase the asset at the end of the lease term. In contrast, an operating lease generally keeps the risks associated with ownership with the lessor, meaning the lessor is responsible for maintenance and other ownership-related risks. Therefore, while the lessee can use the asset, they do not assume the full ownership risks that come with it. This distinction is crucial in understanding the accounting treatment and implications of different leasing arrangements and highlights why finance leasing indeed transfers ownership risks to the lessee.

In the context of finance leasing, ownership risks, such as the risk of asset depreciation and maintenance obligations, are transferred to the lessee. This is because a finance lease is structured to give the lessee control over the asset for the majority of its useful life, and they are often responsible for servicing, insuring, and maintaining the asset. This includes taking on risks associated with the asset's value over time, as the lessee typically has the option to purchase the asset at the end of the lease term.

In contrast, an operating lease generally keeps the risks associated with ownership with the lessor, meaning the lessor is responsible for maintenance and other ownership-related risks. Therefore, while the lessee can use the asset, they do not assume the full ownership risks that come with it.

This distinction is crucial in understanding the accounting treatment and implications of different leasing arrangements and highlights why finance leasing indeed transfers ownership risks to the lessee.