BLM15510 - Lease accounting: finance lease accounting: finance lessees: example 1: is this a finance lease?

The lease in Example 1 at BLM15505 is a finance lease as it is evident substantially all the risks and rewards incidental to ownership of the asset have been transferred.

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. As in this example, 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 is that the risks and rewards of ownership rest with the lessee – which is what makes the lease a finance lease, see BLM11200.