Finance lease

A finance lease or capital lease is a type of lease. It is a commercial arrangement where:

• the lessee (customer or borrower) will select an asset (equipment, vehicle, software);
• the lessor (finance company) will purchase that asset;
• the lessee will have use of that asset during the lease;
• the lessee will pay a series of rentals or installments for the use of that asset;
• the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee;
• the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price);

The finance company is the legal owner of the asset during duration of the lease.
However the lessee has control over the asset providing them the benefits and risks of (economic) ownership.


A finance lease differs from an operating lease in that:

• in a finance lease the lessee has use of the asset over most of its economic life and beyond (generally by making small 'peppercorn' payments at the end of the lease term).

In an operating lease the lessee only uses the asset for some of the asset's life.

• in a finance lease the lessor will recover all or most of the cost of the equipment from the rentals paid by the lessee.

In an operating lease the lessor will have a substantial investment or residual value on completion of the lease.

• in a finance lease the lessee has the benefits and risks of economic ownership of the asset (e.g. risk of obsolescence, paying for maintenance, claiming capital allowances/depreciation).

In an operating lease the lessor has the benefits and risks of owning the asset.
The U.S. Financial Accounting Standards Board and the International Accounting Standards Board announced in 2006 a joint project to comprehensively review lease accounting standards. The boards' stated intention is to recognize an asset and obligation for all leases (in essence, making all leases finance leases). The projected completion of the project is now mid-2011