A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership to the lessee.
The term of a finance lease
The term of a finance lease may be equal to but no greater than the useful economic life of the asset. The lease may incorporate a ‘balloon payment’ (i.e. a balance due) at the end of the term. The lease may also be structured to match the cash flows of the business i.e. seasonality. With a lease the lessee is not entitled to purchase the asset at any time.