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.
Upon the scheduled expiry of a lease, the lessee can a) retain use & possession of the asset(s) for payment of usually peppercorn secondary rentals, b) sell the asset(s) as agent of the lessor, or c) return the asset(s) to the lessor.
Ownership of the asset
The legal ownership of the asset remains with ABN AMRO Lease (lessor), while the lessee has beneficial (“economic”) ownership. In certain circumstances (long-funded leases) the lessee may be able to claim the writing down allowances associated with the investment.
Insurance and maintenance of the asset
The lessee will usually be responsible for insurance and maintenance.
Advantages for the lessee
- 100% financing of the asset
- Predictable fixed monthly payments
- Flexible payment structures
- The lessee is entitled to capital allowances (with a long funding lease)
- The asset is recognized in the lessee’s balance sheet