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Finance lease
A means of financing involving a lease of an asset, the commercial effect of which is that the owner of the asset is in a similar position to a lender and the lessee is in a similar position to owner and borrower.
Lease payments during the life of the lease are sufficient to enable the owner to recover the cost of the asset from the lessee, plus a return on its investment, regardless of any fluctuation in the value of the asset.
For accounting purposes, the lessee under a finance lease is treated in the same way as if it were the owner of the relevant asset.
Any lease which is not a finance lease is an operating lease. The distinction depends on the accounting rules in the relevant jurisdiction.
For English accounting purposes, the distinction depends on whether substantially all the risks and rewards of ownership are with the lessor (in which case it is an operating lease) or the lessee (in which case it is a finance lease).
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