Sunday, March 22, 2009

features of finance lease

In general , UK finance leases contain the following features :
- the asset is selected by lessee and usually supplied by a third party ;
- the lessor negotiates with the supplier the terms of warranties, maintenance agreements ,delivery , installation and the price ;
- the losser retains ownership and claims the capital allowances;
- the lessee carries the risk of obsolescence and has exclusive right to use the asset ,subject to the terms of the lease ,which will include a requirement to keep it in good working order;
- the lease is,nominally , over anon-cancellable period covering the asset is working life,with rentals to cover the capital outlay of the lessor.finance leases are sometimes called 'full pay-out leases ' ,reflecting this ;
- the lease agreement will probably contain a provision to ensure the lossor suffers no loss in the event of early termination;
- at the end of the lease the lessee may continue to lease the asset at a nominal 'secondary' rental or arrange , as agent for the lessor for the equipment to be sold or scrapped. A finance lease in the UK allows for most of any profit on disposal to be returned to the lessee as a rebate of the sale proceeds.
finance leases are reported 'on balance sheet',whereas operating leases are not.In distinguishing a finance lease from an operating lease,Uk accounting practice uses an 'ownership' test based on the risks and rewards of ownership being 90% of the fair market value of the leased asset start of the lease agreement . so ,in UK accounting terms ,a finance lease is one where the net present value of the rentals exceeds 90% of the capital cost of the asset . however ,as will be seen later ,this test is not the issue in differentiating between operating leases and finance leases.

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