What is finance leasing?
A finance lease is a leasing contract in which the lessor transfers ownership to the lessee at the end of the lease term. Capital or finance leasing contracts are long-term and cannot be terminated.
In a finance lease, the lessor transfers ownership of the asset to the lessee at the end of the term. The lease gives the lessee an option to purchase that allows the lessee to purchase the asset at a discount that is less than the market value at the end of the lease term.
In the case of a finance lease, the present value of the minimum lease payments roughly corresponds to the fair value of the leased item. In addition, the term of the contract should correspond to the majority of the economic life of the asset.
If the lease is canceled for any reason, the loss caused by it must be borne by the lessee. At the end of the lease term, the lessee is considered the owner of the asset and has the right to demand depreciation and financing costs.