Question

Describe three major differences between operating and financial leases, pointing out how these differences reflect varying lessor and lessee situations.

Answer 1

Finance Lease	Operating Lease
A commercial arrangement in which the lessor allows the lessee to use the asset for the maximum part of its economic life against payment of rentals is known as finance lease.	A commercial arrangement in which the lessor allows the lessee to use the asset for a term smaller than the economic life of the asset against the payment of rentals is known as operating lease.
It is a loan agreement in which the lessor permits the lessee to utilize a particular asset, for a pre agreed fixed term which covers the major part of the economic life of the asset, without the transfer of title of ownership of the asset but with the transfer of risk and rewards to the lessee is known as Finance/Capital Lease.	It is a rental agreement in which the lessee is permitted to utilize an asset with the permission of the lessor, for a pre-determined limited term which is smaller than the economic life of the asset, without the transfer of title, risk and reward is known as Operating Lease. An Operating lease is more like a rental agreement, and that is why the rental payments for the use of the asset are charged a rental expense in the Profit and Loss Account in the books of the Lessee.
Depreciation and finance charges are allowable as a Tax benefit deduction to lessee.	Lease rent is allowable as a Tax benefit deduction to lessee.