Question 3 (b)
Operating lease versus financial lease
3 marks
- Time to write
- About 6 minutes
From an older CBCS paper
Question
Question 3 (b) · 3 marksHow does an Operating Lease differ from a Financial Lease ? 3
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- differSet the differences out in a table, basis by basis, not as two separate essays.
Write it in this order
- 1 Classification test 1 mark 2 min
- 2 Points of difference 2 marks 4 min
Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
AS 19 classifies leases as finance or operating leases on the substance of the transaction rather than its form. A finance lease transfers substantially all the risks and rewards incident to ownership of an asset, whether or not title passes; an operating lease is any lease that does not.
1The press is signed over for nearly its whole life—oiling, repairs and all are the lessee's now.
Finance leaseA lease that transfers substantially all the risks and rewards incident to ownership of an asset
2The laptops come like a rental: used for the season, then carried back out the door.
Operating leaseLike a rental agreement
| Point | Financial lease | Operating lease |
|---|---|---|
| Risks and rewards | Transferred substantially to the lessee | Remain with the lessor |
| Period | Usually most of the asset's economic life (long term) | Shorter than the asset's economic life |
| Cancellation | Generally non-cancellable; if the lessee may cancel, the lessor's losses on cancellation are borne by the lessee | Usually cancellable |
| Recovery of cost | The present value of the minimum lease payments amounts to substantially all of the asset's fair value | Payments may not recover the cost; lessor leases again |
| Maintenance, insurance | Usually borne by the lessee | Usually borne by the lessor |
| Ownership at end | Often passes to the lessee, or a purchase option | Asset returns to the lessor |
| Lessee's accounts | Asset and liability recognised; depreciation and finance charge | Lease rent charged as an expense; no asset or liability |
Where the 3 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Classification test | 1 |
| 2 | Points of difference | 2 |
| Total | 3 |
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