Question 5 (b)
Lease financing; operating and finance lease
6 marks
- Time to write
- About 12 minutes
- Topic
- Leases and AS 19
- Notes
- Crux notes
Question
Question 5 (b) · 6 marksExplain lease financing. Also differentiate between Operating Lease and Financial Lease. (12+6=18)
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
- Explain…Differentiate…2 asks, each with its own marks below. Answer both.
- differentiate betweenSet the differences out in a table, basis by basis, not as two separate essays.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Lease financing explained 2 marks 3 min
- 2 Operating and finance lease: the deciding test and differences 4 marks 7 min
- Check: every ask answered, key terms underlined 1 min
Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks.
Try it first. About 12 minutes for 6 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.
Lease financing. A lease is an agreement by which the lessor conveys to the lessee, in return for a payment or a series of payments, the right to use an asset for an agreed period of time. The lessee gets the use of the asset without buying it, and pays for it out of the income it earns; the lessor keeps ownership and earns the rentals. Leasing is thus a way of financing the use of an asset.
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
Operating and finance lease. A finance lease transfers substantially all the risks and rewards incident to ownership of an asset; an operating lease is a lease other than a finance lease. Which one a lease is depends on the substance of the transaction rather than its form.
| # | Basis | Finance lease | Operating lease |
|---|---|---|---|
| 1 | Risks and rewards | Substantially all pass to the lessee | Stay with the lessor |
| 2 | Nature | A kind of loan agreement; the lessor is a financier | Like a rental agreement |
| 3 | Term | Long; most of the asset's economic life | Short compared with the asset's life |
| 4 | Cancellation | Not cancellable by the lessee | Can be cancelled before the term ends |
| 5 | Maintenance, insurance, obsolescence | Borne by the lessee | Borne by the lessor |
| 6 | Option to buy | Usually given to the lessee | Not given |
The rows follow the DU text's comparison of the two and its list of their features.
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Lease financing explained | 2 |
| 2 | Operating and finance lease: the deciding test and differences | 4 |
| Total | 6 |
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