Finance Lease
A finance lease is a lease that transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. Economically, it resembles a purchase financed over time.
Leasing
Explanation
Typical criteria indicating a finance lease:
• ownership transfers to the lessee by the end of the term,
• the lessee has a purchase option that is reasonably certain to be exercised,
• the lease term covers the major part of the asset's economic life,
• the present value of lease payments amounts to substantially all of the asset's fair value,
• the asset is so specialized that only the lessee can use it without major modifications.
For lessees under ASC 842, a finance lease leads to separate amortization of the right-of-use asset and interest on the lease liability.
For lessors, the term is used under IFRS 16. Under ASC 842, the lessor equivalent is a sales-type lease (or, in specific cases, a direct financing lease). The lessor derecognizes the asset, recognizes a net investment in the lease, and earns interest income over the term.
Why It Matters
For lessors, finance leases require present value calculations and schedules that split each payment into interest and principal. In SAP Revenue Accounting and Reporting (RAR), this typically requires additional, customer-specific logic.
Related Terms
Sales-Type Lease · Operating Lease · Net Investment in the Lease · Interest Rate Implicit in the Lease · Significant Financing Component · Direct Financing Lease · Sale-and-Leaseback
Related Solution:
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