Understand The Differences Between Finance Lease And Operating Lease

Published by slang July 5th, 2008 in Lease Accounting

For those unfamiliar between Finance Lease and Operating Lease, tabulated below in summary some of the differences:

Finance Lease	Operating Lease
Lease period is normally related to the useful life of the asset	Usually of a shorter duration and bears no relation to economic life of the assets.
Is a non-revocable contract.	Is a revocable one.
The lessee has to bear the risk.	The lessee is protected against risk of obsolescence
Cost of maintainance repairs, taxes, insurance,etc is placed with the lesses unless the contract provides to the contrary	The cost of maintainance,repairs, taxes, insurance,etc are all borne by the lessor.
The lease rental would cover the lessor’s original investment cost plus a reasonable return on the investment.	The lease rentals are generally not sufficient to fully amortize e cost of the asset.

If you found this post useful, keep updated with future posts by subscribing to FMAccounting (for free) through RSS or email.

Navigation