Finance Lease

Formal

(also known as a ‘Capital Lease’) A lease where the user owns the equipment at the end of the lease period OR, Lease term represents more than 75% of the useful life of an asset OR, The current worth of future rentals is greater than 90% of the asset’s value.

Real-world Example

A company leases a machine for most of its useful life and takes on the risks and rewards of ownership (maintenance, insurance) even though the leasing company holds legal title - a finance lease, treated on the balance sheet much like a purchase.