finance lease

meibaker

hi, i am doing june 2005 exam, 1.8 about finance lease, in the answer it said a finance lease under which you normally become the legal ower of the asset at the outset., but in osborne book it state, the legal ownership remains with the lessor, is only the hire purchase has the ownership. now i am confused, which is right? or just simple i understand wrong, which happens all the time. many thanks

Bookworm55

FRA June 05, right? I think you may have misinterpreted the answer slightly.

If you read the answer closely, you'll see that it doesn't actually say that you become the legal owner at the outset at all. What it doesn't say explicitly is that you account for the asset as if you were the legal owner, from the start of the lease.

I don't remember how much detail you need for Intermediate, so here's a stripped down version:

There is no legal distinction between a finance lease and an operating lease, it's purely a matter of accounting treatment. In a finance lease (such as hire-purchase situations), the owner leases the asset to the company, and receives lease payments over most of the life of the asset. Usually, this ends with a final payment and the transfer of the asset from the lessor to the the lessee. From a legal standpoint, the ownership is with the lessor, and there is no question of anything else.

However, from an accounting standpoint, there is the issue of who has control over the asset. Since the lessee has control over it for most of its useful life, the lessee accounts for the asset as though it owned them. But the lessee doesn't actually own them at all. (although they might purchase the asset at the very end of the lease)

This is also called the principle of economic substance over legal form.

meibaker

oh wow, thanks for your detailed reply, very much apprciated!thanks agian