What Is a Finance Lease?

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. The classic example is a lease that runs for most of the asset's useful life, or one that transfers ownership at the end. The distinction still matters for lessors, and it shapes how the substance of a lease is understood.

How lessees account for leases under IFRS 16

For lessees, IFRS 16 largely removed the old finance-versus-operating distinction. With limited exemptions (short-term and low-value leases), a lessee recognises:

• A right-of-use asset, representing its right to use the leased item.
• A lease liability, representing its obligation to make lease payments, measured at the present value of those payments.

The right-of-use asset is depreciated, and the lease liability is unwound using the effective-interest method, giving a finance charge in profit or loss.

The lessor side

Lessors still classify leases as finance or operating. A finance lease is effectively treated as a sale, with a receivable recognised; an operating lease keeps the asset on the lessor's books with rental income recognised over the term.

Leases are a high-frequency ACCA FR and SBR topic, and the marks come from correctly measuring the right-of-use asset and liability and unwinding the interest. Practising full lease questions and marking them against the official ACCA scheme with The 50% Club shows you exactly where your workings lose marks.