Understanding Finance Leases

A finance lease represents an agreement where the risks and rewards of owning an asset are substantially transferred from the owner (lessor) to the user (lessee). Essentially, it functions similarly to acquiring the asset on credit.

Analyzing Statements about Finance Leases

We need to identify which statements about finance leases are NOT true. Let's break down each statement:

• Statement (i): "Finance lease transfer substantially all the risks and rewards incidental to ownership of an asset."
  • Explanation: This statement is TRUE. A core definition of a finance lease is precisely this transfer of significant ownership risks (like asset obsolescence or economic changes) and rewards (like potential value appreciation or profitable usage) to the lessee.
• Statement (ii): "The lease period in a finance lease covers a substantial portion of the asset's economic life."
  • Explanation: This statement is TRUE. Finance leases are typically long-term. The lease duration usually spans a major part of the asset's useful life, often considered 75% or more, ensuring the lessee benefits from most of its utility.
• Statement (iii): "Payment towards lease rental in finance lease cover all cost incurred by lessor in obtaining the assets."
  • Explanation: This statement is considered NOT TRUE. While finance lease payments are structured to ensure the lessor recovers the initial capital cost, financing expenses, and earns a profit, the word "all" makes this statement problematic. Lease payments aim to recoup the primary investment and provide a return, but they might not cover every single conceivable cost the lessor incurs, especially unforeseen expenses or costs associated with residual value guarantees.
• Statement (iv): "Finance lease is considered short-term in nature."
  • Explanation: This statement is definitively NOT TRUE. Finance leases are characterized by their long-term nature, covering a significant portion of an asset's useful life, distinguishing them clearly from short-term operating leases.

Conclusion on Finance Lease Characteristics

After evaluating each statement based on the standard characteristics of a finance lease, we find that statements (iii) and (iv) are not accurate descriptions.

Therefore, the statements about Finance lease that are NOT true are (iii) and (iv).