Differences between Finance Lease and Operating Lease
The following are some of the differences between finance lease and operating lease.
1. The asset is exclusively for the use of a particular lessee.
The asset is meant for a number of lessees.
2. The lease period may stretch over the entire economic life of the asset.
The lease period is shorter than the useful life of the asset.
3. The lessee has option to purchase the equipment at the end.
The lessee had no such option.
4. The lease period is non-cancellable.
The lessor is free to cancel the lease at any time.
5. The liability for repair, maintenance and insurance of equipment rest with the lessee.
The lessor maintains the leased asset and provides service such as insurance, support staff, fuel and so on.
6. Rentals are sufficient to amortise the capital outlay of the lessor and leave some profit.
Lease rentals are not sufficient to totally amortise the cost of the asset.
7. Assets leased include ships, aircraft, raihvay wagons, lands, building, heavy machinery etc.
Assets leased include mobile cranes with operators, chartering of aircraft including the provision of crew, fuel and support services, hiring of computers with operators, hiring a taxi for a particular travel which includes services of driver, provision for maintenance, fuel, immediate repairs, and soon.
8. The lessor is only a financier. Usually he is not interested in the asset.
The lessor has ultimate interest in the residual value of the asset.