What is a lease intended as security?

What is a lease intended as security?

• A. A lease with no asset transfer
• B. A lease that qualifies as a true lease
• C. A lease where the lessor does not have a residual interest, functioning as a secured loan
• D. A short-term operating lease

Answer: (C)

A lease intended as security is a financing arrangement where the asset itself serves as collateral and the lessor does not retain any residual interest in the asset. Because there is no residual value to the lessor, the transaction behaves like a secured loan rather than a true lease. The lessee gets use of the equipment, but the lender’s primary protection is the asset itself, so if the borrower defaults, the asset can be repossessed to satisfy the debt. This specific setup—no residual interest for the lessor and the transaction operating like a loan secured by the asset—is what makes it a lease intended as security. Short-term operating leases or leases with residual value expectations aren’t describing this security-focused structure, and a true lease implies the lessor retains residual interest.

A lease intended as security is a financing arrangement where the asset itself serves as collateral and the lessor does not retain any residual interest in the asset. Because there is no residual value to the lessor, the transaction behaves like a secured loan rather than a true lease. The lessee gets use of the equipment, but the lender’s primary protection is the asset itself, so if the borrower defaults, the asset can be repossessed to satisfy the debt. This specific setup—no residual interest for the lessor and the transaction operating like a loan secured by the asset—is what makes it a lease intended as security. Short-term operating leases or leases with residual value expectations aren’t describing this security-focused structure, and a true lease implies the lessor retains residual interest.