Which statement best describes a finance lease under ASC 842?

Which statement best describes a finance lease under ASC 842?

• A. A lease that is always provided by the equipment manufacturer.
• B. A lease that is treated as an operating lease for accounting purposes.
• C. A true lease where the lessor is not the manufacturer or supplier of the equipment.
• D. A sale of equipment with a leaseback arrangement.

Answer: (C)

Under ASC 842, a finance lease is a lease arrangement that transfers substantially all the risks and rewards of ownership to the lessee, so the lessee records a right-of-use asset and a lease liability. A true lease where the lessor is not the manufacturer or supplier describes a genuine financing arrangement rather than a vendor rental, which aligns with how a finance lease typically functions in practice. If the terms meet the relevant criteria (such as the lease term being for a major part of the asset’s economic life, or the present value of payments being substantially all of the asset’s fair value, or ownership transferring at the end), it would be classified as a finance lease. The other statements mischaracterize the concept: leases from the manufacturer aren’t automatically operating leases, and a sale with a leaseback is a separate structure that can be either finance or operating depending on terms.

Under ASC 842, a finance lease is a lease arrangement that transfers substantially all the risks and rewards of ownership to the lessee, so the lessee records a right-of-use asset and a lease liability. A true lease where the lessor is not the manufacturer or supplier describes a genuine financing arrangement rather than a vendor rental, which aligns with how a finance lease typically functions in practice. If the terms meet the relevant criteria (such as the lease term being for a major part of the asset’s economic life, or the present value of payments being substantially all of the asset’s fair value, or ownership transferring at the end), it would be classified as a finance lease. The other statements mischaracterize the concept: leases from the manufacturer aren’t automatically operating leases, and a sale with a leaseback is a separate structure that can be either finance or operating depending on terms.