What is the main focus of a finance lease?

The primary focus of a finance lease is the transfer of risks and rewards incidental to asset ownership. In this type of leasing arrangement, the lessee effectively takes on many of the benefits and responsibilities associated with owning the asset, even though the legal title remains with the lessor. This includes the ability to use the asset for most of its useful life, maintenance responsibilities, and any potential gains or losses from changes in the asset's value.

Unlike operating leases, where the risks and rewards of ownership remain primarily with the lessor and the lease is often more of a short-term arrangement, finance leases are structured to provide the lessee with a significant portion of the economic benefits associated with the asset. This characteristic makes them similar to purchasing the asset outright, just from a cash flow and accounting perspective. Moreover, at the end of the lease term, there may be an option for the lessee to purchase the asset, further emphasizing the transfer of ownership characteristics.

The framework around finance leases tends to be established to align closely with how owning an asset would economically function, thus reflecting the substantial commitment of resources by the lessee during the lease term. This alignment with ownership is why the focus is correctly associated with the transfer of risks and rewards.