A lease that, for accounting purposes, transfers most risks and rewards of ownership to the customer.
For example, a construction company signs a finance lease on a $150,000 excavator with a $1 purchase option at the end of the 5-year term. Because the lease transfers substantially all risks and benefits of ownership, the asset and the corresponding liability both appear on the company's balance sheet.
Why it matters: Also known as a capital lease, it allows businesses to claim depreciation and interest expenses for tax purposes, operating essentially as ownership.
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