Leases are contracts that convey the right to use an asset for a
period of time in exchange for consideration. A lessee currently
classifies them on the financial statements as either finance or
operating leases, depending on the nature of the lease.
A finance lease is "a lease that transfers
substantially all the risks and rewards incidental to ownership of
an asset"1. An operating lease is "a
lease other than a finance lease"2. It is used
to finance the asset for less than its useful life.
The distinction is sometimes put colloquially: a long-term
lease, versus a mere rental.
Under current rules a finance lease results in the asset and
finance liability being recorded on the lessee's balance sheet.
In the income statement, the payments over the term of the lease
are split between depreciation and interest. This reflects
one aim of accounting which is to record substance, rather than
form: a long-term lease might encompass so much of the life
and value of an
