Why are the risks and rewards of an operating lease not transferred when there is a lease? Lease: An agreement that lessor allows lessee to use an assets over a period of time in return of rental payment. Finance lease: •
Transfer substantially all risks and rewards + ownership of an assets (AASB 117 par 6)
•
Title: may or may not transferred (AASB 117 par 6)
•
Long term
•
Non-cancellable
Operating lease: •
“A lease other than a finance lease” (AASB 117 par 6)
•
DOES NOT transfer substantially all risks and rewards + ownership
•
Title: will be transferred
•
Short term
•
Cancellable
Therefore, in operating lease lessor the lessee :the right to use the assets but no continuing right to the assets lessee: merely rent the assets but is not otherwise responsible for it no intention to acquire the assets lessor: retains the risks and rewards