What is the primary characteristic of finance leases?

The primary characteristic of finance leases is that they transfer the risks and rewards of ownership of the leased asset from the lessor to the lessee. This means that even though the title of the asset may legally remain with the lessor, the lessee effectively controls the asset and has the benefits associated with ownership, such as depreciation and the ability to use the asset to generate income.

In a finance lease, the lessee is responsible for making lease payments that generally cover most of the asset's life, and they often have the option to purchase the asset at the end of the lease term at a favorable price. This type of lease reflects a long-term commitment and is typically used for significant assets that a business intends to use for a substantial period.

In contrast, leases for low-value assets do not define finance leases, as finance leases often relate to more significant investments. Short-term leases usually characterize operating leases, which are not intended to transfer risks and rewards. Lastly, leases with no asset recognition are specific to operating leases under certain regulations, whereas finance leases require the lessee to recognize the asset and the corresponding lease liability on their balance sheet, reflecting the financial commitment associated with the lease.