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Leasing is one of Financing Tool.
According to IAS17 two types of leases are identified namely Finance lease and Operating lease. The distinction between the two primarily resulted from the implications of one of the important accounting concept Substance over form.
Finance lease is a lease agreement in which substantially all the risks and rewards incidental to ownership of an asset are transferred to the lessee from the lessor. Where lessee is the person who acquired an asset from lessor for use and lessor is the person who is the owner of the asset and has handed over the asset to lessee to earn rentals.
On the other hand operating lease is a lease agreement which is NOT a finance lease. In short, a lease agreement in which risks and rewards associated with the asset are not transferred to the lessee and stays with the owner of the asset i.e. lessor.
In simplest word, transfer of risks and rewards means transfer of control of the assets. And from the definition and recognition principle of the asset we understood that is the control of the asset that is important and not the ownership of the assets that determines the rightful person to report the asset in his books of accounts.
