Finance lease
Financial Accounting glossary · The Accounting Cycle & Financial Statements
Definition
Lease classification (ASC 842) where the lessee effectively obtains control; results in interest + amortization expense and a front-loaded total expense pattern.
Finance lease in plain English
A lease is just a long-term rental, and a finance lease is the type where renting is really more like buying on an installment plan — the renter (the 'lessee') gets essentially all the control and benefit of the item, as if they owned it. Picture leasing a car for basically its whole useful life: on paper it's a rental, but in reality it's yours. Because of that, the accounting treats it like a purchase funded by a loan: the lessee reports interest expense (the cost of borrowing) plus amortization (spreading the asset's cost over time). Those two together make the total expense higher in the early years and lower later — a 'front-loaded' pattern.
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