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A finance lease is a form of rental agreement under which you lease an asset for an agreed period and rental. A residual value is set upfront to reflect the asset’s value at the end of the term. This Accounted for on the balance sheet.
Under the conditions of most finance leases you have no option or right to purchase the asset. However it is common practice that most financiers will consider an offer from you to purchase the asset at the end of the term for the residual value. Alternately, you may trade it in on a replacement, return it to the financier paying the difference between the residual and market value (residual risk) or even extend the lease for a further term.
