Which statement best distinguishes a true lease from a lease intended as security?

Which statement best distinguishes a true lease from a lease intended as security?

• A. A true lease transfers ownership of the equipment to the lessee, while a lease intended as security does not.
• B. A true lease never transfers ownership to the lessee.
• C. A true lease requires personal guaranties.
• D. A lease intended as security transfers ownership to the lessee after repayment.

Answer: (A)

Ownership of the equipment is the deciding factor. A true lease is structured so the arrangement functions as a genuine lease, with ownership effectively passing to the lessee as part of the transaction. A lease intended as security is really a financing device in which the owner retains title to the equipment to secure the debt, so ownership does not pass through the lease. Because who holds ownership drives how the deal is treated for accounting, tax, and risk, this distinction is captured by saying the true lease transfers ownership to the lessee while a lease intended as security does not. The other statements introduce requirements or timing that aren’t the defining difference.

Ownership of the equipment is the deciding factor. A true lease is structured so the arrangement functions as a genuine lease, with ownership effectively passing to the lessee as part of the transaction. A lease intended as security is really a financing device in which the owner retains title to the equipment to secure the debt, so ownership does not pass through the lease. Because who holds ownership drives how the deal is treated for accounting, tax, and risk, this distinction is captured by saying the true lease transfers ownership to the lessee while a lease intended as security does not. The other statements introduce requirements or timing that aren’t the defining difference.