Distinguish between Financial lease and operating lease.

A financial lease and an operating lease are two types of leasing arrangements, each with distinct characteristics and implications for both the lessor (the party leasing the asset) and the lessee (the party using the asset). Understanding the differences between the two is crucial in financial management as they have different impacts on the financial statements, cash flows, and the allocation of risk and ownership.

1. Ownership and Risk:
In a financial lease, the lessee assumes most of the risks and rewards associated with the ownership of the leased asset. Although legal ownership remains with the lessor, the lessee effectively controls the asset and bears the risks related to its use. This means the lessee is responsible for maintenance, insurance, and other associated costs. The lease term in a financial lease is usually long-term and often covers the majority of the asset's useful life, making it similar to a financing arrangement.

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