What is a characteristic of financial leases?

The characteristic of financial leases is that the lessor recovers full economic costs, including interest. In a financial lease arrangement, the lease payments are structured so that they cover the full economic cost of the asset, taking into account factors such as depreciation, interest, and any associated costs of ownership. This is in contrast to operating leases, where the lessor may absorb more of the risks and costs associated with ownership.

In financial leases, the lessee typically uses the asset for a significant portion of its useful life and is responsible for maintenance and insurance, further confirming the financial nature of the agreement. This arrangement can be beneficial for lessees as it allows them to use the asset without having to make a large capital investment upfront, while also providing lessors with a means to recover their investment in the asset over the lease term through the lease payments.