What is the difference between a financial lease and a sale leaseback arrangement

What is the difference between a financial lease and a sale leaseback arrangement Introduction: The Significance of Leasing in Business Hello everyone! Leasing is a vital aspect of modern business operations. It allows companies to acquire assets without the need for substantial upfront investments. Today, we'll explore two popular leasing structures: financial leases and sale-leasebacks. While both involve the use of assets, they differ in their fundamental nature and implications. Let's dive in! Financial Lease: A Comprehensive Overview A financial lease, also known as a capital lease, is a long-term arrangement where the lessee (the company leasing the asset) enjoys most of the benefits and risks associated with the asset. In this type of lease, the lessee is essentially the owner for accounting purposes. They record the leased asset as a liability on their balance sheet and make regular lease payments, which include both principal and interest components. At the end of the lease term, the lessee may have the option to purchase the asset at a predetermined price, often referred to as the 'bargain purchase option.' Sale-Leaseback: A Unique Transaction In a sale-leaseback arrangement, the process begins with the company owning the asset. They sell the asset to a third party, known as the lessor, and simultaneously enter into a lease agreement to continue using the asset.