ACCA Financial Management (F9) Certification Practice Exam

What is the role of a lessor in a leasing agreement?

1. A party that uses another’s asset without any financial obligation

2. A party that sells an asset and leases it back

3. A party that provides finance for an asset and retains most risks of ownership

4. A party responsible for maintenance of the asset

The correct answer is: A party that provides finance for an asset and retains most risks of ownership

In a leasing agreement, the lessor plays a critical role as the party that provides the asset for lease while retaining ownership and most of the risks associated with that ownership. This means that the lessor invests in the asset, which could be machinery, equipment, or property, and then leases it to another party (the lessee) who pays for the right to use the asset for a specified period. Moreover, by retaining ownership, the lessor can manage the asset more effectively, ensuring it is maintained and valued correctly. They also handle the inherent risks such as depreciation, obsolescence, and potential loss or damage to the asset, depending on the terms of the lease agreement. This arrangement allows the lessee to use the asset without the burden of ownership, which can include significant capital investment and ongoing costs. The other options describe roles or scenarios that do not accurately capture the essence of what a lessor does in a leasing agreement. For instance, the idea of a party using an asset without financial obligation does not reflect the lessor's position since they receive payments for the lease. Meanwhile, selling an asset and leasing it back refers to a sale and leaseback transaction, which is a specific financing strategy rather than a general role in leasing