ACCA Financial Management (F9) Certification Practice Exam

Who bears the primary risk in a lease agreement?

1. The lessee, as they own the asset

2. The lessor, as they retain ownership

3. Both parties share equal risk

4. The financial institution providing the funding

The correct answer is: The lessor, as they retain ownership

In a lease agreement, the primary risk is borne by the lessor, who retains ownership of the asset. This is because the lessor is responsible for the asset's performance, maintenance, and any potential depreciation in value over the term of the lease. If the lessee defaults on payments, the lessor faces the risk of asset repossession and dealing with any potential loss in value. The lessor also assumes the risk of any liabilities associated with ownership, such as damage or wear and tear, as well as the risk of market conditions affecting the asset’s future value. The lessee, while responsible for lease payments and maintaining the asset during the lease term, does not own the asset and generally does not face the same level of exposure to risks associated with ownership, such as asset depreciation or residual value risk. Therefore, in the context of a lease agreement, it is clear that the lessor bears the primary risk due to their retained ownership of the asset.