Which statement best describes a financial lease?

A financial lease, also known as a capital lease, is characterized by the lessee effectively treating the leased asset as if they own it, despite the legal ownership remaining with the lessor. This is because the lease term typically covers a significant portion of the asset's useful life, and the lessee gains the benefits and risks associated with ownership of the asset.

In accounting terms, the asset is recorded on the lessee's balance sheet, along with a corresponding liability for the future lease payments. This treatment reflects the fact that the lessee is responsible for the asset and bears the risks and benefits of ownership, which aligns with the rationale behind treating it as a purchase of an asset. This accounting approach is distinct from an operating lease, where the lease payments are simply treated as operational expenses without recognizing the asset on the balance sheet.

Understanding this distinction is crucial for financial reporting and analysis, especially in accurately reflecting a company's financial position and obligations.