In a financial lease, who typically bears the risk of asset depreciation?

In a financial lease, the lessee typically bears the risk of asset depreciation. This is because a financial lease is often structured to resemble a loan rather than a traditional rental agreement. The lessee has the right to use the asset for a specified period while making periodic payments that could cover the asset's entire value minus any residual value.

Since the lessee gets the benefit of the asset during the lease term, they also take on the responsibility for its upkeep and any depreciating value throughout that duration. If the asset loses value faster than anticipated, it's the lessee who faces financial implications from that depreciation. This structure ultimately aligns the risks with the party that has control over the asset and its usage, reinforcing the principle that the party using the asset is responsible for its condition and value over time.

In contrast, the other parties such as the lessor, bank, and manufacturer do not typically face this direct risk in a financial lease scenario. The lessor may own the asset but generally is more concerned with receiving lease payments rather than the asset's depreciation. The bank's role, if involved, is usually as a financier, focusing on securing payments, while a manufacturer may sell the lease but isn't responsible for depreciation once ownership has transferred. Thus,