The basic feature of financial lease is that the lessee buys the object of lease and the lease company at the beginning issues an invoice for the object of lease.
The basis for calculating interest is the complete value of the object of lease with VAT included. In practice, the most common case is financial lease with participation, on the basis of which the participation of the lessee in financing in a certain percentage of the purchase value of the asset is contracted. The principal, the basis for calculating interest is reduced by the amount of participation for the lessee. Legal ownership over the object of lease is transferred by settlement the last installment and all obligations under the contract.
Financial lease the lessee records in its books as assets and as a long-term liability based on the acquired assets. Costs when negotiating and securing a lease agreement (consluting costs, legal services, transportation costs, fee for processing the lease subject) are direct costs that increase the value (cost of acquisition) of the leased subject. The amount of the long-term liability is reduced by repaying the lease installment so that part of the installment is shown as repayment of principal and part as interest expense for the period. The presentation of a long-term liability in the balance sheet worsens the lessee´s level of debts, which is one of the main disadvantages of financial lease. However, in the case of financial lease, the lessee has the right to calculate depreciation and to present it as an expense in its income statement.