What is a characteristic of a finance lease regarding the underlying asset?

• A. The underlying asset can be repurposed for any use by the lessee.
• B. The underlying asset is expected to have no alternative use to the lessor at the end of the lease term.
• C. The asset must be owned by the lessee after termination.
• D. The asset's residual value is irrelevant.

Answer: (B)

A finance lease is indicated when the asset is specialized to the lessee's use, such that the lessor has little or no alternative use for it at the end of the lease. This lack of viable resale or redeployment for the asset signals that most of the risks and rewards of ownership have effectively been transferred to the lessee through the lease. Because the asset wouldn’t have a meaningful secondary use for the lessor, the arrangement resembles financing the lessee’s use of the asset rather than renting out a general-purpose asset.

That’s why this option is the best fit: it captures the idea that, at term end, the asset has no practical alternative use to the lessor, reflecting the transfer of ownership-like risks and rewards inherent in a finance lease.

The other ideas aren’t defining features. The asset being repurposable for any use by the lessee isn’t what distinguishes a finance lease. Ownership after termination isn’t required for all finance leases, so it isn’t a universal characteristic. And residual value isn’t irrelevant in lease judgments—it's part of evaluating whether the lease transfers substantially all the risks and rewards of ownership.