Which of the following statements is correct about a finance lease?

A finance lease, also known as a capital lease, is characterized primarily by the transfer of risks and rewards associated with asset ownership from the lessor to the lessee. This means that under a finance lease, the lessee essentially benefits from the use of the asset as if they were the owner, which includes responsibilities such as maintenance and insurance. Since the lessee bears the risks and rewards, this type of lease is treated similarly to asset ownership in the lessee's financial statements, allowing them to capitalize the leased asset and recognize depreciation.

Understanding this concept is crucial because it reflects the economic realities of the lease arrangement rather than just its legal form. Finance leases usually cover a significant portion of the asset's useful life and often include options for the lessee to purchase the asset at the end of the lease term, further emphasizing the transfer of ownership benefits.

The other options present limitations or characteristics that do not accurately define a finance lease. For instance, while finance leases often span long-term periods, they are not exclusively long-term, and a variety of lease lengths can exist. The statement regarding unguaranteed residual values is misleading in this context, as finance leases can indeed include unguaranteed residual values. Regular cash payments are a common feature