What is a synthetic lease?

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What is a synthetic lease?

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What is a synthetic lease?

Explanation & AnswerSolution by a verified expert

Explanation

Under synthetic lease, the asset is sold to a new entity, known as a special purpose entity created by the parent company. The special purpose entity raises its funds from issues of debt, equity or by raising loan for purchasing the asset and then leases it back to the parent company generally for a period of 3 to 5 years.
Synthetic lease is particularly an off-balance sheet operating lease where the special purpose entity that purchases the asset is lessor and the parent company that uses the asset is lessee.

Verified Answer

Synthetic lease is a type of lease where a new entity is created, called a special purpose entity (SPE) that purchases the asset and then leases it back to the parent entity. It is a form of an off-balance sheet operating lease.

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