On 1 April 2020, Falda Bhd. increased the operating capacity of its plant. Due to a lack of liquid funds it was unable to buy the required plant which had a cost of RM 3,500,000. On the recommendation of the finance director, Falda Bhd entered into an agreement to lease the plant from the manufacturer. The lease required four annual payments in advance of RM 1,000,000 each commencing on 1 April 2020. The plant would have a useful life of four years and would be scrapped at the end of this period. The finance director, believing the lease to be an operating lease, commented that the agreement would improve the companys return on capital employed (compared to outright purchase of the plant).

Required: Discuss the validity of the finance directors comment and describe how FRS 117 Leases ensures that leases such as the above are faithfully represented in an entitys financial statements (C2).