Operating lease


Operating lease

An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner, a ship, etc.) being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis. Thus, for example, an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease.

The determination of whether a lease is a finance (also called capital) lease or an operating lease is defined in the United States by Statement of Financial Accounting Standards No. 13 (FAS 13). In countries covered by International Financial Reporting Standards, the tests are defined in IAS 17. In July 2006, the FASB and the International Accounting Standards Board (IASB) announced the commencement of a joint project to comprehensively reconsider lease accounting. In July 2008, the boards decided to defer any changes to lessor accounting, while continuing with the project for lessee accounting, with the stated intention to recognise an asset and obligation for all lessee leases (in essence, eliminating operating lease accounting). The projected completion of the project is now 2011. [1] [2]

In the context of cars and other passenger vehicles, under an operating lease the lessor leases the vehicle to the lessee for a fixed monthly amount, and also assumes the residual value risk of the vehicle. This provides a way to lease a vehicle where the cost of the vehicle is known in advance – however, operating leases can be an expensive option as there is a risk premium priced into the monthly payments.

Operating lease has also spread to industrial equipment. The lessor leases the equipment to the lessee which pays periodically a rent. Operating lease is the smartest way for the outsourcing of industrial equipment. It allows the company not to use its equity in a investment that produces no direct added value, but to dedicate it to its core business and valuation.

At the end of an operating lease, the lessee has several possibilities:

  • Pursuit of the lease
  • Renewal of equipment
  • Restoration of equipment
  • Purchase of equipment at their market value

The main advantages of operating lease are:

  • No incidence of the rents on the balance sheet: they are operating expenses deductible from profits.
  • Improvement of cash-flow
  • Economy of corporate taxes


References

  1. ^ FASB Project Update: Leases
  2. ^ IASB Current Projects: Leases

See also


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Look at other dictionaries:

  • operating lease — see lease Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. operating lease …   Law dictionary

  • operating lease — See lease. American Banker Glossary short term, cancelable lease. A type of lease in which the contract period is shorter than the life of the equipment, and the lessor pays all maintenance and servicing costs. Bloomberg Financial Dictionary * *… …   Financial and business terms

  • Operating lease — Short term, cancelable lease. A type of lease in which the period of contract is less than the life of the equipment and the lessor pays all maintenance and servicing costs. The New York Times Financial Glossary * * * operating lease operating… …   Financial and business terms

  • operating lease — A lease under which an asset is hired out to a lessee or lessees for a period that is substantially shorter than its useful economic life. Under an operating lease, some of the risks and rewards of the ownership of the leased asset remain with… …   Accounting dictionary

  • operating lease — A lease under which an asset is hired out to a lessee or lessees for a period that is substantially shorter than its useful economic life. Under an operating lease, the ownership of the leased asset remains with the lessor. Statement of Standard… …   Big dictionary of business and management

  • operating lease — A lease agreement, usually cancellable, which provides the lessee with the use of an asset for a period of time which is considerably shorter than the useful life of the asset. Unlike a capital lease, the lessee in an operating lease does not… …   Black's law dictionary

  • Operating Lease — A lease contract that allows the use of an asset, but does not convey rights similar to ownership of the asset. An operating lease is not capitalized; it is accounted for as a rental expense …   Investment dictionary

  • operating lease — veiklos nuoma statusas Aprobuotas sritis buhalterinė apskaita ir finansinė atskaitomybė apibrėžtis Nuomos rūšis, kai perduodant turtą nuomininkui neperduodama didžioji dalis rizikos ir naudos, susijusios su turto nuosavybe. atitikmenys: angl.… …   Lithuanian dictionary (lietuvių žodynas)

  • operating lease — A *lease whose contractual terms and economic effects do not involve the transfer of the *risks and *rewards of a leased asset. Under most systems of *Generally Accepted Accounting Principles, a *lessee does not *capitalize an asset obtained… …   Auditor's dictionary

  • lease — 1 / lēs/ n [Anglo French les, from lesser to grant by lease, from Old French laisser to let go, from Latin laxare to loosen, from laxus slack] 1 a: a contract by which an owner of property conveys exclusive possession, control, use, or enjoyment… …   Law dictionary


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