Definition Operating Lease. Description.
Operating Lease does not transfer the risk or rewards of the
leased property to the lessee in any economically substantial way. In an operating
lease, the lessor (or owner) transfers only the right to use the property
to the lessee. At the end of the lease period, the lessee returns the property
to the lessor.
In accounting, operating leases are treated as Off-Balance Sheet Financing: an operating
expense, and no asset or liability is recorded as part of the capital of the
firm.
In the US, the Financial Accounting Standards Board has ruled
that a lease should be treated as an operational lease if it meets none
of the following four conditions:
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The lease life exceeds 75% of the life of the asset.
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There is a transfer of ownership to the lessee at the end
of the lease term.
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There is an option to purchase the asset at a "bargain price"
at the end of the lease term.
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The present value of the lease payments, discounted at an
appropriate discount rate, exceeds 90% of the fair market value of the asset.
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What are the Benefits of Lease Financing for Fixed Assets?
"A firm can obtain loans from banks or any other financial institutions to acquire fixed assets. But a good number of companies opt for lease financing. Why?
Is there any cost minimization in lease financing?
Can a company get any tax advantages by using lease financing? How?
Or are there other advantages associated with lease financing?" |
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Operating Lease Special Interest Group
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Compare with: Capital
Lease
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Operating Lease Sponsor
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