Operating leasing
Encyclopedia
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.
In the context of car
s 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:
The main advantages of operating lease are:
Lease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
whose term is short compared to the useful life of the asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
or piece of equipment (an airliner
Airliner
An airliner is a large fixed-wing aircraft for transporting passengers and cargo. Such aircraft are operated by airlines. Although the definition of an airliner can vary from country to country, an airliner is typically defined as an aircraft intended for carrying multiple passengers in commercial...
, a ship
Ship
Since the end of the age of sail a ship has been any large buoyant marine vessel. Ships are generally distinguished from boats based on size and cargo or passenger capacity. Ships are used on lakes, seas, and rivers for a variety of activities, such as the transport of people or goods, fishing,...
, 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
International Financial Reporting Standards
International Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....
, 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.
In the context of car
Čar
Čar is a village in the municipality of Bujanovac, Serbia. According to the 2002 census, the town has a population of 296 people.-References:...
s 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
Residual value
Residual value is one of the constituents of a leasing calculus or operation. It describes the future value of a good in terms of percentage of depreciation of its initial 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
Risk premium
A risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset, in order to induce an individual to hold the risky asset rather than the risk-free asset...
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
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
. 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 leaseLeaseA lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
- 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 sheetBalance sheetIn financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
: they are operating expenses deductible from profits. - Improvement of cash-flow
- Economy of corporate taxes
See also
- Finance leaseFinance leaseA finance lease or capital lease is a type of lease. It is a commercial arrangement where:* the lessee will select an asset ;* the lessor will purchase that asset;...
- Novated leaseNovated leaseA novated lease is a type of motor vehicle lease common in Australia that allows a business to lease a motor vehicle on behalf of an employee, with the responsibility for the lease lying with the employee and the lease payments being made from the employee's pre-tax income.The term novated lease is...
- Vehicle leasingVehicle leasingVehicle leasing is the leasing a motor vehicle for a fixed period of time. It is commonly offered by dealers as an alternative to vehicle purchase but is widely used by businesses as a highly cost-effective method of acquiring vehicles for business, without the usually needed cash outlay...
- Accounting for leases in the United StatesAccounting for leases in the United StatesAccounting for leases in the United States regulated by the Financial Accounting Standards Board by the Financial Accounting Standards Number 13. These standards were effective as of January 1, 1977...