Operating lease is an operating lease is for part time usage of the property. It is usually used to get equipment on a short-term basis. This type of lease is beneficial for businesses who want to keep their leases out of their financial statements. With an operating lease, only the right to use the property is transfered and not the actual ownership of the asset. The lessee is only required to record the operating expense of the property and it does not affect the balance sheet.
An operating lease forces the lessee to assume some risk of ownership, but also allows them to enjoy some tax deductions due to the depreciation of the asset as well as the interest payed on the lease. However it is treated as an asset and a liability so it must be recorded in the books.
If any one of the following criterion are met, the lease cannot be recorded as an operating lease and must be entered into the financial records as an operating lease.
- The length of the lease exceeds 75% of the life of the asset.
- Ownership is transfered at the end of the lease.
- There is a purchase option, when the lease term ends, for a bargain price.
- The lease payment values, at the proper discount rate, is greater than 90% of the fair market value.