The expression "operating lease" is somewhat confusing as it has a different meaning based on the context that is under consideration. From a product characteristic stand point, this type of a lease, as distinguished from a finance lease, is one where the lessor takes larger residual risk, whereas finance leases have no or a very low residual value position. As such, the operating lease is non full payout. From an accounting stand point, this type of lease (if it fails to meet varied criteria that define a finance lease) results in off balance sheet financing which can be advantageous for companies in terms of gearing and other accounting ratios. The determination of whether a lease is a finance (also called capital) lease or an operating lease from an accounting point of view is defined in the United States b
Statement of Financial Accounting Standards No. 13 (FAS 13)
In countries covered by

International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...

, the tests are defined i
IAS 17
In July 2006, the

Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...

(FASB) and the

International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). ...

(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 liability for all lessee leases (in essence, eliminating operating lease accounting). This culminated in the issuance of IFRS 16 and FASB Topic 842. Both are effective January 1, 2019. The similarity in the two pronouncements is that leases, which previously qualified as operating leases- and hence resulted in off balance sheet treatment, are now to be capitalized by the lessee. Unlike a finance lease (differs by geography & whether a small residual value), at the end of the operating lease the title to the asset does not pass to the lessee, but remains with the lessor. Accordingly, at the end of an operating lease, the lessee has several options: *Return of the equipment *Renewal of the lease *Purchase of the equipment (not available in all geographies) Operating leases, where the lessor takes a residual position, offer a host of benefits to the lessee the type of which finance leases do not. Other benefits of an operating lease vs a finance lease are that working capital is maintained, rentals will be fully tax-deductible if the equipment is used to generate taxable income and there is no resale value risk as the financier will own the asset at the of the operating lease.{{Cite web, url=https://www.creditone.com.au/business/equipment-operating-lease, title=Equipment Operating Lease | Finance Lease Australia | Credit One | Australia

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See also