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 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.
Unlike a
Financial Lease or Finance lease, 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 possibilities:
·
Pursuit of the lease
·
Return of the equipment
·
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