Operating Lease

Operating lease can be defined as a legal contract that allows the use of an asset of the owner by the third party but does not conveys the rights or the ownership of the asset to the entity that is utilizing the asset. Unlike all the other assets the asset that is being used under the tag of the operating lease is not capitalized. In terms of accounting the operating lease is considered rental expense and is not allocated on a balance sheet instead it is recorded in the transactions that are considered to be the off balance sheet financing. However the asset that is being leased is also the asset of the company like many other assets and is accounted as an asset and depreciated in the same way as the other assets of the organization are depreciated. There are number of tax incentives associated with the operating lease. The assets that are on the operating lease are not recorded on the balance sheet of the lessee’s nor are they tagged as the liabilities of the lessee as a result they yield tax incentives for lessee. Operating lease can also help in improving the financial ratios of the lessee.

Leases can be categorized into two major types and these are the capital lease and the operating lease. Capital lease cannot be cancelled and there are a number of requirements that must be fulfilled by operating lease these requirements include the transfer of the ownership of the asset including a bargain purchase option. Other requirements include the duration of the lease that is equal to the 75 percent of the useful life of the asset and the value of the lease that is at least about 90 percent of the value of the asset.



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