Operating and Financing Lease

Lease

The term lease defined as a contact between the owner of an asset that is called lessor or the user of the assets that is called lessee.  The lessor of the contract gives the right to lessee to use the assets or equipment for agreed period of time. The lessee pays rental consideration to the lessor for the use of assets or equipment. The lease is treated most suitable method for financing most investment such as office equipment, machinery, aircraft, high-value cars, software, mining equipment and alternative energy.

In simple words, we can say the lease is a method of acquiring right to use an equipment or assets for a consideration.

Definition

Lease can be defined as an agreement whereby the lessor conveys to the lessee in return for a payment or a series of payments the right to use an asset for an agreed period of time.

Financing Lease:

The financial lease is also known as the capital lease.  The  assets held under financing leases are capitalized in the financial statements of lessees at the commencement of the lease. Under the financial lease assets held for a long period. The time duration is equal to the economic life of an asset.

Operating Lease:

Operating leases are not a capitalized nature. Operating lease is a lease if it does not transfer the substantially all the risks and rewards incident to ownership. AS-19 and IAS-17 define the operating lease as a lease other than a financing lease. An operating lease is for the short period as compared to the useful life of the assets or equipment being leased. In operating lease, the lessor is responsible for all kinds of maintenance, insurance, and all other expenses related to leased amount.

The difference between Financing and operating lease.

 DifferenceFinancing LeaseOperating Lease
DurationFinancing leases for whole useful  life of assetsOperating lease for short term basis
RevocationThe lease contracts cannot be revoked under financing lease.The lease contracts are revocable under the operating lease.
Obsolescence riskUnder the financing lease, the lease has to bear the risk of obsolescence.Under the operating lease, the lessor has to bear the risk of obsolescence.
An option of purchaseAt the end of the contracts, the lessee has the option to buy the assets.No such option is available for the lessee in operating- lease contracts

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