Operating lease

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 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 lease or an operating lease from an accounting point of view is defined in the United States by . In countries covered by International Financial Reporting Standards, the tests are defined in . In July 2006, the Financial Accounting Standards Board and the International Accounting Standards Board 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. 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, 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:
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