Operating lease and Operating profit: Difference between pages

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imported>Doug Williamson
(Update for change in lease accounting regime.)
 
imported>Doug Williamson
(Add link to Operating profit margin page.)
 
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An operating lease involves the lessee (user) paying rentals for the hire of an asset for a period of time which is normally substantially less than the asset’s full useful life.
(Op P).
The owner (lessor) retains the significant risks and rewards of ownership - usually including the responsibility for maintenance, insurance and the like, and enjoyment of a significant residual value of the asset at the end of the lease term.


Operating profit is the amount of revenue after deducting the operating costs. <br />


Relevant accounting standards include [[IAS 17]] and Section 20 of [[FRS 102]], under which operating leases have historically been accounted for 'off balance sheet' by the user of the asset, and [[IFRS 16]], which brings all leases 'on balance sheet' with effect from 2019.


In a simple business, the operating profit will be the same as the profit before interest and tax.


===Off balance sheet accounting===
For this reason, operating profit is sometimes treated in simple terms as being the same thing as the profit before interest and tax.


'Off balance sheet' accounting treatment for operating leases means that the obligations/liabilities to pay future lease instalments are only disclosed in the notes to the financial statements, not on the face of the balance sheet.


This accounting treatment will be phased out over time, and replaced by mandatory 'on balance sheet' accounting for all leases.
In a more complex business, there may be other items of income or expenditure, or both, in between operating profit and profit before interest and tax.




== See also ==
==See also==
* [[Finance lease]]
* [[Operating profit margin]]
* [[IFRS 16]]
* [[Profit before interest and tax]]
* [[IAS 17]]
* [[RCOP]]
* [[FRS 102]]
* [[Lease]]
* [[Off balance sheet]]
* [[MCT]]


[[Category:Corporate_finance]]
[[Category:Accounting,_tax_and_regulation]]

Revision as of 08:41, 2 February 2019

(Op P).

Operating profit is the amount of revenue after deducting the operating costs.


In a simple business, the operating profit will be the same as the profit before interest and tax.

For this reason, operating profit is sometimes treated in simple terms as being the same thing as the profit before interest and tax.


In a more complex business, there may be other items of income or expenditure, or both, in between operating profit and profit before interest and tax.


See also