Operating lease
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.
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.
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.
Off balance sheet accounting
'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.
