Operating lease

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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.

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 the former IAS 17 and Section 20 of FRS 102, under which operating leases historically were accounted for 'off balance sheet' by the user of the asset, and IFRS 16, which brought all leases 'on balance sheet' with effect from 2019 for entities reporting under these standards.

The similar relevant accounting standard under US GAAP is ASC 842.

2. US GAAP - lease accounting - ASC 842.

Any lease that is not a capital lease, as defined for the purposes of ASC 842.

Former off balance sheet accounting treatment

In the past, 'off balance sheet' accounting treatment for operating leases meant that the obligations/liabilities to pay future lease instalments were only disclosed in the notes to the financial statements, not on the face of the balance sheet.

This former accounting treatment has been replaced by mandatory 'on balance sheet' accounting for all leases.

See also