Operating lease is a type of lease in which the lessor purchases the asset and leases it to the lessee for a limited and small period of time. Unlike finance lease, the lessor provides certain other related services also along with leased asset and thereby also known as service lease. The ownership and risks of the asset are retained by the lessor and is not dependent on one lessee for the entire cost of the asset.
Operating lease is very different from a normal finance lease. It is more popular among small assets like computers, office equipment, automobiles, trucks, telephones, etc. The period of lease varies from hours, days to years but normally does not exceed the life of the asset.
The asset under operating lease goes under the hands of different users over its life. The lessor not only leases the asset but also provides required services along with it.Let’s take the example of computers, the lessor would need to set up the computers and also provide maintenance services.
Normally, operating lease is preferred by the lessee or the user, when the asset is not used in the daily life. For example, a projector in a business may be used once in a while when some special training is provided to the employees. If the projector is used once or twice in the whole year, it does not make sense for the user to purchase it when it is available on rent. It will be cheaper compared to buying it.
Features of an Operating Lease
In an operating lease, ownership is not transferred to the lessee at any point in time. It may be transferred to the place of the lessee for use but ownership remains with the lessor.
The term of Lease
Term of an operating lease is very small compared to a financial lease. It never extends up to the life of an asset.
Lease rental is decided in advance between the lessor and lessee. In the lease rental, lessor covers the part of his investment made, interest thereon, maintenance, profit and his service cost.
The asset is selected, purchased and owned by the lessor. The lessee is interested in the asset only till the time it is on lease to him. His interest is restricted to the use of the assets and till the time he needs it.
There are no major tax benefits in operating lease compared to finance lease. The depreciation is claimed by the lessor and on the other hand, the income of lease rental is booked as income to the lessor.
No. of Lessee
Lessor in an operating lease does not depend on one single lessee for recovery of the cost of the asset. It is used by many lessees over the period of its life.
In summary, when an asset is utilized once in a while and buying of that asset is not economically viable for just that little usage, operating lease is the best option available to the user or lessee. All the risk and reward due to owning the asset lies with the lessor.