Generally accepted accounting practice (both SSAP 21 and IAS
17) defines an operating lease as a lease other than a finance
lease. Thus all the accountancy definitional material is in
connection with finance leases.
In contrast to a finance lease, an operating lease does not
transfer substantially all of the risks and rewards of ownership to
the lessee. That is, an operating lease is a lease where the lease
terms do not guarantee that the lessor will get back all, or
substantially all, of the cost of the asset plus a commercial rate
of interest. In many cases the asset may be leased several times
throughout the course of its life, though this is not always the
case, see
BLM00060.
This means that operating leasing leaves the lessor with an
equity risk. That is, at the end of the term of the lease the
lessor will be relying on the value of the leased asset to ensure
they make an overall profit.
In some cases operating lease rentals can be thought of as
reflecting the market rate for hiring the asset concerned. However,
this is not always the case and has nothing to do with the
definition of an operating lease.
