Operating Lease

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What is an 'Operating Lease'

An operating lease is a contract that allows for the use of an asset, but does not convey rights of ownership of the asset. An operating lease is not capitalized; it is accounted for as a rental expense in what is known as "off balance sheet financing." For the lessor, the asset being leased is accounted for as an asset and is depreciated as such. Operating leases have tax incentives and do not result in assets or liabilities being recorded on the lessee's balance sheet, which can improve the lessee's financial ratios.

BREAKING DOWN 'Operating Lease'

There are two primary types of leases: capital and operating. Capital leases are non-cancelable, and must meet at least one of the following requirements: the lease transfers ownership of the asset, the lease contains a bargain purchase option, the duration of the lease is 75% or more of the asset's expected economic life and/or the lease is worth at least 90% of the asset's value. An operating lease is one that meets none of the criteria.

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