Operating Lease

AAA

DEFINITION of 'Operating Lease'

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Shell Lease

    A commercial lease in which a tenant rents a property with an ...
  2. Recapture Clause

    A provision usually found in percentage leases, especially in ...
  3. Percentage Lease

    A type of lease where the tenant pays a base rent plus a percentage ...
  4. Capital Lease

    A lease considered to have the economic characteristics of asset ...
  5. Graduated Lease

    A type of long-term, typically for commercial property, lease ...
  6. Lease

    A legal document outlining the terms under which one party agrees ...
Related Articles
  1. Why might a bond agreement limit the ...
    Investing

    Why might a bond agreement limit the ...

  2. Uncovering Hidden Debt
    Bonds & Fixed Income

    Uncovering Hidden Debt

  3. Advanced Financial Statement Analysis
    Options & Futures

    Advanced Financial Statement Analysis

  4. The Big Credit Card Companies Have Room ...
    Stock Analysis

    The Big Credit Card Companies Have Room ...

comments powered by Disqus
Hot Definitions
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  2. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  3. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  4. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  5. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  6. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
Trading Center