Operating Lease
A short-term asset rental agreement where the lender retains a meaningful residual value in the asset, resulting in lower monthly payments than a finance lease.
An operating lease is a shorter-term rental arrangement where the lender (lessor) retains a significant 'residual value' in the asset at the end of the term. Because the lender is not recovering the full cost of the asset through the rental payments, operating lease payments are lower than finance lease payments for the same asset over a similar period.
Operating leases are common for vehicles (including car fleet schemes), IT equipment, and technology assets where regular upgrades are desirable. At the end of the operating lease, you simply return the asset and can take a new lease on the latest model. This protects businesses from the obsolescence risk of owning aging technology.
Under IFRS 16 (effective from 2019), most operating leases for terms over 12 months must now be recognised on the balance sheet of IFRS-reporting companies, which reduces the off-balance-sheet accounting advantage they previously offered. Consult your accountant on how an operating lease would be treated under your specific reporting standards.
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