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Operating lease

Operating lease

A lease is classified as an operating lease if it


does not transfer substantially all the risks
and rewards incidental to ownership.
It is usually used to get equipment on a short-
term basis.
Since firms prefer to keep leases off the
books, and sometimes prefer to defer
expenses, there is a strong incentive on
the part of firms to report all leases as
operating leases.
This type of lease is beneficial for
businesses who want to keep their leases
out of their financial statement.
“operating lease in the financial
statements of lessees”

The whole of the payments are


charged to the profit and loss
account.
IAS 17 require the rental to be charged
on a straight-line basis over the lease
term even if the payments are not
made on such a basis.
 If the term of the lease require a
heavy initial payment, a proportion
of the payment can be treated as
prepaid expense.
Since the lessee does not assume the risk
of ownership, the lease expense is
treated as an operating expense in the
income statement and the lease does
not affect the balance sheet.
The operating lease does not show up as
part of the capital of the firm.
“Operating leases in the financial
statements of lessors”

 Lessors shall present assets subject


to operating leases in their statement
of financial position according to the
nature of the asset.
 The depreciation policy for
depreciable leased assets shall be
consistent with the lessor’s normal
depreciation policy for similar assets,
and depreciation shall be calculated
in accordance with IAS 16 and IAS
38.
 Lease income from operating lease
shall be recognised in income on a
straight-line basis over the lease
term, unless another systematic
basis is more representative of the
time pattern in which the benefit
from the leased asset is receivable.
The lease can not be recorded as an
operating lease if any of the following
criterion are met:

 1. the lease life exceeds 75% of the


life of the asset.
 2. there is transfer of ownership to
the lessee at the end of lease term.
 3.there is an option to purchase the
asset at a “bargain price” at the end
of the lease term.
 4.the present value of the lease
payments, discounted at an
appropriate discount rate, exceeds
90% of the fair market value of the
asset.
The end

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