The financial accounting term operating lease is used to describe one of several lease arrangements that a company can hold. Operating leases are used to acquire assets on a relatively short-term basis. The cost of an operating lease appears as an expense on the income statement.
The Financial Accounting Standards Board rules allow companies two methods to account for leases: capital and operating. If a lease does not qualify as a capital lease, then it should be classified as an operating lease.
The following tests are used to determine if a lease is to be treated as a capital lease:
If none of the above criteria apply, the lease should be treated as an operating lease.
When compared to a capital purchase, or finance lease, an operating lease provides companies with two significant advantages: