Operating Lease

The idea behind an operating lease is renting rather than buying. The lessor keeps ownership and usually expects to lease the asset again or sell it when the lease ends.

For lessees, accounting for operating leases changed significantly with newer standards. Under IFRS 16, most leases, whether called operating or finance leases, are recorded on the lessee's balance sheet as a right-of-use asset and a lease liability. IFRS no longer classifies leases as operating or finance for lessees; only short-term and low-value leases can be kept off the balance sheet and simply expensed.

Under US GAAP, lessees still classify leases as operating or finance. Both appear on the balance sheet, but for operating leases the cost is usually shown as a single straight-line lease expense in the income statement.

For example, a company renting an office for five years at 100,000 a year would, under current rules, generally record a lease liability and right-of-use asset at the start of the lease.

For lessors, the distinction still matters under both frameworks. In an operating lease, the lessor keeps the asset on its balance sheet and records lease payments as income.