operating lease

Examples of operating lease in the following topics:

• Capital Leases vs. Operating Leases

  • Capital leases and operating leases are two types of leases with different criteria.
  • An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner, a ship, etc.) being leased.
  • An operating lease is commonly used to acquire equipment on a relatively short-term basis.
  • Thus, for example, an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease.
  • Accordingly, at the end of an operating lease, the lessee has several possibilities:

• Overview of Lease Accounting

  • There are two types of leases: capital leases and operating leases and each has a different accounting methodology.
  • There are two types of leases capital leases and operating leases.
  • On the other hand, an operating lease lets a company obtain equipment with virtually no upfront capital outlay and with the lease payments treated as a deductible cost of business.
  • Under an operating lease, the lessee records rent expense (debit) over the lease term, and a credit to either cash or rent payable.
  • Under an operating lease, the lessor records rent revenue (credit) and a corresponding debit to either cash/rent receivable.

• Impact of Leasing on the Income Statement

  • In accounting, leases can be considered either operating leases or capital leases (also called financial leases).
  • When determining whether a lease is capital or operating, the following criteria are useful considerations:
  • Otherwise, it is seen as an expense and filed as an operating lease on the income statement.
  • The lessee records rent expense (debit) over the lease term, and a credit to either cash or rent payable when on an operating lease.
  • For an operating lease - the ownership of the asset is maintained by the lessor and must be represented on the balance sheet as an asset.

• Being Aware of Off-Balance-Sheet Financing

  • Another example of off-balance-sheet financing is an operating lease, which are typically entered into in order to use equipment on a short-term basis relative to the overall useful life of the asset.
  • An operating lease does not transfer any of the rewards or risks of ownership, and as a result are not reported on the balance sheet of the lessee.
  • For example, if a company defaults on the rental payments required by an operating lease, the lessor could repossess the assets or take legal action, either of which could be detrimental to the success of the company.

• Maximizing building interiors

  • To be sure, firms that lease or rent their premises or share building space with other companies may not be able to perform renovations or improvements that optimize their workplaces.
  • That being said, it may be feasible to negotiate new lease terms if envisioned improvements are seen to reduce operating costs.

• Does leasing always close the manufacturing loop?

  • Sometimes a customer will purchase a leased product at the end of the lease term and never return it to the manufacturer.
  • Similarly, after a transfer of ownership, the customer may sell the leased product on the second-hand market.
  • Both of these practices can break the closed-loop cycle needed for leasing to provide its benefits.
  • In this regard, products may need months or perhaps years of redesigning or rethinking before leasing can become profitable.
  • (Fishbein, Bett, McGary, Lorraine, and Dillon, Patricia, ‘Leasing: A Step toward Producer Responsibility', Inform Inc.)

• Advantages of Leasing

  • The main advantage of leasing lies in a business' ability to attain assets without outlaying essential cash.
  • For businesses, leasing property may have significant financial benefits, which are outlined below:
  • Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than by purchasing property.
  • Leasing shifts risks to the lessor, but if the property market has shown steady growth over time, a business that depends on leased property is sacrificing capital gains.
  • Leasing may provide more flexibility to a business which expects to grow or move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term.

• Introduction to Resource Extension Part 2

  • If it depreciates, lease it. ' John Paul Getty, Billionaire
  • To achieve this goal, Interface developed what it calls an ‘Ever-Green Lease' in which the company focuses on leasing what a carpet is supposed to deliver rather than selling the carpet itself.
  • This is good news for customers because it means that when a leased carpet begins to show wear, Interface will come in, pull up the worn areas, and immediately replace them (a service that is part of the lease arrangement).
  • Not to be outdone, DuPont has developed a similar carpet-leasing program to enhance its carpet manufacturing subsidiary.
  • Furthermore, because DuPont runs several different manufacturing operations, fibres from its carpet reclamation process can also be used to manufacture auto parts and sound insulation products.

• Leasing

  • For example, customers often lease software products.
  • Additional advantages of B2B leasing agreements include flexible lease-to-own programs.
  • A lease can be structured to allow the purchase of equipment at the end of the lease for fair market value of the hardware.
  • However, some leases will allow product upgrades before the end of the lease.
  • Leasing terms sometimes include hidden fees and penalties at the conclusion of the lease, all of which can cost the organization extra money.

• Mall Kiosks

  • A retail kiosk (or mall kiosk) is a store operated out of a merchant supplied kiosk.
  • A retail kiosk (or mall kiosk) is a store operated out of a merchant supplied kiosk.
  • It is typically enclosed with the operator located in the center and the customer approaching the vendor from across a counter.
  • These smaller desk size units were created to avoid lease conflicts with existing stores with "kiosk" language exclusions and local fire codes requiring greater distance between units by placing them on wheels.
  • RMUs are usually supplied by the property owner and licensed rather than leased.