Financial Terms Glossary

Operating Lease

Formal

A lease (see separate definition) is an Operating Lease if:- a) Lessee doesn't own property at end of lease AND b) Lease term is less than 75% of the economic life of the asset AND c) Net Present Value of rental and lease payments are less than 90% of its fair market value. Reported 'Off Balance Sheet'.

Informal

Assets can either be owned or rented/leased. Some companies entered into rental contracts simply because the accounting rules allowed them to exclude rented assets from their Balance Sheet - and make some of the key performance measures look a lot better than they were in reality! Operating lease is a term for a type of lease that is a genuine rental - eg car contract hire - and not an attempt to cheat the accounting disclosure rules.

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