Operating Lease

According to the AS-17 and AS-19, an operating lease is one that is not a finance lease. In a operating lease, the lessor does not transfer all the risks and rewards incidental to the ownership of the asset and the cost of the asset is not fully mortised during the primary lease period, The lessor provides services (other than the financing of the purchase price) attached to the leased asset, such as maintenance, repair and technical advice. For this reason an operating lease is also called a service lease. The lease rental is an operating lease that includes a cost for the services provided, and the lessor does not depend on a single lessee for recovery of his cost. An operating lease is generally used for computers, office equipment, automobiles, trucks other equipment, telephones and so on. An operating lease is structured with the following features:

(i) An operating lease is generally for a period significantly shorter than the economic life of the leased asset. In some cases, it may be. even on an hourly, daily, weekly or monthly basis The lease is cancelled by either party during the lease period.

(ii) Since the lease periods are shorter than the expected life of the asset, the lease rentals are not sufficient to totally amortise the cost of assets.

(iii) The lessor does not rely on the single lessee for recovery of his investment. His ultimate interest is in the residual value of the asset. The lessor bears the risk of obsolescence since the lessee is free to cancel the lease at any time.

(iv) Operating leases normally include a maintenance clause requiring the lessor to maintain leased asset and provide services such as insurance, support staff, fuel and so on.

Examples of operating leases are:

(a) Providing mobile cranes with operators:

(b) Chartering of aircrafts and ships, including the provision of crew, fuel and support services.

(c) Hiring of computers with operators.

(d) Hiring a taxi for a particular travel, which includes service of the driver, provision for maintenance, fuel, immediate repairs and so on.

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