Operating Lease

OPERATING LEASE

An operating lease is an asset finance product with an off-balance sheet structure. The agreement is structured between two and five years and longer periods are possible. As with a rental product, businesses generally have three options at the end of the agreement:

  1. return the equipment;
  2. upgrade the equipment; or
  3. extend the agreement.

An operating lease is commonly used to:

  • utilise a tax deductible and off balance sheet asset finance product;
  • use OpEx rather than CapEx to fund equipment use;
  • avoid technology and asset risk;
  • smooth cash flow by agreeing to set payments over a specified period;
  • incorporate servicing and disposal costs into their agreed cash outlays.

Like a rental product, an operating lease can also offer operational flexibility by allowing the business to add or upgrade assets during the agreed period.

Important note: AASB16 the new accounting standard for leases, which makes significant changes to the way lease arrangements are accounted for, is applicable to annual reporting periods beginning on or after 1 January 2019.

The standard will impact the treatment of operating leases. To find out about the pending changes, read our article: AASB 16: A critical change to financing growth.

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