Operating lease
A lease reported as a single straight-line cost. Since the standards changed, the asset and the obligation sit on the balance sheet either way.
Where you will meet it
Operating lease appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Explain how a lessee accounts for leases
“This ended the era in which an operating lease kept both the asset and the obligation off the balance sheet and analysts added them back by capitalising rent.”
- Assess the effect on financial statements and ratios of a particular change in accounting standards, methods or assumptions
“Recognising leases on the balance sheet raises assets and debt, lowers asset turnover and, under IFRS where lease cost becomes depreciation plus interest, raises EBITDA and operating profit; under US GAAP an operating lease keeps a single straight-line cost in operating expense.”
- Explain how a lessor accounts for leases
“In an operating lease the asset stays on the lessor's balance sheet and is depreciated, and lease income is recognised on a straight-line basis over the term, even when payments escalate.”
Practise it
Practise operating lease until it is automatic: questions that explain every wrong option.
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