What is an Operating Lease?

Operating leases are defined as a contract that permits the use of a certain asset without transferring the ownership right of that asset for any less than a major part of the asset’s life. That is, unless the lessee pays the lessor virtually all of the asset’s fair value.

Operating leases are used for the limited-term leasing of assets and include a traditional renting relationship where there is no transferal of ownership. These types of leases are expenses that used to remain off of a company's balance sheets under the old lease accounting standards (ASC 840)— the leased asset and the liabilities associated with it were not previously included on a company’s balance sheet.

Under each standard, a lease must be classified.  Under ASC 842, the options are finance & operating.  Under IFRS 16, finance is the only option for lessees. 

Different classifications will produce different amortization schedules and different line items in a disclosure report