Difference between Operating Lease and Finance Lease | Free ...

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Finance Lease Operating Lease 1. Definition Financial lease like an installment loan is a legal commitment to pay for the entire cost of equipment plus interest over specified period of time. Leassee commits to a series of payment which in total exceeds the original cost of equipment plus interest. Operating lease is a rental agreement in which leassee is not committed to paying more than original cost of equipment during period of contract. 2. Responsibility for the maintenance etc. Financial lease normally excludes provisions for maintenance, insurance or taxes, which are paid separately by the lessee. Operating lease usually includes provision for maintenance expenses and taxes etc. Lessee pays only rental. 3. Nature or financial commitment. The lease involves a financial commitment similar to a loan from a leasing company to the lessee. The financial commitment is restricted to regular periodical rental payment which finds a place in the Profit and Loss Account of the lessee. 4. Period of lease Contract period ranges from medium to long term. Contract covers essentially the expected useful life of the asset. Contract is not usually cancelled and it fully amortises the original cost of the asset. Contracts are usually cancelable either by lessor or lessee. Operating leases normally do not fully amortise the original cost of the assets. 5. Types of assets leased Aircraft, rail, cars, land, building, heavy machines, diesel generating sets, etc. Computers, office equipments, automobiles, trucks etc. 6. Risk of obsolescence and under utilization Lessee assume the risk of obsolescence and under utilization of the equipment Leasing company assume risk of obsolescence and under utilization of the equipment.

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