Monday, March 23, 2009

Operating leases

If a finance lease has an element of 'fiction' about it and is really a quasi-loan device to enable the financier to get access to tax allowances ,operating leasing is 'true' leasing and in fact s called by this term in some parts of the world .
it is sometimes said that a taxi ride is the simplest illustration of an operating lease- the hirer of a taxi ride (the lessee) has its use for a limited period in return for paying the fare (the rental) and never takes any of the risk or benefits n owning it,which remain with the taxi owner (the lessor).however,if it seems that it should be a straightforward matter to give a simple definition of an operating lease ,this is not so in accounting terms .Both SSAp 21 and IAS 17 ,rather unhelpfully ,define an operating lease as 'a lease other than a finance lease'.A more helpful way of looking at an operating lease is that it is an arrangement where the lessee requires the asset for a period shorter than its useful life . The lessor retains a significant interest in the end value (commonly known as the 'residual value') of the equipment at the conclusion of the lease period because the asset is returned to him or her and he or she will have to realize its value by selling it into the second-hand market to recover costs and make an adequate return .

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