Basis in which Operating and Finance lease can be differentiated
are:
- Ownership: in Operating lease the ownership
remains with the lessor, whereas in finance lease the ownership
gets transferred to the lessee.
- Type of
expense: in accounting the operating lease is
expensed as operating expense, while in finance lease it is
capitalized and depreciated, charging the interest portion as
operating expense.
- Asset operating
cost: in operating lease the lessor bears all
running cost of asset, while in finance lease the lessee bears all
operating expenses of the assets.
- Term of lease: the term is shorter in operating lease while
finance lease is long term 5 years.
- Purchase Option: Operating lease doesn't have that option for
the lessee but finance lease has the purchase option.
These are the few main differences between the operating and
finance lease.