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IAS17 is an international standard related to leasing. Operating and capital lease are concepts that reflected the main idea of “substance over form”. Write an article explaining the different criteria for different types of leasing.
Different types of leasing
The term lease refers to an agreement between a lessor – the party leasing an asset to another, for instance, a landlord – and a lessee – the party holding the lease of an asset, for instance, tenant – for a specific duration on a specified rental. Usually, the maximum period for any lease as provided by law is 99 years. Leases are classified into various different kinds based on the distinction in the lease elements. The most commonly known types of leases are operating and financial lease. Other kinds of leases include: Sales and Lease Back Leasing, Sales Aid Lease, Specialized Services Lease, Big Ticket and Small Ticket Leases, Domestic and International Lease, and Single Investor Lease and Leveraged Lease.
Operating and Financial Lease
The financial lease, otherwise known as Full Payout Lease, is a lease where the lessor transfers all the risks and benefits associated to an asset to the lessee. At the end of the fiscal life of an asset, its rights are transferred to the lessee. Thus, the lease term is spread out across the vast part of the asset life. The lessor, therefore, becomes a financier of, for instance, a big industrial equipment.
In operating lease, on the other hand, the risks and benefits are not fully transferred to the lessee. The period of the lease is relatively shorter measured up against the financial lease. The lessor here is, therefore, forced to rely on several other leases to recover his cost. Additionally, the asset ownership along with benefits and risks remain with the lessor. Here, therefore, the lessor is not only a financier, but further offers additional services linked to the asset during the lease term. A good example is a sound system leased for an event but comes with technicians to operate it.
Sale and Lease Back and Direct Lease