What characterizes an operating lease?

An operating lease is characterized by the use of property for a specified period without the transfer of ownership from the lessor to the lessee. In this type of lease agreement, the lessee has the right to use the asset, such as equipment or real estate, for a defined duration, but they do not gain any ownership rights to the asset itself.

This arrangement allows businesses to use the asset for their operational needs while preserving their capital and avoiding the long-term commitment of ownership. Operating leases are typically shorter in duration compared to capital leases and do not appear on the lessee's balance sheet in the same way capital leases do. This structure enables lessees to maintain flexibility in their asset management and can be financially advantageous for managing cash flow.

Other types of leases, such as capital leases, involve a transfer of ownership or long-term control of the asset, which distinguishes them from operating leases. Additionally, operating leases do not generally involve fixed payments over long-term contracts, as the terms can be more flexible to accommodate the needs of the lessee.