An operating lease or operating lease is a contract or agreement that allows the lessee to use the lessor's property in the short term without acquiring ownership of the leased property.
Signs and Features
There are some signs of an operating lease: the lessor is always the owner of the property. When the contract expires, a significant portion of the value of the leased property is not amortized. The transaction includes comprehensive additional services provided by the lessor. The property leased out is equipment, manufacturing equipment, real estate, specialized and vehicles.
The property is transferred for a specified period to the lessee on the conditions provided for in the contract. During the operation of an operating leasing facility, it can be transferred to use many times.
Types of operating leases
- Commercial real estate for business development.
- Rental of equipment for the production.
- Aircraft rental.
What are these deals? Operating leases have their own characteristics. Transactions on it are always concluded for a short or medium term, not exceeding the term of operation of the leased property. In most cases, rent is carried out in the development of one-time projects that are not systemic for this enterprise. That is, equipment is taken for any highly specialized purposes, they realize these goals and return the equipment to the owner. In the lease agreement, if additional services are supposed to be provided, all services related to the operating leasing that the lessor provides are described in detail. In addition, it is mandatory to indicate not only specific dates for the return of leased property, but also the procedure for its operation.
Benefits
Instead of acquiring the necessary equipment or property, there are usually a lot of objective reasons for concluding an operating lease agreement. The period of validity of a lease is significantly shorter than the period of useful operation of property or equipment leased. In addition, having any property, the owner must take into account the risks and obligations that arise in connection with this fact. Sometimes such an encumbrance is unacceptable for subjective reasons. In addition, it allows you to minimize the costs spent on organizing and running a business, including reducing the tax base. Commercial real estate for rent is now very popular. The owner of the property, transferring it to operating leases, is responsible for the condition of the leased object, is engaged in maintenance and insures it. All risks associated with the loss or destruction of property are also borne by the lessor. The conclusion of an operating lease agreement has its advantages in the following situations:
- when, the profit from using the leased asset is less than the value of the property used;
- if property or equipment may be morally obsolete during the period of its operation;
- the entrepreneur does not consider it necessary to load the balance sheet of his organization with non-core assets;
- property or equipment necessary for a one-time project, and subsequently will not be used;
- need additional services to the property (maintenance, for example).
Termination of an agreement
Please note that the lessee has the right to terminate the current lease only if the lessor provides property or equipment unsuitable for use. The growing popularity of operating leases can be explained by the fact that under this contract the period of use of equipment or machinery is a significantly shorter period compared to the real depreciation period. For the lessee, this is beneficial, since he has the right to give the lessor the leased object before the specified date, without making a purchase at the residual price, as with the financial leasing mechanism.
The lessee may acquire new equipment under these conditions, while he is not obliged to buy the old one. This feature of operating leases allows you to increase business efficiency through regular updates of fixed assets. In addition, under an operating lease agreement, the recipient has the right to rent equipment for certain contract works and for a very short time. For example, an operating lease is absolutely unprofitable if the leased object is not just equipment, but specialized equipment requiring expensive installation and dismantling. The expenditure side, the risks associated with its movement and installation - all this negates the expected benefits of both sides.
As well as renting an airplane.
Lessee's actions at the end of the contract
The lessee has the right, by agreement of the parties:
- return the leased property to the lessor;
- to replace property taken under operational leasing with another (for example, a newer one that meets the other goals of the lessee);
- extend the existing contract or enter into a new one;
- redeem leased property.
Operating leases bring benefits to both parties to the agreement: the lessee operates the equipment necessary for doing business, without burdening itself with significant costs of money for its purchase and subsequent maintenance. The lessor receives income from property that he does not use on his own. Traditionally, this type of lease is most common in construction, transport, mining, and agriculture. The terms and conditions of an operating lease agreement can vary significantly, so it must be carefully studied and evaluated.
If the parties find it difficult to reach an agreement (disagreement regarding the conditions, or some wording of the operating lease agreement is incorrect), then they should resolve these contradictions before signing the agreement, when the parties assume the established obligations. An agreement already signed, which means it has entered into force, greatly complicates the opportunity to challenge its terms in court, which, as a rule, leads to losses for both the lessor and the lessee. It is better not to bring it to this, but to solve problems before they take on the scale of the disaster.
Operating lease terms
In its pure form, the mechanism of operational leasing is as follows. An organization receives an object (property, machinery, equipment) from a leasing company for a specified period of time, after which it undertakes to return it. For the use of this facility, the organization makes monthly cash payments to the leasing company’s settlement account, which, as a rule, are lower than with a financial lease. The contract is signed for the period that is normative for the use of leased equipment.
The difference between operating leases and finance leases is obvious.
If the period is less time, then it is already considered hiring, if more, then this is a lease in standard form. Situations when leasing companies provide customers with additional services related to the maintenance and operation of equipment during the term of a contract are common in Europe, but are still very rare in Russia.
Operating leasing is used when the lessee is not able to pay the cost of the leasing equipment, in contrast to the terms of the financial lease agreement. With the latter, the tenant is simply obligated and has no right not to pay the full price of the equipment and interest. By the way, exactly this moment makes the mechanism of financial lease unpopular among businessmen. Let's look at an example of how this circuit works. How is operational car leasing for legal entities?
Using the operating leasing mechanism, the company takes several cars for a period of two years and gives them to customers for short-term rental. If you use the financial lease mechanism, then it is very likely that problems will soon approach, because cars become obsolete (especially those cars that have a representative class), the fleet needs to be updated, and with such conditions it is not profitable. At the same time, when using the operating leasing mechanism, the company, after the expiration of the standard period, can renew the fleet of vehicles in the same leasing company, returning those cars whose term of operation under the contract has ended. Such a mechanism provides the full cost of depreciation of a rented car.
Operational Leasing in Russia
What is the degree of development of the operating leasing institution in Russia? In the development of this market, we have only taken the first steps, despite the popularity among foreign companies that operate in the Russian market. All of them show remarkable activity in this area. But the majority of clients of such companies still constitute representative offices of other foreign organizations. As we have already said, in Europe and the USA, this business tool has long gained solid popularity among businessmen. In Russia, operating leases or operating leasing are still new experiences, the market is just starting to gain momentum, but the lack of information support makes it difficult to develop a new service. However, experts still note in recent years that interest in operating leasing is steadily growing. At the same time, the focus of attention is gradually shifting from financial leases to operating ones. The development of this market segment will inevitably lead to increased competition. This will allow you to stay on the market only to the most reliable and stable enterprises, offering the most favorable conditions for obtaining income from operating leases.
Rental Objects
Of course, considering operating leasing as a universal tool for doing business is fundamentally wrong. First of all, you need to evaluate the appropriateness of using this tool for the tasks of your enterprise.
Limitations
Experts remind that operational leasing does not apply to all types of objects. This situation does not arise due to legislative prohibitions (it should be noted that the concept of “operating lease” is practically not spelled out in the current Russian legislation), but because of the impossibility to fulfill some requirements. This can only mean that the conditions of operating leasing cover only those objects for which the use of such a scheme would be an advantage. Thus, operating leasing is a financial scheme in which the use of the leased object is convenient and profitable, and the operation object can be subsequently realized without significant additional costs in the secondary market.In this regard, the most popular type of operating leasing is the acquisition of cars, the subsequent use of cars and the change of the fleet in the same leasing company after some time.
Operating leases in IFRS
The concept is pretty easy to understand. In cases where the lease has no signs of financial, it is considered as an operating lease.
According to the requirements of IFRS, the total fee for the use of the leased object provided for by the contract, regardless of the payment schedule, must be distributed over the reporting periods for the entire lease term. At the same time, IFRS determines that such a distribution does not apply to the payment of services provided by the lessor, reimbursement of the lessor's expenses, and also the conditional rent, the amount of which is determined by a non-timely factor.
Operational leasing allows you to save on taxes
Lease payments under a lease contract reduce the organization's tax base. Using the accelerated depreciation coefficient allows you to write off equipment according to a faster scheme than usual and significantly save on property tax. The advantages of operational leasing are quite obvious: the acquisition of fixed assets with a minimum investment of own financial resources, the application of tax benefits, more efficient and flexible use of the company's resources compared to loans. Efficiency and flexibility in the use of company assets over time not only do not decrease, they increase. A lessee who takes a car on lease does not spend a lot of time on paperwork. As a result, he gets a workable and insured car that can make a profit almost immediately. When obtaining a loan or financial lease, the whole process takes longer and takes more effort and money (insurance, repair). There is also a rental of industrial equipment.
The lessor in this case has no hope to compensate for the cost of equipment or property that is leased to the leasing recipient from lease payments under the contract. However, the size of payments under an operating lease is larger when compared with finance leases, because the lessor in this situation has additional risks. We repeat once again that all the obligations to arrange insurance, to conduct maintenance of the leased object are fully assumed by the lessor. The possibility of loss, damage or damage to property is also the risk of the landlord. What to choose, financial or operating lease, you decide.
We briefly talked about operational leasing, its features and the development mechanism in our country.