Definition
Operating Lease vs Finance Lease
A finance lease transfers substantially all risks and rewards of ownership to the lessee, while an operating lease does not; Ind AS now brings most leases onto the balance sheet.
Historically, operating leases were kept off the balance sheet, with only rental expense in the P&L, while finance leases were capitalised. Ind AS 116 changed this for lessees, requiring almost all leases to be recognised as a right-of-use asset and a lease liability.
This shift increased reported assets, debt and EBITDA (since rent moves from operating expense to depreciation and interest) for lease-heavy businesses like retail and aviation. Analysts must adjust for it when comparing companies or periods across the transition.
Related terms
- EBITDAEBITDA is earnings before interest, tax, depreciation, and amortisation, a measure of a company's core operating profitability.
- DepreciationDepreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life, reflecting wear and obsolescence as an expense.
- Off-Balance-Sheet ItemsOff-balance-sheet items are obligations or exposures not recorded as assets or liabilities on the balance sheet but disclosed in the notes.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.