What is the definition of an operating lease?

An operating lease is defined as a lease agreement where the risks and rewards of ownership remain with the lessor, meaning the lessor retains the responsibility for maintenance, insurance, and other ownership-related aspects of the leased asset. In this type of lease, the lessee essentially borrows the use of the asset for a specified period without obtaining any actual ownership rights.

This arrangement is commonly used for assets that the lessee needs for a short time or that may become obsolete quickly, such as office equipment or vehicles. The shorter duration and the lack of a transfer of ownership mean that operating leases often appear as off-balance-sheet financing for the lessee, which can help improve financial metrics.

Other options describe different types of leases or features that are not characteristic of operating leases. For example, a lease that transfers ownership to the lessee typically refers to a capital lease, which has different financial implications and involves a transfer of risks and rewards. Similarly, mentioning a buyout option or enhancements to equity does not reflect the fundamental nature of operating leases.