Operating lease

What it means

An operating lease is a long-term rental of an asset, most often a car, equipment or machinery, in which the lessee pays a regular monthly rent and returns the asset when the contract ends. The price usually includes services such as maintenance, insurance, tyres or a replacement vehicle.

Unlike a finance lease, the asset never passes to the lessee; it stays with the lessor, which depreciates it and bears the risk of its residual value. The lessee pays for use, not for gradually paying off a purchase price.

For a company, an operating lease is a way of having new vehicles or equipment without a one-off investment and without the hassle of managing them. Monthly costs are predictable, which makes cash flow planning easier.

How it works in practice

Under Slovak accounting rules the lessee does not recognise the asset on the balance sheet and expenses the rent in the period. For companies reporting under IFRS, however, an operating lease is generally recognised as a right-of-use asset and a liability, which changes leverage ratios.

Rent is tax-deductible, and a VAT payer deducts the VAT on it to the extent the asset is used for business. For cars also used privately, we deal with a proportional restriction of the deduction or with taxation as a company car for private use for the employee.

For a larger fleet we compare operating lease offers with buying and arranging our own fleet insurance. We take into account mileage, servicing costs, residual value and how much time the company saves by not managing the cars itself.

What to watch out for

Operating lease contracts contain a mileage limit and return conditions. Excess mileage, damage or excessive wear are charged at the end, sometimes in large amounts. The charge is an expense in the year it arises.

Terminating the contract early is usually expensive, because the lessor claims lost rent or the loss in the vehicle’s value. For a company expecting changes in headcount we therefore recommend shorter contracts or the option to transfer a vehicle.