A lease that is treated as a true lease (as opposed to a loan) for book accounting purposes. As defined in FAS13 13, an operating lease must have all of the following characteristics:
Lease term is less that 75% of estimated economic life of the equipment
Present value of lease payment is less than 90% of the equipment’s fair market value
Lease cannot contain a bargain purchase option (i.e. less than the fair market value)
Ownership is retained by the lessor during and after the lease term
The lessee accounts for an operating lease without showing an asset (for the equipment) or liability (for the lease payment obligations) on his balance sheet. Periodic payments are accounted for by the lessee as operating expenses of the period.