Finance Leases vs Operating Leases in Aviation
There are a number of important differences to note. Firstly, an operating lease does not involve any transfer of ownership, which is not the case with a finance lease. In a finance lease, the aircraft is transferred to the lessee at the end of the agreement. Secondly, finance leases typically involve longer lease periods than operating leases, which last anywhere between 6 and 12 years. Finally, finance leases allow the lessee to record the aircraft as an asset on their balance sheet, whereas an operating lease does not.
Economic Ownership and Balance Sheet Treatment
Under the current accounting standards, operating leases are capitalised by the lessee and recognised on their balance sheet as a right-of-use asset, meaning they are not treated as outright ownership. The aircraft instead remains on the lessor’s balance sheet. Finance leases, on the other hand, are treated differently. In a finance lease, the lessee will recognise the aircraft on its balance sheet as if it were owned economically by the lessee. The lessor, on the other hand, recognises a lease receivable on their balance sheet. With regards to economic ownership, the lessee bears the residual value risk for the asset but has almost complete control of its use.
