Introduction: why lease: improving the appearance of balance sheets
Operating leases do not feature on the lessee’s balance sheet. Where the lease performs a financing function it allows what amounts to borrowing to be left off the borrower’s (lessee’s) balance sheet.
In contrast, if the lease is a finance lease, both the asset and the associated borrowing appear on the lessee’s balance sheet.
The use of operating leases as a source of off balance sheet finance is of concern to accountants. As at 2014, the IASB has been looking at the existing standards for several years and a leasing project is under way, the primary objective of which is to increase transparency and comparability among organisations by recognising lease assets and liabilities on the balance sheet and disclosing key information.