What characterizes an operating lease compared to a capital lease?

An operating lease is characterized by a short-term system of payments without the transfer of ownership of the asset. In an operating lease, the lessee essentially pays for the right to use the asset for a specific period, typically shorter than the economic life of the asset. This arrangement allows the company to avoid the responsibilities of ownership such as maintenance, insurance, and taxes, which are typically borne by the lessor.

This distinguishes operating leases from capital leases (or finance leases), which usually involve longer-term arrangements and transfer certain risks and benefits of ownership to the lessee, including the option to purchase the asset at the end of the lease term.

Unlike other lease types, operating leases do not appear on the balance sheet as liabilities, which can influence financial ratios and covenants. This may lead companies to prefer operating leases when they want to maintain financial flexibility.

The other options reflect attributes commonly associated with capital leases or do not accurately describe the fundamental nature of an operating lease.