Which statement best characterizes an operating lease?

Which statement best characterizes an operating lease?

• A. Fails FASB 13
• B. Lessee doesn't own asset
• C. Lessee owns asset
• D. Requires a $1 net payment

Answer: (B)

In an operating lease, the lessee uses the asset but does not own it; ownership stays with the lessor, and the asset isn’t capitalized on the lessee’s books. Lease payments are treated as rent or operating expenses over the term, rather than depreciation and interest on a financed asset. This distinction is what sets an operating lease apart from a finance (capital) lease, where ownership or a bargain purchase option transfers control to the lessee. The other statements aren’t defining features: a lease described as failing FASB 13 isn’t a description of what the lease is; ownership by the lessee would indicate a finance lease; and a nominal $1 net payment often signals a bargain purchase option, which also points to a finance lease.

In an operating lease, the lessee uses the asset but does not own it; ownership stays with the lessor, and the asset isn’t capitalized on the lessee’s books. Lease payments are treated as rent or operating expenses over the term, rather than depreciation and interest on a financed asset. This distinction is what sets an operating lease apart from a finance (capital) lease, where ownership or a bargain purchase option transfers control to the lessee. The other statements aren’t defining features: a lease described as failing FASB 13 isn’t a description of what the lease is; ownership by the lessee would indicate a finance lease; and a nominal $1 net payment often signals a bargain purchase option, which also points to a finance lease.