In essence operating lease is something that has minimal risks – you just use the asset, pay for it and only if deemed so, have to also take care of the regular maintenance. The ownership and risks related to this however are never yours (if they were, it’d be a finance lease).

All that you essentially have to worry about is the cash flow needed to pay your monthly dues and that’s about it really. An operating lease does not affect your balance sheet in no other way but the initial payment in the form of prepaid expenses, the cash and profit. No other balance sheet item is affected.

There have been questions whether future payments should be recognized on the balance sheet as a liability. The argument there is that it’s known the payments are going to be done anyway and as such the payments should be recognized as a liability. If anything I’d argue that the payments from the non-cancellable period may be recognized, however not the entire period. Why? Purely because of the fact that you can step out from an operating lease agreement at any given time regardless of whether you plan to do it or not. In the case of a finance lease agreement it’s different in a way that you’re getting the ownership of the asset most likely and hence you should recognize the asset and the corresponding liability on the balance sheet. Stepping out usually means you do have to pay in full for the asset. Under the operating lease though you’re not entitled to the asset and hence you have no liabilities occurring either.

Accounting is always done with double entries and as such you have to have another side to every entry you make. If you take on the liability, you must get something on the other side as well. Purely assessing the agreement based on ownership and risks, you’re not entitled to the asset nor have you the liability for full payment.