What basis is used to assess whether a lease is an operating lease for the lessor?

To determine whether a lease is classified as an operating lease for the lessor, the assessment is primarily based on the "OWNES" criteria. This framework includes several specific characteristics that define ownership and the financial risks associated with the asset being leased.

The "OWNES" criteria consist of the following five elements: Ownership transfer at the end of the lease term, option to purchase the asset at a bargain price, the lease term is for a major part of the asset's economic life, present value of lease payments amounts to substantially all of the asset's fair value, and the asset is specialized in nature such that it is expected to have no alternative use. If any one of these criteria is met, the lease is likely classified as a finance lease (or a capital lease), which impacts how the lessor recognizes revenue and expenses associated with that lease.

In contrast, if none of the "OWNES" criteria are satisfied, the lease will be considered an operating lease. This means the lessor retains most of the risks and rewards of ownership, and the lease payments are recognized as rental income over the term of the lease.

This assessment is distinct from comparing lease payments to operating expenses or evaluating present value cash flows, as those methods do not directly inform