What is the difference between an operating lease and a finance lease?

Under current US GAAP, both kinds of lease go on the balance sheet. The company records a right-of-use asset and a lease liability, measured at the present value of the lease payments. So the difference isn't whether the lease is on the balance sheet. The difference is the income statement. A finance lease is one that works like buying the asset with debt. Typical signs are that ownership transfers at the end, there's a purchase option the company is reasonably certain to use, or the lease covers most of the asset's useful life or most of its value. Anything else is an operating lease, which is closer to renting. For an operating lease, the income statement shows a single lease expense, straight-line over the term, inside operating expenses. For a finance lease, it shows depreciation on the asset plus interest on the liability. Interest is highest when the liability is largest, so a finance lease costs more in the early years and less later. The total over the lease is the same. Under IFRS nearly all leases are treated like finance leases.

Under current US GAAP, both kinds of lease go on the balance sheet. The company records a right-of-use asset and a lease liability, measured at the present value of the lease payments. So the difference isn't whether the lease is on the balance sheet. The difference is the income statement. A finance lease is one that works like buying the asset with debt. Typical signs are that ownership transfers at the end, there's a purchase option the company is reasonably certain to use, or the lease covers most of the asset's useful life or most of its value. Anything else is an operating lease, which is closer to renting. For an operating lease, the income statement shows a single lease expense, straight-line over the term, inside operating expenses. For a finance lease, it shows depreciation on the asset plus interest on the liability. Interest is highest when the liability is largest, so a finance lease costs more in the early years and less later. The total over the lease is the same. Take five payments of $100 a year at a 6% rate. The liability starts at about $421. As an operating lease, the expense is $100 every year. As a finance lease, year one is about $84 of depreciation plus about $25 of interest, so about $110. That changes the metrics. Depreciation and interest both sit below EBITDA, so a finance lease gives higher EBITDA than an operating lease. On the cash flow statement, operating lease payments are in cash flow from operations, while the principal part of a finance lease payment is in financing. Under IFRS nearly all leases are treated like finance leases, so before comparing a US company with an IFRS one I'd put their leases on the same basis.