Which statement best describes operating leases?

Operating leases are characterized by the fact that they do not transfer the ownership risks associated with the leased asset to the lessee. In an operating lease, the lessor retains ownership of the asset, and lessees merely pay for the use of the asset for a specific period. This arrangement typically allows lessees to benefit from the asset without being responsible for its depreciation or risks related to obsolescence, maintenance, and disposal at the end of the lease term.

This non-transfer of ownership risks makes operating leases distinct from finance leases, where ownership and associated risks are typically conveyed to the lessee. As a result, lessees in an operating lease can manage their cash flow effectively and respond flexibly to changes in business needs without the long-term commitment that ownership entails.

The other options imply characteristics or conditions of leases that do not align with the nature of operating leases. For example, stating they are typically long-term agreements or that they may confer ownership to the lessee contradicts the fundamental principles of operating leases. Additionally, the assertion that they are only applicable to physical assets overlooks the fact that operating leases can also apply to intangible assets, such as software licenses.