What is Operating Interest?
Operating interest represents the legal rights a company holds over assets. In many cases, the assets are typically land or other natural resources, such as timber, oil, or a rock quarry. Companies holding the operating interest over such assets assume both the risks and profits associated with them. Some assets — particularly oil wells and mining operations — can have significant risks due to the nature of the work to produce usable products. Another term for this type of agreement is the exclusive rights to raw materials or goods.
Companies that face copious risk when holding operating interest over assets are subject to higher probabilities of failure. Business insurance policies can help reduce this risk factor. A company will often take out a policy to help offset the potential loss from dangerous operations. Losses related to worker injury, damaged equipment, or facilities and other problems may fall under this insurance policy. This helps the company receive reimbursement for cash spent on operations that prove unprofitable.
Having an operating interest in a certain piece of land or other natural resource can also prove infinitely beneficial to a firm. Holding rights to land can result in a strong competitive advantage as there is often only one piece of land with the potential resources. Exclusive operating interest rights can then allow a company to set market prices for certain products. Other firms may be unable to produce similar products as the land with natural resources will provide exclusive goods for a company’s production operation.
Other assets can also fall under an operating interest agreement. Equipment or facilities are often the subject of contracts and legal agreements. This gives a company the rights to use the asset for producing goods and services. The structure of these agreements is typically a lease. The lessee will have rights to use the asset for a specific amount of time and then purchase or give it back to the lessor.
Depending on the agreement, companies may not include operating interest rights on their financial statements. The lack of a specific dollar value for the rights can prevent it from appearing on a balance sheet. In this case, the company will simply add a disclosure or include a paragraph in their management statements regarding the exclusive use. The end date of the agreement is also important to report for stakeholders. This provides an idea of when the company may lose exclusive rights and profits may decrease.
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