ISSN 0798 1015

Vol. 39 (Number 34) Year 2018 • Page 14

Review of the Methods for Leasing Payments Calculation

Revisión de los métodos para el cálculo del pago de arrendamientos

Ekaterina BLINOVA 1; Kirill GERASIMOV 2

Received: 20/03/2018 • Approved: 30/04/2018

Content

1. Introduction

2. Method

3. Discussion

4. Conclusions

References

1. Introduction

To ensure competitiveness, industrial enterprises have to improve the quality of products and reduce costs. This cannot be achieved without modern means of production, therefore, firms need to timely change the morally and physically obsolete equipment. At present, many Russian enterprises need modernization. To solve long-term tasks of re-equipping enterprises with fixed assets, considerable financial resources are needed.

The technical re-equipment, modernization and renewal of the fixed as-sets of Russian enterprises was primarily financed from the profits of enterprises. The 1990s period and the subsequent regular financial crises in the Russian economy led to a complete lack of own funds for the enterprises, and as a result did not allow enterprises to update the worn out industrial machinery park and master new production technologies. Moreover, there was no reasonable credit system.

In these conditions, leasing has become the most appropriate way to finance investments for Russian enterprises. The main advantage of leasing is that it is not money that is provided, but the necessary equipment that can immediately be used in the production process. Leasing, as a mechanism for alternative financing, plays a huge role in the implementation of strategic tasks for the technical re-equipment of enterprises.

The total amount of leasing payments for the entire term of the leasing contract can be calculated as the sum of its constituent parts:

Figure 1
Classification of leasing payments

Addressing the economics authors (Dogan, 2016; Gazman, 2005; Giner, 2017; Goremykin, 2005; Keyhanian, 2015) we can classify the leasing payments according to the following characteristics:

1. By forms of payments:

- in monetary forms (most frequent in practise);

- compensational (if payments are made goods produced using the leased asset, or by rendering counter services to the lessor);

- in mixed form (in both monetary and compensational form).

2. By method of calculation:

- in the form of a fixed rate, established in the monetary (the most common option), in natural or mixed form, also in absolute form;

- with an advance payment (with partial prepayment at the time of signing the leasing contract, in the future the respective sums of money are deducted from the total amount of obligatory leasing payments, and the remaining sums are paid in the established order).

- in the form of share payments (the share of the amount of the sold products which were produced on the leased equipment) (Batkovskiy, 2016);

- as a percentage of the value of the object leased.

3. By frequency of payments:

- one-time (are made after the property is delivered and the acceptance certificate is signed by the lessee and the supplier);

- periodic (monthly, quarterly or annual according to the schedule established by the parties). This method most corresponds to the essence of leasing. A one-time form of payment turns a leasing transaction into a simple purchase of property.

4. By contribution of payments:

- linear (paid in proportionally equal parts);

- progressive (gradually increasing as the leased equipment is developed and the volume of output produced by the lessee is increased);

- regressive (gradually decreasing with relatively large payments in the initial stage of leasing) (Contino, 2016);

- seasonal (taking into account seasonality of cash flows of the lessee).

With the first two methods of calculation, the commission fee does not depend on the payment schedule for lease payments. In the third version of the calculation, used in the practice of leasing companies, the commission fee of the lessee, and, consequently, the total amount of leasing payments depends on the schedule of leasing payments. In leasing companies, the scheme used to calculate the commission fee is a percentage of the unpaid property value (Eisfeldt, 2009).

The most common ways of paying leasing payments are as follows:

- annuity payments (the amount of payments is constant),

- regressive payments (the amount of payments decreases during the term of the contract),

- progressive leasing payments (the amount of payments increases during the term of the contract),

- seasonal leasing payments (the amount of payments corresponds to the seasonal nature of the inflow of funds of the lessee).

The choice of the before mentioned methods of leasing payments is carried out as a result of negotiations between the lessor and the lessee (Belyakova, 2006; Bolshakov, 2006).

Each periodic leasing payment ut consists of two parts, the first part is to repay the value of the property, the second - to pay interest accrued on the unpaid property value:

Table 1
Terms of leasing contract

Commissions are charged on the unpaid value of the property. Calculation of the total amount of leasing payments using a regressive scheme (Kirkorov, 2006; Pavlov, 2006) is presented in the table 2.

Table 2
Calculation of leasing payments with a regressive scheme

The amount of leasing payments using the regression scheme was 1061804,50 monetary units; rise in price of property - 6,18%. Graphs of regressive lease payments ut, commission payments It, payments for the repayment of the cost of property Kt are shown in the figure 2.

Figure 2
Regressive leasing payments graph

The calculation of the total amount of leasing payments using the annuity scheme is presented in the table 3.

Table 3
Calculation of leasing payments with an annuity scheme

The amount of annuity leasing payments was 1090834,33 monetary units, rise in price - 9,08%. Charts of annuity leasing payments ut, commission payments It, payments for the repayment of the cost of property Kt are shown in the figure 3.

Figure 3
Annuity leasing payments graph

Calculation of the total amount of leasing payments using a progressive scheme is presented in the table 4.

Table 4
Calculation of leasing payments with a progressive scheme

The amount of leasing payments using the progression scheme was 1112656,36 monetary units, rise in price of property - 11,27%. Graphs of regressive lease payments ut, commission payments It, payments for the repayment of the cost of property Kt are shown in the figure 4.

Figure 4
Progressive leasing payments graph

The amount of leasing payments, commission fees, property values and increase in the contract price for various payment schedules are presented in the table 5.

Table 5
The amount of payments for different payout schemes

As you can see, the amounts of payments for different methods of payment are different. The smallest amount of leasing payments and of the rise in price corresponds to the regressive schedule, the largest amount of leasing payments and of the rise in price correspond to the progressive schedule. Leasing payment schedules affect the total price of leasing contract (Muftahova, 2015).

The trajectories of the unpaid value of the property for different methods of payment are shown in the figure 5.

Figure 5
Trajectories of unpaid equity cost for the 3 payments methods

Thus, the choice of how to pay leasing payments greatly affects the value of the entire leasing transaction. Comparative analysis allows us to make a specific choice of a particular methodological approach for determining the size of lease payments. In one case, the methodology is more advantageous for the lessor, in another case - for the lessee, but the agreement is reached by signing a specific contract.

From the lessee’s point of view, the application of any method for calculating leasing payments should pursue one goal: to use the leasing transaction as a resource-saving factor for conducting its own investments.

As a result of the analysis, the following conclusions can be drawn:

- the development of leasing as a form of entrepreneurial activity in Russia presupposes the existence of a certain group of prerequisites and factors;

- successful practice of leasing application and distribution in the Russian economy is related to the availability of a legal framework for the implementation of this form of entrepreneurial activity;

- in recent years we can notice a significant breakthrough in the development of leasing in Russia, a fairly large number of different leasing companies are being established;

- at the same time, the volume of leasing services provided in cash equivalent is insignificant against the background of traditional methods of investment and does not correspond to the opportunities of the created leasing market;

- the solution of problems in the leasing sphere will promote the leasing to the forefront among other types of investment activity in the real sector of the economy, which corresponds to its potential capabilities.

1. Attorneys, J.P., & Fred, S.S. (2005) Negotiate the Best Lease for Your Business, 2nd ed., NOLO Inc., USA.

2. Batkovskiy, A.M., Semenova, E.G., Trofimets, V.Y., Trofimets, E.N., & Fomina, A.V. (2016), Computer modeling of leasing operations. Indian Journal of Science and Technology, 9(28), p. 97661.

3. Belyakova, M.Yu. (2006). Formation of investment resources in the enterprise. Reference book of the economist, 2(32), pp. 21-30.

4. Bolshakov, S.V. (2006). Enterprise Finance: Theory and Practice. Moscow. Book World Publ.

5. Contino, R.M. (2002). The complete equipment-leasing handbook: A deal maker’s guide with forms, checklists, and worksheets. AMACOM.

6. Dogan, F.G. (2016) Non-cancellable Operating Leases and Operating Leverage. European Financial Management, 22(4), pp. 576-612.

7. Eisfeldt, A., & Rampini A. (2009). Leasing, Ability to Repossess, and Debt Capacity. Review of Financial Studies 22 (4), pp. 1621-1657.

8. Gazman, V.D. (2005). Financial leasing. Moscow: HSE Publ.

9. Giner, B., & Pardo, F. (2017), Operating lease decision and the impact of capitalization in a bank-oriented country. Applied Economics, 49(19), pp. 1886-1900.

10. Goremykin, V.A. (2005). Classification of leasing operations. Reference book of the economist, 7(25), pp. 90-102.

11. Keyhanian, S., & Rabbani, M. (2015), Revenue and turn-over based joint pricing and production planning for an integrated financial lease-sales system: A new mathematical model. International Journal of Operational Research, 22(3), pp. 310-341.

12. Kirkorov, A.N. (2006). Finance management of a leasing company. Moscow. Alfa-Press Publ.

13. Muftahova, O., Nechaev, A., & Antipina, O. (2015), The use of financial and credit tools to minimize the risks in the organization of production. International Journal of Economics and Financial Issues, 5(4), pp. 1060-1065.

14. Pavlov O.V. (2006). The dynamic task of coordinating the schedule of lease payments between the parties to the transaction. Izvestiya of the Samara Scientific Center of the Russian Academy of Sciences. 2006, Special Issue, pp. 82-85.

1. Samara National Research University, Samara, Russian Federation; E-mail: blinova@ssau.ru

2. Samara National Research University, Samara, Russian Federation; E-mail: kgerasimov@ssau.ru