Methodology for calculating lease payments

2024 Author: Howard Calhoun | [email protected]. Last modified: 2024-01-17 18:37

The word "leasing" has English roots. Translated, the term means "rent". Leasing is a type of financial service, a specific form of lending for the acquisition of fixed assets by enterprises or expensive goods by individuals.

Nature of the deal

According to the agreement, the lessor assumes the obligation to acquire the property determined by the lessee into ownership. The seller is determined by the recipient. The acquired property is transferred to him for a fee for use and temporary possession.

As a rule, such a procedure is carried out within the framework of entrepreneurial activity. From 1 Jan. 2011 Leasing can also be consumer.

The contract may provide that the choice of the seller and property is made by the lessor. In this case, the lessee may be the owner of the valuables.

Nuances

In the laws of different states, the tax consequences of leasing are considered differently. In the Russian Federation, for example, such a lease allows you to calculate depreciation using the accelerated method. Alsothe law provides for the redistribution of the timing of VAT deductions.

At its core, leasing is a long-term lease followed by the purchase of property. The UNIDROIT Convention, ratified by the Russian Federation, does not provide for a mandatory right of redemption, only rent is allowed.

Subject of the contract

These are any non-consumable objects. Among them, for example, structures, buildings, equipment, vehicles, other property.

Land plots, objects that are prohibited or restricted in circulation cannot be the subject of such a lease.

The subject of leasing, provided to the recipient for temporary use and possession, is considered the property of the lessor. Objects transferred under the agreement are accounted for on the balance sheet of one of the parties to the transaction by their agreement.

The subject of leasing belongs to a specific profile group. Belonging to one or another category determines the risk of the transaction.

Classification

Types of leasing vary depending on the useful life of the object and the economic content of the contract. Rent can be:

• Financial. The term of the contract is similar to the useful life. Usually, at the end of the agreement, the residual value of the item approaches zero. In this case, the object can become the property of the recipient at no additional cost. Financial lease is considered one of the ways to attract targeted funds.
• Operational. The period of validity of the contract is significantly less than the period of useful operation. As a rule, the subject of the agreement are assets alreadyat the disposal of the tenant. In this case, there may not be a seller (third party) in the transaction. After the expiration of the contract, the object is either returned to the lessor and can be re-leased, or it is redeemed by the lessee at the residual market price. The latter option is considered more of an exception to the rule. The rental rate for an operating lease may be higher than for a financial lease.

Returnable leasing is considered separately. Its essence is that the seller of property is at the same time the lessee. Leaseback can be viewed as obtaining credit funds against the security of production assets and extracting additional economic benefits from the difference in taxation.

Payment schedules

The main options are:

• Regressive. This schedule stipulates that the monthly amount decreases over the duration of the lease.
• Annuitive. In this case, the amount remains unchanged.
• Seasonal. In this case, the schedule is tied to the seasonality of the lessee's activities.

Financial leasing is regulated by articles 665 and 666 of the Civil Code, the provisions of Federal Law No. 164 and other regulations.

Essential terms of the deal

The contract must contain clauses about:

1. Subject of the deal.
2. The seller of the property and that his choice is made by the lessee.
3. Term.
4. Cost (value of payments).

In the absenceof these conditions, the contract is recognized as not concluded.

Lease payments

They are the amounts deducted to the lessor for the right granted by the lessee to use the property that is the subject of the contract.

When calculating the amounts of leasing payments, the following are taken into account:

• Depreciation of the object for the entire period of the agreement.
• Compensation of the lessor's payment for the credit funds he used.
• Amounts transferred for the provision of additional services by the lessor, established in the contract.
• Commission.
• The cost of the object to be redeemed, if the agreement provides for the appropriate procedure and procedure for paying this price in installments as part of lease payments.

When drawing up a contract, the participants in the transaction determine the total amount of deductions, the method and form of calculation, the frequency of payment and the method of payment.

Payments can be in cash, compensation or mixed form. The cost of services or products in the second method is determined based on the provisions of the law.

Methods for calculating lease payments

When concluding an agreement, the parties can choose the following accrual options:

1. With a fixed total amount. This methodology for calculating lease payments involves spreading equal parts of the amount over agreed periods during the term of the agreement.
2. In advance. In this case, the lessee pays the lessor a preliminary amount. Its size is set by the parties. The rest is calculated andpaid during the term of the agreement in the same way as when calculating lease payments with a fixed amount.
3. Minimum deductions. In this case, the total amount includes the amount of property depreciation for the entire period of the contract, payment for the use of borrowed funds, commission, as well as payment for additional services agreed by the parties to the contract, and the cost of the property to be purchased (if it is established by the parties to the transaction).

Let's consider further how the calculation of lease payments is carried out with examples of calculations.

General calculation rules

Reducing the debt of the lessor leads to a decrease in payment for the use of borrowed funds. In addition, the size of the commission is reduced if its rate is set as a percentage of the outstanding value of the leased object. In this regard, it is advisable to calculate lease payments according to the following scheme:

1. Amounts are calculated for the years covered by the contract.
2. The total amount of payments for the entire duration of the agreement is determined. To do this, the amounts determined by years are added up.
3. The amount of contributions is calculated based on the frequency chosen by the parties, the methodology for calculating lease payments and the method of making them.

When operating lease, if the term of the agreement is less than a year, the amount of deductions is determined by months. A detailed description of the algorithm is given in the Methodological recommendations for the calculationlease payments.

Account scheme

In practice, the following formula for calculating lease payments is used:

OP=PC + AO + DU + KV + VAT, in which:

• OP - total payments.
• PC - Fee for the use of borrowed funds.
• AO - depreciation.
• DU - additional payment. services.
• CF - remuneration for providing an object.
• VAT - tax on ext. cost.

Please note that if the lessee is a small business, VAT is not included in the calculation of the total amount of lease payments.

Depreciation charges

To determine them, the formula is used:

AO=BS x On / 100, in which:

• On – depreciation rate.
• BS – book value.

When calculating lease payments, the book value is determined according to accounting rules.

Participants in the transaction have the right to apply the accelerated depreciation method with a coefficient of no more than 2 units.

Fee for using loan funds

To determine the amount of payment for the use of a loan for the purchase of a leasing object, the following equation is used when calculating lease payments:

PC=St x KR / 100, in which:

• KR - loan amount.
• St – loan rate.

This assumes that during each billing year, the PC indicator correlates with the average annual value of the outstanding loan in the current period or with the average annual residual price of the object:

Krtek=K x (Osnach + OScon) / 2, where:

• KRTek - credit funds used to purchase an object, payment for the use of which is made in the current period.
• OSnach and OScon - the estimated residual price of the property at the beginning and end of the period, respectively.
• K - coefficient taking into account the share of the loan in the total cost of the object. If only credit funds are used in the acquisition of property, the coefficient is taken equal to one.

Commission

When calculating payments under a leasing agreement, remuneration can be determined as a percentage of:

• average annual residual price of an object;
• book value of the subject of the transaction.

Depending on this, the corresponding equation will be used. When calculating lease payments, remuneration can be determined as follows:

CV=BS x p, where:

• BS – book value;
• r – reward rate.

You can also use this equation:

KV=Sv / 100 x (OSnach + OScon) / 2, in which:

• Sv – reward rate.
• OSnach and OScon - the residual price of the object at the beginning and end of the period.

Additional services

When calculating leasing payments, additional payment. services of the lessor in the current year is as follows:

DUt=(P + … Pn) / T, where:

• Р… Pn – lessor's costs for services (each separately) specified by the parties to the transaction.
• T is the period of validity of the agreement.

VAT accrual

If the general procedure for calculating lease payments is used, the tax is determined as follows:

NDStack=Wtek x ST / 100, where:

• NDStack - the amount of deductions in the current year.
• Vtech - the amount of proceeds from a transaction in the billing period.
• ST – tax rate.

Revenue is determined by the following formula:

Vtek=KVtek + PKtek + AOtek + DUtek.

It should be taken into account that the composition of the elements that generate revenue is determined by the Tax Code and the rules for determining the taxable base.

Calculation of amounts when deducting in equal shares

If the parties have provided for an annual payment, the calculation of lease payments is as follows:

LPg=OP / T, where:

• LPG - the amount of the contribution per year.
• OP - total payments.
• T is the duration of the agreement.

If the parties have established quarterly payments, the formula used to perform the calculation is:

LPK=OP / T / 4

The calculation of the amount of lease payments per month is as follows:

LM=OP / T / 12

Effective rate

It represents the real price of the leasing project. The effective rate is formed from the costs to be incurred by the lessee. Consider an example. Initial data:

• A citizen decided to buy an expensive car for 2.8 million rubles.
• The buyer has only 280 thousand rubles, which is 10% of the advance.
• The contract is for 10 years.
• Monthly you need to pay 100,000 rubles.
• The appreciation rate is 9.52%.
• Total payout RUB 3.6 million
• Repayment is carried out in an annuity way.

After making the first installment, the appreciation rate is applied to the remaining amount: 2.8 million - 280 thousand=2.52 million. This amount is a real loan taken from a leasing company.

It is better to calculate lease payments in Excel. You can use the following calculation model:

Efficient rate(months of rent; -amount of payment per month (the sign "-" must be put in front of the indicator without fail); total debt).

Values are entered into the formula fields:

Effective rate (36; -100,000; 2,520,000)

The result will be 2.07% per month. and 24.85% per annum.

Accrual of the amount under the operating lease agreement

The initial data is as follows:

• The price of the object is 72 million rubles.
• Contract period - 2 years
• Depreciation rate - 10%/year
• Loan rate - 50%/year.
• Commission - 12%/year.
• The amount of payment for additional services is 4 million rubles. (including: consulting services for the operation of the facility - 1.5 million rubles, travel expenses - 500 thousand rubles, employee training - 2 million rubles).
• Amounts are paid in equal installments on the first day of the first month of each quarter.
• VAT - 20%.

Average annual value of an object (in million rubles)

Years	St-object at the beginning of the year	Depreciation charges	Object value by the end of the year	Average annual property price
1	72	7, 2	64, 8	68, 4
2	64, 8		57, 6	61, 2

Determine the total amount by year (in million rubles).

1 year:

• PC=50 x 68, 4 / 100=34, 2.
• AO=10 x 72, 0 / 100=7, 2.
• SW=12 x 68, 4 / 100=8, 208.
• B=2, 0 + 34, 2 + 7, 2 + 8, 208=51, 608.
• DU=4 / 2=2.
• VAT=20 x 51, 608 /100=10, 3216.
• OP=2, 0 + 7, 2 + 10, 3216 + 34, 2 + 8, 208=61, 9296.

Year 2:

• CV=12 x 61, 2 / 100=7, 344.
• PC=50 x 61, 2 / 100=30, 6.
• AO=10 x 72, 0 / 100=7, 2.
• DU=4 /2=2.
• B=2, 0 + 7, 2 + 30, 6 + 7, 344=47, 144.
• VAT=20 x 47, 144 / 100=9, 4288.
• OP=9, 4288 + 7, 344 + 7, 2 + 30, 6 + 2, 0=56, 6328.

Total value:

56, 6328 + 61, 9296=118, 5624

Contributions - 14, 8203:

118, 5624 / 2 / 4

Determination of amounts under a finance lease with full depreciation

Initial data:

• The price of the object is 160 million rubles.
• The agreement is issued for 10 years.
• Depreciation rate - 10% per annum.
• Loan rate - 40% per year.
• Commission - 10% per annum.
• Credit funds - 160 million rubles.
• Additional services – RUB 9.6 million
• Contributions are deducted annually from the first year in equal installments.
• VAT - 20%.

Average annual value of an object (million rubles)

Year	The value of the object at the beginning of the year	Depreciation charges	The value of the object at the end of the year	Average annual price
1	160	16	144	151
2	144		128	136
3	128		112	120
4	112		96	104
5	96		80	88
6	80		64	72
7	64		48	56
8	48		32	40
9	32		16	24
10	16		0	8

Determine the total amount in million rubles.

1 year:

• AO=10 x 160 / 100=16.
• DN=9, 6 / 10=0, 96.
• PC=40 x 152 /100=60, 8.
• CV=10 x 152 / 100=15, 2.
• B=15, 2 + 0, 96 + 16 + 60, 8=92, 96.
• VAT=20 x 92, 96 / 100=18, 592.
• OP=16 + 18, 592 + 60, 8 + 0, 96 + 15, 2=111, 552.

Year 2:

• DN=9, 6 / 10=0, 96.
• AO=10 x 160 / 100=16, 0.
• CV=10 x 136 / 100=13, 6.
• PC=40 x 136 / 100=54, 4.
• B=13, 6 + 0, 96 + 16 + 54, 4=84, 96.
• VAT=20 x 84, 96 / 100=16, 992.
• LM=54, 4 + 16, 992 + 16 + 0, 96 + 13, 6=101, 952.

Calculations for 3-10 years are carried out in a similar way. As a result, the amount of contributions (in million rubles) will be - 68, 352 (683, 52 / 10).

Economic feasibility of the deal

The purchase of fixed assets under a leasing agreement allows the company to reduce the tax burden. Thus, payments reduce the income tax base, since they are recognized as expenses. Accelerated depreciation using a factor of 3 makes it possible to reduce the deduction base for property and further reduce it for income tax.

With proper planning of VAT flows under a leasing agreement, in some cases it allows you to get additional benefits.

Separately, it is worth considering a leaseback, in which the lessee is also the seller of the object. An enterprise, in other words, leases property that originally belonged to it. When renting back, 2 agreements are concluded: 1 - on the sale and purchase, 2 - on the transfer of the object to leasing.

This procedure does not include changes in the production process. Returnable leasing is used to cover the shortage of working capital of an enterprise that receives money at the same time for "sold" property. Experts compare such a deal with the provision of a secured loan. But with a leaseback, the costs under the contract are lower than in a bank.

Extra

In domestic practice, it is customary to determine the rate of appreciation in the contract. As a rule, it is considered as an annual %. The rate is calculated as the difference between the total amount of payments and the cost of the object, reduced to the annual rate, taking into account the term of the contract.

Evaluation of the effectiveness of leasing operations can be carried out in the course of analyzing the structure of payments and economic results. To do this, the payment is decomposed into components:

LP=principal debt + (% on loan + property tax + additional expenses) x 1, 18 (VAT).

The real cost of the company's resources is reduced by the savings resulting from the use of the leasing scheme. However, it should be taken into account that at the end of the lease, the company does not deduct property tax, since the asset is transferred at zero value.

In addition, when buying an OS with its own or credit funds, the company deducts VAT from the price under the sales contract. When leasing, tax is charged on the total amount of payments.

As the calculations show, the leasing model for acquiring property is much more profitable than lending in the usual way through a banking structure. However, it should be borne in mind that its use is limited to the amount of the transaction. The higher it is, the greater the economic benefit.