Leasing

 

The financial crisis has undoubtedly made a detrimental effect on the domestic market of leasing services. That is why there has arisen necessity to take urgent and efficient measures to minimize losses and back up leasing companies and along with them       more than a hundred of thousands of Russian      lessees, equipment and vehicle producers, i.e. participants of large-scale and small investment projects    that promote home economy development.    Addressing the Russian Prime Minister in 2008   at the international leasing conference   in Barcelona (October 30-31) the North-West Leasing Association underscored          (November 19) that it is expedient to:

_ grant the right to leasing companies and banks so that they receive loans    to support liquidity and realize new projects. It will   help regulate     reasonable use of government funds during the crisis. According to the report of the “Vremya” (“Time”) programme of Pervy Kanal (the First TV channel) released on December, 27, out of one and a half trillion rubles granted by the government to Russian banks to maintain their current liquidity and economy crediting the bulk went to clear debts of the earlier received foreign loans and the other part was used to acquire fast growing currency and only 80 mln rubles, i.e. 2% of the total sum of government support reached the real economic sector;

_ stipulate the addressed use of loans granted by banks, obligatorily indicating a certain amount that must be directed at realization of investment, including leasing,     projects. Better late than never: in two months they relized that state- allotted funds need particular monitoring and strict supervision and they made a decision to assign the Central Bank of Russia representatives    to bring under control rational allocation and spending monetary funds;

_ declare a moratorium on a unilateral raise of interest rates concerning already signed credit agreements. The thing is that a number of leasing companies faced requirements of banks to change interest rates of agreements in force. At the October conference in Barcelona representatives of German companies declared such practice outrageous saying it was inadmissible in their country. But in Russia it is becoming a custom of business intercourse. As offset of credit debts is exercised out of leasing payments,    lessors are forced to recalculate amounts for payment on leasing agreements. Lessees were offered to complete deals ahead of schedule;

_ provide putting into operation the mechanism of accelerated amortization with coefficient 3 or less    at the linear accrual concept of depreciation      for the first three depreciation groups from January, 1, 2010. It will help comply with   principles of the Civil and Tax Codes on two paramount foundations: the law has no retroactive effect; the introduced changes must not deteriorate the position of taxpayers. It is necessary to lift restrictions on accelerated amortization calculated via a nonlinear method for the 8-10 groups;

_ legally fix the right of leasing companies in the Tax code to use a 10% investment benefit granted to manufacturing companies. Though some lessors managed to stand up for the right to be granted this benefit in courts and tax bodies, currently the right to apply it, according to the Ministry of Finance, must be granted in case the major funds are acquired by a leasing company and leased   without the right to redemption;

_ put expenses of leasing companies’ financial risks insurance on the list of insurance expenditures that refer to an insurer’s prime cost      and are stipulated in Article     263 of the Tax code.    It implies: a lessee’s complete insolvency (bankruptcy) risk insurance; insurance of risks due to a lessee’s non-observance of contractual obligations   on leasing payments;   insurance of a lessee’s income (profit) losses due to forced production downtime caused by insured property damage or ruin. In autumn 2008 lessees’ defaults became frequent.   Before that   the ratio of indebtedness under the agreements stipulating seizure of a default lessee’s property             to the value of the total portfolio of the leasing company   equaled 0.3-0.5%. Now this index has increased.   In order to speed hearings of disputes between leasing companies and lessees who default on payments, on the RF Chamber of Commerce and Industry leasing section’s initiative from October, 30, 2008 the RF FederalService of judicial police officers (or the RF Federal Bailiff Service)     made a decision to consider as lawful out-of-court penalty on the ground of notary    executive caption. Some home lessors, for example ÊÀÌÀz-Leasing, turned to the bankruptcy legislation in their interrelations with defaulters that allows   initiating the bankruptcy procedure if two non-payments running took place and the indebtedness amounts to     100 thousand rubles. The leasing   company supposes it will help make a lessee pay in such a way if there are funds on a lessee’s account.      I believe the suggested measures will stimulate investment activity in our country because    a great number of enterprises and organizations are interested in the leasing companies’ activity. The Rosleasing Association announced on December, 8    2008 that it will stand for the interests of leasing companies in the crisis conditions and that there is necessity in recommendations that would be summarized and sent to the Russian government in a week after their receipt. Indeed, on December, 23 there was an announcement a the non-government organization website that according to the government resolution initiated by the association leader to stimulate native producers’ commercial vehicles sales, credit lines for 43 mln rubles will be opened for leasing companies          a term under three years    at an interest rate not exceeding the refinancing rate. In the first quarter leasing companies will be granted loans for 7 bln rubles. Along with that, unfortunately,   there are no leasing companies on the list of    295 enterprises and organizations to receive top-priority government support in the form of interest rate subsidies, tax debt restructuring, granting tax   credits, the RF Central bank pawnless credits     on a security of regions for one year.     But even if   the Rosleasing association report is accurate, the above indicated sums of future credit lines   account for about 7% of total Russian leasing financing volume     in 2007.    I suppose this backup will apply to only one or several lessors.     The lot of the rest is to share the joy of those colleagues who have received state support.

 

 

What statistics paradoxes did we have to face both before the crisis and when    its activity was in full swing? For example, there were cases when, according to the Rosleasing association, some companies’ half-year volume indices   exceeded values for the whole past year.       Another nonsense belongs to IFC leasing development Group when assessments of the Russian leasing market were made on the basis of incommensurable showing. For example, in some reports a sum of leasing deals was mentioned, in others      – the cost of leased equipment, but a single dynamic line was built. The indicator of “interest rate growth of equipment leased this year” does not take into account the value of interest and other constituents of a lessee’s investment outlay. As a result lease investment volumes were almost 1.5 times underrated. Such computations certainly aroused great doubt    concerning an objective estimation of the lease service market situation and the reliability of its development forecast.   Expert-RA Agency in estimating lease business volumes in the country and leasing companies has been applying the following method for several years: the value of advance payments was excluded from the original tenement cost      and the lease interest was left out of account.      The Rosleasing association made up a uniform chronological line of lease volume values   in Russia from 1998 tî 2007 that includes absolutely incompatible activities borrowed from     IFC, Expert-RÀ rating agency, and its own data which encompass a little over a half of the All-Russian leasing value.       There were incidents when leasing companies   were ranged by Expert-RÀ agency    on a cost of new concluded leasing agreements including VAT.     But still data on some companies, even large ones such as Raffeisen Leasing, “ElementLeasing, Ltd.”,   were indicated net of value-added tax. As for Business Alliance   company that started its activity in the reporting period, it said: new business volume   in the course of year – 23,190 mln rub.; received leasing payments in the course of year – 196 mln rub.; the current portfolio at the end of year – 23,190 mln rub. This information is altogether absurd. In 2007 four companies were lessors on international export leasing transactions for $2,071.9 mln, i.e. carried out investments to the CIS and foreign countries. In respect to lease statistics methods for these companies and European showing, transactions of that kind were no doubt a new business last year, but this sum needs to be subtracted from total volumes when estimating Russian market. This is what we did to carry out the making-up on international leasing and define the resulting totals.              Besides, sales transactions were carried out in large scales. So, for VTB-Leasing the purchase of a portfolio   from another large leasing company for $607 mln is a new business and the buyer's merit is that    it has managed to attract the necessary financing for the project.   Correspondingly, this sum is taken into account in the total results of VTB-Leasing. But as for the Russian market estimation validity  in general and to avoid a double account the indicated sum must be subtracted as it was taken into consideration in the previous year indices of the leasing company that sold its portfolio. The distinctive feature of the crisis period is a situation when in most leasing companies the absolute increase of new business volumes exceeded the increase of leasing agreement portfolios’ cost. Moreover, the increase was not in per cent but multiple times. The following factors can be reasons to form proportions of this kind:

1. shorter terms of new leasing agreements concluded in the current year compared to the previously signed agreements;

2. increased advance capacity of new leasing agreements;

3. sales of leasing contracts in force to other companies;

4.  early termination  of agreements    on two main reasons: the lessees' consent  and their advance payment of all indebtness to a leasing company; cancellation of an agreement by a lessor due to defaulters'  non-payment and seizure of property. From the point of view of logics, paradoxical circumstances arose in some leasing companies   in the second half year of 2008. Some illogical to our mind situations are meant which were reflected in the statistics on the second and third quarter results provided   by Expert-RA:

_ the cost of new concluded leasing agreements over three quarters (the calculation   has been made with the progressive total  since the beginning of the year) is lower than over two quarters;

_ the leasing agreements' portfolio over the  period under reportis increasing while the cost of new leasing agreements  has not changed. Òheoretically it is possible if there is a  reappraisal of agreements in force   towards augmentation. But the lessee’ consent  is necessary for that. The increase of interest rates by banks and leasing companies on the earlier concluded credit and leasing agreements can finally result in the lessees' indebtness growth, i.e. the leasing portfolio growth;

_ the portfolio of agreements is increasing in greater absolute values that the cost increase of new leasing agreements.   It should noted that many leasing companies have in their portfolios the so-called  “bad  accounts receivable”. Only some lessors when informing about their activity indices said that they excluded  obligations of bankrupt lessees or those who arouse doubts in terms of leasing payments from the portfolio. We have counted eleven examples with leasing companies where the situation is illogical in the same way out of the first hundred companies whose information was published. I consider it necessary to underscore that such leasing companies' share accounts for 16 % of the investigated companies of the first hundred of the published ranking. Their activity results under these circumstances arouse great doubts as they contain paradox statistic facts. I admit that in separate cases specialists of lessor companies preparing statistics could give inaccurate data. But there are analysts who generalize received materials and consider themselves experts and it is their duty to pay attention to   errors and ask to correct them but not publish them, thus misleading their readers. But together with that there is a certain benefit from the information    collected by Rosleasing association, IFC leasing group, Expert-RA. These data help   show the accurate picture and more objectively estimate separate market segments while the detected errors help take measures to eliminate them in the following analytical works.

 

According to updates introduced in the Tax Code by the Federal law dated June, 22 2008 ¹ 158-FL it is stipulated that from January, 1, 2009 accelerated depreciation calculated with a linear method is canceled for the first three amortization groups. it means from now on the mechanism of accelerated depreciation will not be applied in reference to certain construction equipment and machinery leasing, particularly certain kinds of pumps, soil compaction devices, used in construction pluggers, cable-laying machines, portable and mobile boom cranes with 0.5 to 1.0 t load capacity, construction elevating platforms, elevators, loading/unloading equipment. Problems arise with computers widely wised in various economic branches including construction. They had referred to group 4 before, but from 2008 they were shifted to group 3. If computers   remained in the fourth group, from 2009 the depreciation term of this property kind would make up 21 months together with the acceleration coefficient.    But now the acceleration term is 37 months. The method of calculating amortization through a non-linear method has altered drastically. So, before 2009  the calculation of accrued for one month depreciation was defined as a sum of depreciation calculated for a month, now it is defined as the product of    property cost and depreciation norm set for the given object. But for the fourth-seventh depreciation groups   it was allowed to apply acceleration factor not higher than three. The new  regulation in force since January, 1, 2009   (Article 257 of the Tax code), stipulates that   residual cost of depreciable property objects   whose depreciation is calculated by a non-linear method follows the formula:

Clause 5 of Article 2592 of the Tax code fixes monthly depreciation rates   in order to apply a non-linear method for each group. In particular, group four – 3.8; group five – 2.7; group six – 1.8; group seven – 1.3 (the majority of construction and road-building equipment is concentrated in these groups and accelerated depreciation is applied to them with a coefficient not higher than 3). Let us compare the extent to which the new procedure of linear   depreciation  methods  are  more preferable or, vice versa, less profitable for enterprises in comparison with the former one.

Let us take an amount of 10,000 rubles as the first-cost of construction equipment referring to the fifth group to conduct a comparative analysis.    Considering the given circumstances and the accelerated depreciation coefficient that equals three, let us estimate the residual cost values for construction equipment   and wear and tear after each month of the property useful life. According to the data in the table above,  the 80% wear level was reached using the "old" method over 22 months and when the new method was applied it was 19 months. Thus, the new method is more beneficial in this part as it helps amortize sooner for a construction company expenses and in that way reduce the taxable base by a profit. It is necessary to elucidate, earlier it was fixed that in a month following the one when the residual cost of a depreciable property object reached 20% of the object’s first-cost, amortization was calculated in the following order: the depreciable property residual cost was fixed as its cost basis   for further calculations    and then the sum of amortization accrued for one month  was calculated by dividing the given object cost basics   by the number of months  left before the object’s useful life termination.     Thus, when a nonlinear property amortization method reached the residual cost value of 20%, it transformed into  a linear depreciation method. The new scheme stipulates  (Clause 1  Article 259 of the Tax code) that “a taxpayer shall have the right to   switch from the nonlinear to the linear depreciation method not more often than once in five years”.     Employees of construction companies’ financial and accounting services   will have to define when it is more expedient to   change a depreciation method    on a given property.  It is necessary to  follow the rule: it is more beneficial to apply the method  at which monthly  retirement for expenditures is the greatest.    According to the table (graphs 3 è 4), the nonlinear method is more preferable that the linear method    considering the    accelerated depreciation rate equaling three   only in the first  nine months.    Then the linear method gains advantage.    A monthly retirement rate with  calculations on formula (1)  evidences   that this indicator will equal    353 thousand rubles, or 3.53%. To estimate how many   months are left to  amortize we can make a simple calculation: 4297/353 = 13 months.

But the Tax code gives no special instructions as to the period duration of total property depreciation  if a nonlinear method was applied at first.   It is not ruled out   that   rating authorities    can demand following two criteria after  the depreciation method change: depreciation rate characteristic of a linear method, i.e. 3.53% and the total period of the key enabler useful life, i.e. 29 months. In that case it is rational to  change the depreciation method after the expiry of the 25 month, and   to use the linear method in the four following months.   

Thus, the calculations showed that the new  methods of    residual cost    to  evaluate amortization  are more preferable than the one used    according to the  previous edition of chapter 25 of the Tax code. It will   result in the taxable base reduction on profit.  But the calculation algorithm itself  did not seem so simple and clear to us.   There is need in its modeling.   This circumstance and  likelihood that rate authorities will establish unpredictable requirements can urge economy subjects including construction enterprises to   use the linear amortization method in a greater degree.