Leasing as a Practical Instrument for Financial Design in Russia

Journal of Environmental Treatment Techniques

2019, Special Issue on Environment, Management and Economy, Pages: 1104-1107

J. Environ. Treat. Tech.

ISSN: 2309-1185

Journal web link: http://www.jett.dormaj.com

Leasing as a Practical Instrument for Financial

Design in Russia

Alla I. Podgornaya*, Timur S. Abitov

Institute of Management, Economics and Finance, Kazan Federal University, Kazan, 420008, Russia

Received: 13/09/2019

Accepted: 22/11/2019

Published: 20/12/2019

Abstract

The solution to the urgent problem of financing a business, at first glance, is to attract a bank loan. However, at present, the

receipt of borrowed funds from banks by companies in Russia is limited by a number of reasonable reasons: the distrust of banks in

businesses due to their nontransparency, instability of the proceeds, lack of collateral. As a result, all this leads to higher interest

rates. In this light, the use of leasing acquires additional benefits, among its main advantages. The paper explores relevant scientific

discussions regarding the use of leasing as an instrument for financing fixed assets modernization projects in Russia. The authors

investigated the problem of assessing the effective implementation of the project for the modernization of fixed assets using leasing

instruments. The classification of existing methods for assessing the effectiveness of leasing transactions is developed. The main

advantages of leasing are determined. The factors affecting the efficiency of projects on modernization of fixed assets at an enterprise

using leasing instruments are identified. A methodology for assessing a leasing transaction based on economic indicator of added

value, and an author's scheme for the use of leasing in financial design are proposed. The purpose of the study is to identify key

features of leasing as a financial instrument in Russia.

Keywords: Leasing, Modernization of fixed assets, Enterprise, Financial design, Assessment of a leasing transaction, WACC,

Weighted Average Cost of Capital

calculating leasing payments based on determining the costs

Introduction

of a leasing company. For example, the techniques presented

by Ladnova E.S., Kasimov A.V., and others (1) Another

group of economists compares leasing with alternative

financing methods (in particular, with lending) to analyse the

effectiveness of leasing transactions. For example, the

methods of Ivashkin V.A., and Gazman V.D. (2). In turn,

leasing can be compared with alternative investment methods

in accordance by direct comparison, by calculating the

adjusted current value, by calculating the net present value of

the lease at the adjusted discount rate. Some methods based

on the lessor’s costing suggest the use of correction factors,

and others – by discounting.

The problem of relevant use of leasing in Russian

companies is justified, first of all, by its effectiveness,

remains acute and requires a comprehensive review. In

developing methods for determining the effectiveness of

leasing transactions, it is important to understand the goals of

the parties interacting in the process of concluding a contract.

For a lessor, this is, first of all, a type of entrepreneurial

activity, and for a lessee, this is a capital-saving form of

attracting investments. In the current economic realities, the

feasibility and necessity of leasing activities, like any other

economic activity, must ultimately be justified on the basis of

one of the most important categories - the effectiveness of its

implementation. In the study of the scientific literature it was

revealed that there are a number of foreign and domestic

procedures for evaluation of the effectiveness level for

leasing schemes, including for assessment of the effective use

of leasing in comparison with other financial instruments.

Based on the analysis of published leasing valuation

techniques, two groups can be distinguished. The first group

of economists assess efficiency on the basis of methods for

The purpose of this paper is to identify the key features of

leasing as a financial instrument in Russia.

2 Methods

When conducting the research of leasing as a toolkit,

statistical methods, methods of strategic management,

economic analysis of organizations, as well as general

scientific methods such as analysis and synthesis,

systematic approach to studying the external and internal

environment of an organization, socio-economic phenomena

and processes were used.

Corresponding Author: Alla I. Podgornaya, Kazan Federal

University, Kazan, 420008, Russia.

Email: oreola77@mail.ru.

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Journal of Environmental Treatment Techniques

2019, Special Issue on Environment, Management and Economy, Pages: 1104-1107

Table 1: Methods for assessing the effectiveness of leasing transactions

Authors / Representatives

Methodology

Methods based on a comparison of leasing and

credit.

Methods that determine the effectiveness of leasing

on the basis of discounting cash flows.

Methods based on a comparison of leasing and

various purchase options.

I..B. Kiselev, V.A. Shtavrin, V. Maslenikov

V.D. Gazman, I.P. Kamenev

I. I. Lukasevich, N.A. Grabar

Methods that determine the effectiveness of

leasing, regardless of other sources of financing

A. Kadushkin and N. Mikhailova, A.V. Kasimov, I.A. Form

The methodology of the non-profit fund for enterprise restructuring and the development of

financial institutions.

Methods described in foreign literature

Methodology used by leasing participants in the

US market (8)

S. Myers, D. Dill, and A. Batista, “Equivalent Loan Method.” E. Reed, R. Cotter, E. Gill, R.

Smith in the book “Commercial Banks” proposed a model that is separately applied to the

lessor and lessee.

E. Durik, C. Jenson, E. Laverin. The method of evaluating the effectiveness presented in the

book "Leasing and a new approach to capital structure"

to a bank and, if necessary, take a loan. As history shows, at

Results and Discussion

the stage of its development, interest on loans reached 210%

per annum (at such a rate the Central Bank of the Russian

Federation issued loans to commercial banks from October

As a result of the study with the use of data on the

implementation of projects for the modernization of fixed

assets belonging to enterprises in Russia using leasing

instruments, a classification of existing methods for assessing

the effectiveness of leasing transactions is compiled (Table

15, 1993 - April 28, 1994) and were issued at extremely

disadvantageous conditions, in addition to a large interest

percentage (6). This was largely due to an imperfect credit

system, as well as the instability of the economic and

political situation in the country.

1). Thus, to date, there is no clearly applicable methodology

for assessing the effectiveness of leasing projects. Including,

at the moment, there are no effectiveness analysis techniques

focused on accounting for the effect of leasing on company

value. The main advantages of leasing are determined.

Firstly, an entrepreneur can start their own business with only

a fraction (about one third of the funds) needed to purchase

premises and equipment, and secondly, not money is

provided, control of which is not always possible, but directly

the means of production necessary to update and expand the

production apparatus. Also, not all companies can implement

any projects at their own expense (3). Therefore, companies

evaluate in detail the advantages and disadvantages of

various types of investments. Credit and leasing have much

Due to the fact that the loan is repaid from the net profit

of an enterprise, a significant number of them go to various

abuses in order to reduce the amount of profit in order to

avoid progressive taxes. Sometimes some banks cooperate

with companies that violate tax laws (7). When issuing a

loan, a credit institution attaches particular importance to the

liquidity of property acting as collateral. A bank may refuse

to give a loan to enterprises that implement projects equal to

or greater than the liquid assets value on the balance sheet of

the enterprise. The reason for the refusal to grant a loan to the

enterprises implementing investment projects may be the

presence of the outstanding loan. Since an increase in the

share of borrowed funds, on the one hand, indicates an

increase in the financial instability of the enterprise and an

increase in its financial risks, and on the other hand, the

factor of the successful functioning of the enterprise indicates

the trust of creditors and ensures an increase in the

profitability of own funds.

Due to the formation of additional assets, an enterprise

using borrowed capital has a higher financial potential for its

development and the possibility of increasing financial

profitability. However, as the share of borrowed funds in the

total amount of capital used increases, it generates financial

risk and the threat of bankruptcy (8, 17, 18, 19).

In contrast to loan, there is a very effective alternative to

acquiring fixed assets by an enterprise - long-term (financial)

lease or leasing. Unlike ordinary leases, financial leases

in common; however, it is necessary to conduct

comparative analysis to highlight significant features.

Credit has its own distinctive features, which are set out

in its definition. Today, the Central Bank of the Russian

Federation pays special attention to regulating the activities

of credit organizations, regulating it with strict instructions.

Before comparing the loan and leasing directly, it is

necessary first to mention what credit and leasing are, and

secondly, what are their main features.

So, S.S. Artemyeva gives the following definition of

loan: “A loan is an economic category expressing the

relationship that develops between a lender and a borrower

regarding the transfer of funds for temporary use with an

obligation to repay within a certain period of time” (4).

According to the Civil Code of the Russian Federation, a

loan is understood as an agreement on the basis of which a

bank or other credit institution (lender) is obliged to provide

funds (credit) to the borrower in the amount and on the terms

stipulated by the agreement, and the borrower undertakes to

return the received amount and pay interest on it (5).

(

leasing) are a form of borrowed financing in which loans are

provided not with cash, but with property.

A methodology for assessing a leasing transaction based

on an indicator of economic value added has been developed.

The cost of capital concept is one of the key in financial

management. There is a priority for the economic interests of

business owners, which, in turn, has led to a change in the

The lending market in Russia has come a long way in its

development. Today it is considered absolutely normal: to go

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Journal of Environmental Treatment Techniques

2019, Special Issue on Environment, Management and Economy, Pages: 1104-1107

goal-setting process in elaborating a development strategy for

a company. The new process is aimed at maximizing the

corporate value and wealth of business owners, as opposed to

the traditional process of setting goals, focused on

maximizing profits (9, 20, 21).

indicator of economic added value should include the

following sections:

1. Methodology for determining WACC for a leasing

company.

1.1. The procedure for determining the price of equity.

1.2. The procedure for determining the price of borrowed

capital.

2. Methodology for calculating NOPAT as to the leasing

company.

3. Calculation of invested capital of a leasing company.

4. The procedure for assessing the indicator of economic

value added.

The development of a new approach to strategic goal

setting has led to the formation at the end of the last century

of the concept VBM (Value-Based Management). According

to G.I. Khotinsky, the emergence of the VBM-concept was

the result of the strengthening the strategic emphasis in

corporate management, for which current profit is not so

much important as the profit of future periods and the source

of its generation. Thus, the approach underlying this concept

orients the company towards an increase in its value (10). In

the 80s - 90s, a number of value added management systems

appeared in the modern management of organizations.

The main ones include EVA (Economic Value Added),

MVA (Market Value Added management), SVA

(

Shareholder Value Added - increase of equity capital), CVA

Cash Value Added - cash income management, CFROI

Cash Flow Return on Investment - adjusted cash inflows and

outflows), and others. Of all the existing indicators designed

to assess the value creation process, economic value added

(

EVA) is one of the most common. In our opinion, it is also

Figure 1: The use of leasing in financial design

suitable for evaluating leasing transactions. According to the

authors, a significant advantage of economic added value is

that in its calculation, it takes into account the cost of equity

of the company and the costs associated with borrowing

funds.

The main idea of economic added value is as follows:

investor actions should bring returns that would compensate

for the risk he/she has taken reflected in the cost of capital

employed. The traditional approach to the calculation of

economic value added is expressed in formula 1.

Summary

Analysing and comparing the methods of domestic and

foreign scientists, we can draw the following conclusions:

. Foreign methods are based for the most part on

calculating the cost of leasing and comparing the results with

alternative options for financing the project. Domestic

methods consider leasing exclusively as a form of lease.

. Assessing the effectiveness of leasing is an important

step in choosing a method of financing a project; however, in

most domestic methods, the economic effect of leasing

operations is not evaluated, and part of the methods is

focused exclusively on the interests of a lessor.

EVA = NOPAT - WACC * CE []

(1)

Where NOPAT (Net Operating Profit after Tax) is the

post-tax operating profit before deducting accrued interest on

loans and borrowings received. When calculating it, an

account is made of all incomes and expenses of the company

included in the income statement, including income tax. To

determine NOPAT to the net profit of the reporting period, it

is necessary to add interest to payment;

CE (Capital Employed) - invested capital;

WACC (Weighted Average Cost of Capital) in %, per

year.

In its pure form, the economic value added concept is

rather complicated in its application due to the need to make

a large number of adjustments. And accordingly, the

development of the most acceptable way to determine the

economic added value for Russian companies using leasing is

one of the current tasks of the development of economic

science in our country.

To build an effective methodology of financial design

based on an indicator of economic added value, it is

necessary to develop a methodology for determining this

indicator for a leasing company. In general terms, the

methodology for assessing a leasing transaction based on an

3. Often in domestic methods there is no justification for

the selection of criteria. Moreover, the criteria must satisfy

three basic rules: to be objective, adequate and neutral.

4. Most foreign methods are based not on considering

leasing as a form of rental, but on calculating the cost of

leasing for the lessor and lessee and on comparing various

financing options.

5. Most existing methods are based on comparing leasing

with loan. However, the lessee often does not have a choice

between credit and leasing (especially for small businesses),

but only between the most acceptable leasing conditions.

6. The methods proposed by modern science for the most

part do not provide for a clear division of efficiency into two

areas: from the position of investor and from the position of a

business owner (11, 12 ,22). From the investor's point of

view, the analysis is carried out in the conditions of uncertain

investment in various options of financial assets; as a result,

the most profitable project is selected. From the perspective

of a business owner, the analysis is carried out in certain

conditions with specific objectives of the project.

7. The analysis of the published methods for assessing

the effectiveness of leasing showed the absence of a unified

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Journal of Environmental Treatment Techniques

2019, Special Issue on Environment, Management and Economy, Pages: 1104-1107

methodological framework for calculations, generally

accepted methods for determining economic efficiency. So,

the approach based on taking into account the interests of a

leasing company is mainly used in the basis of published

methodological developments, which limits the range of

issues to be resolved. In addition, the ambiguity of the

calculation results when using various methods of assessing

the effectiveness of leasing makes it difficult for the lessee to

make a final decision. Finally, a high degree of uncertainty in

the assessment of leasing is inherent in techniques that offer

an assessment of effectiveness without taking into account

the influence of changes in external factors.

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Conclusions

Today, for the full functioning of an enterprise, own

funds are not enough, since the debt repayment periods, as a

rule, differ from the receipt of funds from sales, there is also

an untimely payment and force majeure circumstances are

not excluded. In such situations, the company is forced to

turn to external sources of financing to obtain funds, and

therefore is forced to choose one or another side of borrowing

on the side (12, 13). So, for example, the management of

some enterprises that do not want to give control (even

partially) to an outside investor or its representatives, thus

exclude the attraction of an external source of financing (14,

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Management. 2018;3(3):23.

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Undergraduate Mathematics: Axiological Aspects. International

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373.

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Tarbaev VA. Evaluate the use of farmlands encumbered with

electric grid facilities: damage factors and solution approaches.

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A, Musharraf SG. Determination of Important Phenolic

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Germinated and Fermented Conditions by High Performance

Liquid Chromatography. Progress in Chemical and Biochemical

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15, 16). For these reasons, in recent years, leasing has

become increasingly popular and widespread, which, due to

its inherent capabilities, can become a motive for the

technical re-equipment of enterprises, the attractiveness of

benefits will contribute to the further development of leasing.

Acknowledgements

The work is performed according to the Russian

Government Program of Competitive Growth of Kazan

Federal University.

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