The most recent financial crisis had many effects during the last year. Majority of the existing companies, worldwide, were harmfully influenced by it. More important, professions and economies were shocked by the crisis. Romania is no exception from theKeywords: Finacial crisis, financial leasing, evaluate, fair value, cancellation of a leasing contract

PAUNESCU MIRELA

English

Research Papers in Economics

1097 
 
CANCELLATION OF A LEASING CONTRACT – EVALUATING THE ASSET 
REGAINED 
 
Paunescu Mirela  
Academy of Economic Studies, Contabilitate si Informatica de Gestiune/Faculty of Accounting 
and Management Information Systems; Catedra de contabilitate, audit si control de gestiune; 
Mirela.Paunescu@gmail.com, tel. 07.44.33.44.96 
 
The most recent financial crisis had many effects during the last year. Majority of the existing companies, 
worldwide, were harmfully influenced by it. More important, professions and economies were shocked by 
the crisis. Romania is no exception from the rule. Our article focuses on Romanian financial leasing 
companies,  in  a  pretty  difficult  period,  and  its  subject  is  how  lessors  are  supposed  to  evaluate  and 
recognize the asset regained when the financial leasing contract is cancel due to lessee‟ s inability to pay 
its monthly invoices. 
 
Keywords: Finacial crisis, financial leasing, evaluate, fair value, cancellation of a leasing contract 
 
M41 F30 
 
1. Introduction 
In Romania in the last quarter of 2008, the leasing market decreased by almost three times as 
compared to the second or third trimester of 2008 
512.  
 
 
 
And this reverse trend comes after 4 -5 years of increasing annually by almost 50% (medium 
yearly increase). But in 2009 numbers may look even worse than in assumptions. This is because 
the Romanian leasing market is structured as follows: 71% vehicles, 7% real estate and 22% 
equipments
513. 
                                                       
512 ―Romanian leasing market for 2008‖, ALB Romania , www.alb-leasing.ro; 
513 ―Romanian leasing market for 2008‖, ALB Romania , www.alb-leasing.ro; 1098 
 
 
 
Due to financial crisis, many common people that could have easily accessed a finance leasing in 
2006-2008 have nowadays problems with paying monthly payments for their cars (considered 
luxury good more than necessity goods). During the crisis the demand of luxury goods is the first 
that  decreases.  Also  important,  depreciation  of  Romanian  currency  led  to  higher  monthly 
payment for leasing contract.  
Under these conditions, most of the Romanian financial leasing companies are in the position to 
cancel their contracts (usually after three unpaid invoices) and to recover the goods. Nowadays, 
the number of recovered good is increased by 4-5 times then the last years. The situation is not 
easy  for  Romanian  leasing  companies  due  to  the  tendency  of  the  cars‘  value  to  depreciate 
significantly (especially for second hand cars), to the decreased demand on the market for cars, to 
the higher cost with storage and current repairing of such used cars and due to the difficulty to 
measure the value of the goods returned and the value of the loss. 
For the rest of the article we will stay focus on measuring the values of returned goods from 
canceled financial leasing. 
 
2. Romanian accounting regulation for financial leasing companies (non-banking financial 
institutions) 
For Romanian leasing companies, regulated since 2006 by the Romanian National  Bank, the 
accounting standards, issued by BNR are fully applicable starting with 2008. In December 2008 
new accounting regulation were issued by BNR and replaced the old ones. According to order 13 
issued  by  BNR  (  Romanian  National  Bank),  non-banking  financial institutions  use  the  rules 
stated by the above mention order for measuring and evaluating assets. According to Order 13 / 
2008, paragraph 83, assets are measured when first recognized, at one of the following values: 
  1. Acquisition cost in case they were bought; 
  2. Production cost in case they produced / obtained by the company; 
  3. Fair value if they were obtained for free ( as a donation). 
First, we must stress the limitation imposed by this paragraph: there is no rule for goods received 
in exchange. In fact, when we talk about cancellation of a leasing contract and returning the 
assets, some financial assets (namely the receivables - net investment in leasing and the current 
debt) are exchanged with another asset, or they are paid using the delivery of another asset, not a 
financial one.  
Also, there are no rules for recognizing or derecognizing financial assets, or for evaluating the 
gain or loss in this situation.  1099 
 
From  those  reasons,  Romanian  financial  leasing  companies  use  a  wide  range  of  solution  to 
measure the value of the asset regained, to classify it, and to derecognize the net investment in 
leasing when the leasing contract is cancelled. 
 
3. International accounting regulation 
Even if IAS 16 Property, plant and equipment 
514 it is not applicable, we can look it up and 
inspire ourselves at least for a little bit. According to IAS 16, paragraph 24, if an item of 
property, plant or equipment was acquired in exchange for a non -monetary asset or assets, or a 
combination of monetary and non-monetary assets, the cost of such an item of property, plant and 
equipment is measured at fair value unless (a) the exchange transaction lacks commercial 
substance or (b) the fair value of neither the asset received nor the asset given up is reliably 
measurable.‖ So, for newly recognized assets in exchange of other assets, the fair value is to be 
used. 
It is very important to stress the fact that in case of a cancellation of a leasing contract and 
returning the assets IAS 16 Property, plant and equipment is not applicable. The reason is that 
the asset that was the object of the contract, when returned, it shouldn‘t be classified as a fixed 
asset in the scope of IAS 16, but as a an inventory, in the scope of IAS 2 Inventory 
515. IAS 16 
defines an item of  property, plant or equipment as being a tangible asset that: 
(a) are held for use in the production or supply of goods or services, for rental to others, or for 
administrative purposes; and 
(b) are expected to be used during more than one period. 
IAS 2 define inventory as being assets: 
(a) held for sale in the ordinary course of business; 
(b) in the process of production for such sale; or 
(c) in the form of materials or supplies to be consumed in the production process or in the 
rendering of services. 
As we can see, for the leasing company the asset returned is not a fixed asset, because it will not 
to be used in the production or supply of goods or services, for rental to others, or for 
administrative purposes, but probably it will be also used for selling under new financial leasing 
contracts (most of the cases). 
In rarely cases when the goods received because of the contracts cancellation are to be used either 
by the company or for operational leasing contracts (namely the leasing company intends to rent 
such assets to new customers) than the goods returned are to be classified as fixed assets, and not 
inventories. 
If we search the answer to our question (how to evaluate the assets received) in IAS 39 Financial 
Instruments: Recognition and Measurement
516, paragraph 26 states that: ―On derecognition of a 
financial asset in its entirety, the difference between: 
(a) the carrying amount and 
(b) the sum of (i) the consideration received (including any new asset obtained less any new 
liability  assumed)  and  (ii)  any  cumulative  gain  or  loss  that  had  been  recognized  in  other 
comprehensive income […] shall be recognized in profit or loss.‖ 
In other words, the difference between the carrying amounts of the net investment in leasing and 
the debt recorded from monthly invoices and the value of the asset recovered from the lessee is to 
be recognize in the profit or loss account as an expense or revenue. The value of the asset 
returned should be the fair value, as no other value is available in this situation ( we should take 
                                                       
514 IAS 16 Property, plant and equipment, IASB, www.iasb.org; 
515 IAS 2 Inventory, IASB, www.iasb.org; 
516 IAS 39 Financial Instruments: Recognition and Measurement, IASB, www.iasb.org; 1100 
 
into consideration that the assets was not recognized in the lessor‘s financial statements and the 
carrying amount of the financial asset is not relevant for the value of the asset returned). 
In some cases, the lessor, even if it comes in the possession of the assets that was formally the 
object of the leasing contract, and even if the fair value of that good exceeds the carrying amount 
of the financial assets, it has a right, according to the contract, to receive from the lessee a price 
for canceling the contract. In this situation, a new financial assets is to be recognize, according to 
IAS 39 Financial Instruments: Recognition and Measurement. In this situation, the new financial 
asset is to be treated as a consideration received in exchange of the old financial assets ( net 
investment in leasing). 
In  case  the  lessor  intends  to  suit  the  customer  for  the  unrecovered  debt  from  the  monthly 
invoices, then that financial asset is not to be unrecognized. Only the difference between the 
carrying amount of the net investment in leasing and the fair value of the regained asset is to be 
recognized in the profit and loss account. 
 
4. Fiscal aspects 
From a fiscal point of view, it is more acceptable to evaluate the asset regained at its fair value 
and to consider it a payment in exchange of the net investment in leasing, and to separately 
recognize the loss from the unrecovered debt from monthly invoices. The reason is that the 
Romanian Fiscal code allow the companies to deduct expenses with losses from customers in the 
same percentage as the previous deductible provision.  
According to BNR orders, if a debt is not paid for more than 90 days, the Romanian leasing 
companies must recognize a 100% provision for that debt, but only for the capital and interest 
portions. Also, when the customers (lessees) were officially declared bankrupt, the lessor may 
deduct 100% from the lost debt and more important may recover VAT from the budget. 
In cases in which the leasing companies evaluate initially the assets regained at the net carrying 
value of the financial assets related to the customers (net investment in leasing and debt form 
current  invoices)  and  afterwards  evaluate  the  fair  value  of  the  asset  (this  represents  a  very 
common method for Romanian leasing companies to evaluate the regained asset) the expense 
recognize with depreciation of the asset is non deductible. Plus, when and if finally the debtor is 
officially declared bankrupt, it is very difficult for the leasing company to adjust in its favor the 
VAT collected in the invoices issued to the lessee. 
 
5. Conclusion 
It is mandatory for Romanian leasing companies to fairly recognize the assets recovered form 
leasing contracts that were cancelled. The correct way to classify such assets is as a current 
assets, meaning inventory, unless the company has the intention to used it in the production or 
supply of goods or services, for rental to others, or for administrative purposes. In this situation 
the correct classification should be as fixed asset. 
The value used for regained assets should be the fair value measured at the date of re-possession. 
If the leasing company doesn‘t derecognize the debt unrecovered ( from invoicing) and finally 
the former lessee is declared bankrupt, VAT may be recovered from the budget and the entire 
expense with the lost debt is deductible. 
Bibliography 
1. IAS 17 Leasing IASB, www.iasb.org; 
2. IAS 16 Property, plant and equipment, IASB, www.iasb.org; 
3. IAS 2 Inventory, IASB, www.iasb.org; 
4. IAS 39 Financial Instruments: Recognition and Measurement, IASB, www.iasb.org; 
5. BNR Order 13 / 2008; 
6. Law 571/2003 Fiscal Code 
7. Decision 44/2004 – Methodological norms for Romanian Fiscal Code   

Decision 44/2004 – Methodological norms for Romanian Fiscal Code

CANCELLATION OF A LEASING CONTRACT a€“ EVALUATING THE ASSET REGAINED

http://steconomice.uoradea.ro/anale/volume/2009/v3-finances-banks-and-accountancy/186.pdf

CANCELLATION OF A LEASING CONTRACT a€“ EVALUATING THE ASSET REGAINED

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