Debt, damage and penalty in the lease agreements: an accounting driven financial calculation

In a lease agreement, when it comes to determine the residual debt at a given date in case of insolvency or continuous arrears (i.e. an early termination, before the maturity of the lease plan), often the contract decides upon the penalties and some lump sum refund for impairment. Accounting purposes require both the lessor and the lessee to calculate separately for the amount of the outstanding debt and the agreed-upon for the impairment and the penalties. In this paper, the authors propose a model for a precise quantification of the residual debt, the damage impairment and the penalty shares based on the contractual and implicit IRRs and on the market prime rate that is compatible with both financial and accounting perspective. The developed methodology can also be proven capable of loan-sharking behaviours early detection, when a usury threshold is given by the law or inferred from market customaries, so that it can be used also for decision making and financing cost forecasting purposes.