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Hire
purchase
is
a
contractual
agreement where by the owner lets the
goods out on hire and agree that the hire
may either return the goods and terminate
the contract or elect.
DEFINITION OF
HIRE PURCHASE AGREEMENT
S. 2 (1) of HPA 1967 (Amendment 2010).
CONTRACT that:
Letting of goods with an option to
purchase; OR
purchase of goods by installments
(whether the agreements describes the
installments as rent or hire or otherwise
Hirer
only
obtains
posses
sion
over
the
goods.
Property in goods
Continue..
WHO IS THE HIRER?
S. 2 (1)
The person who takes or has taken goods
from an owner under a hire purchase
agreement and
includes a person to whom the hirers rights
and liabilities under the agreement have
passed by assignment or by operation of
law
Continue.
WHO IS DEALER?
S.2(1)
A person not being the hirer or the owner
or a servant of the owner, by whom or on
whose behalf negotiations leading to the
making of a hire purchase agreement with the
owner were carried out..
Continue.
What is hire purchase price?
The total sum payable by the hirer under a
hire purchase agreement in order to
complete the purchase
agreements.includes depositsmonthly
installments and monthly interest.
What is goods?
Categories
of
goods
in
HPA
(First
Schedule)
All consumer goods
Motor vehicles
Industry & Commercial goods
FORMATION OF
A HIRE
PURCHASE
AGREEMENT
Purpose
To inform the intending hire purchase concerning
the financial obligations which may be
incurred
Negotiation between dealer and hirer.dealer
shall serve a complete 2nd Schedule sign by
dealer and
the prospective owner
Continue.
Section 4 (2)
Notice delivered
Continue.
Section 4(4)
If a HP contract is made without
serving/giving the notice as required by
section 4(1), the agreement shall be void.
2. WRITTEN AGREEMENT
Section 4A
A hire purchase agreement to be in writing.
An agreement is deemed not to be in writing
and thus void if a handwriting (other than a
signature or initials) , is not clear and
legible and if the agreements is printed,
the print is of size smaller than the type
known as ten point Times
Signature of parties
Section 4B(1)
A hire purchase agreement to be signed by or
on behalf of all parties to the agreement.
Section 4B(2)
the hirer purchase agreement, form or
document has been duly completed
NO COMPLIANCE OF SECTION 4B(1) and
4B(2) is void
Continue
4. Separate Agreement
Section 4D(1)
There shall be a separate hire purchase
agreement in respect of every item of
goods purchased under
this Act
Section 4D(2)
A hire purchase agreement that does not comply
with subsection (1) shall be void
Section 4D(3)
The owner would be liable for an offence under
the Act.
The penalty is under Section 46.
5. Alterations
No addition or alteration can be made to a
hire purchase agreement or written
agreement or written documents
containing the terms and conditions of
the agreement in relation to any of the
matters state out in the pre contractual
statement required to be served on the
prospective hirer pursuant to
Section 4(1)(a) and (b) of the Act
2. Right to appropriation of
Payment
Section 10
When there is more than one agreement with same
owner and the payment is insufficient to discharge
the total amount due under all agreement,
the hirer may require the payment be
appropriated to a particular agreement or to
the satisfaction of the sums due in such
proportion.
4. Right to assign
hirers right
Section 12(1)
The right, title and interest of a
hirer under a hire purchase
agreement may be assigned
with the consent of the owner, or
if his consent is unreasonably with
held, without his consent
5. Right by Operation
of Law
Section 13
Methods of Interest
Calculation
1.
Effective Rate of Interest or Annual
percentage rate Method.
2. Sum of years Digits Method
3. Straight Line Method
Where :
Total amount of interest for HP period =
Total Amt. payable x Flate rate of interest.
Method of Reporting
1. Disclosure in Hirer Books
2. Disclosure in Hire vendor Books
DTS
Annual
Lease Evaluation
Introduction
Meaning of Lease:
Leasing is a process by which a firm can obtain
the use of a certain fixed asset for which it must
make series of contractual periodic
taxdeductable payments(Lease rentals).
Definition:
Leasing is a contractual arrangement , where The
owner (Lessor) of the Asset(Equipment) Transfers
the possession / right to use the Asset(Equipment)
to another(Lessee) For an agreed period of time in
return for rental.
Definition of Leasing
Leasing is a contractual arrangement , where
Essential Elements of
Leasing
Parties to a Lease Contract: Essentially two parties
Lessor is the owner of the asset that is being Leased.
Lessee is the receiver of the services of the asset
Essential Elements of
Leasing
Asset Subject matter of Leasing contract;
Automobiles, Plant & Machinery, Equipments,
Land & building, Factory, a running business,
aircraft, Ships, etc.
Ownership remains with the Lessor
Use - of the asset is allowed to the Lessee.
Lease Term Primary /secondary Lease Term.
Lease Rentals is the consideration for the lease
transaction. So structured to recover the
investment cost, during agreed period.
Lease Financier
(1) Lease
Contract
(3) Takes
Asset on
lease
Operating Lease
( 6) Posses
Ownership
lease Asset
(4) Financing
Arrangement
(1)
1)Financing
Contract
Leasing Process
Financial Lease
Lessor
Lessee
Hire Purchase
1. Ownership:
Never Transferred to the lessee Transferred to the hirer on the
payment of the last instalment
2. Depreciation:
Lessor and not lessee is entitled Hirer (owner) is entitled to claim
to claim depreciation tax shield depreciation tax shield
3.Capitalization:
Capitalization of the asset is
done in the nooks of the lessor,
the leasing company
4. payments:
Entire lease payments are eligible for tax
computation the books of lessee
5. Salvage Value:
Lessor right to claim benefit of salvage value
6. Magnitude:
Leasing is used source of finance usually for
acquiring high cost of assets such as
machinery, shrips, airplanes etc.
7. Down payment:
Non down payment is required for acquring
asset
8. Reporting:
In the books of the lessee leased assets are
disclosed by way of a note only.
9. Maintenance of asset:
Lessor has responsibility to maintenance of
Asset.
10. Suitability:
It is not suitable for low capital
enterprises which desire to show a
strong asset position in their B/S
11. Name of Asset:
An asset given on lease by a
leasing company is considered as
the fixed asset of the lessor
12. Receipts
All receipts from the lessee is
taken into the lessors P & L acc.
13. Income:
Lessors income declines as the
investment O/S in the lease
declines.
Lease Evaluation
Step 1: Find tax shield on annual lease rentals =
Annual lease rental x Tax rate
Step 2: Find net cash outflow of leasing
Annual Lease rental Step 1.
Step 3: Find total PV of net cash outflow of
leasing at the appropriate discount rate
= Net cash outflow of leasing x PVAF
Step 4: Make a decision:
Hp is desirable if total PV of net cash
outflow of HP is less than that of leasing.
Types
of
Lease
Financial Lease :
Operating Lease
Conveyance Type
lease
Leveraged Lease
Sale and Leaseback
Partial Pay-Out
Lease
Consumer Leasing
Ballon Lease
Close end leasing
Swap Leasing
Wrap Leasing
Import Leasing
Cross Border
leasing
International
Leasing
Financial Lease
Also called Capital Lease
A contract involving payment
over an obligatory period, of
specified sums sufficient in total
to amortize the capital outlay ,
besides giving some profit to the
lessor.
Financial lease...
It is non-cancelable in nature.
The lessee is responsible for the
Operating Lease
An operating lease is a type of lease whereby
Operating Lease...
The lease is cancelable at short notice by the
lessee.
The lessee has the option of renewing the lease
after the expiry of the lease period
Asset maintenance and insurance etc. is the
responsibility of the lessor and he charges for
the same.
It is a high risk lease to the lessor, as any time
it may be cancelled by the lessee.
Net Lease :
A variant of operating lease, where the lessor is
not concerned with the repairs and maintenance
of the leased asset.
Lessor does not provide:
property.
Objective to convey the title in property.
Lease periods as long as 99 to 999 years.
Leveraged Lease
Where a financier is involved for the whole or a
Close
Open
Import Leasing :
lessee in another.
The Jurisdiction of lessors and lessees are in
two different countries.
Eg. Leasing of airplanes.
International Leasing
A case where the leasing company is operating
Advantages of Leasing
Flexibility- Lease rental fixed suiting the cash flow of the
Advantages of Leasing to
Lessee
Easy and 100% Financing of Capital goods.
An additional source of Finance
Less costly
Ownership preserved
Avoids cumbersome Institutional finance.
Flexibility in structuring of rentals.
Simplicity of documentation and terms.
Tax benefits.
Obsolescence Risks averted
Advantages of Leasing to
Lessor
Full security as ownership retained
Tax benefit
High profitability
Trading on Equity High Debt:Equity Ratio.
High growth potential
Limitations of Leasing
Restrictions on use of Equipment no additions/alterations.
Limitations of Financial use payout obligations, benefits
of warranties.
Residual value benefit
Consequences of default of terms by Lessee.
Understatement of Lessees Asset in B/S.
Double Sales-Tax, both by Lessor (purchase) and Lessee (at
the time of Lease).