INTRODUCTIONHire 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 AGREEMENTS. 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

The property in the goods is not transferred to the hirer at the time of the contract is made.

Property in goods REMAIN with the OWNER until the FULL PAYMENT of the installment or the HIRER Chooses to PURCHASE THE GOODS.

TERMINOLOGIES IN HIRE PURCHASE AGREEMENT WHO IS THE OWNER?S.2 (1)A person who lets or has lets goods to a hire purchase agreement includes a person to whom the owners rights and liabilities under the agreement have passed by assignment or by operation of law.

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 goodsMotor vehiclesIndustry & Commercial goods

Includes any replacements or renewals by the hirer of any part or parts thereof and any accessories added or additions made thereto by the hirer during the period of hiring

1. Notice of the 2nd Schedule before entering HPABefore a hire purchase agreement

2nd Schedule Notice to serve on the hirer

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

To the person intended to be hirer

Acknowledge receipt of notice, signing the appropriate column.

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 AGREEMENTSection 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 partiesSection 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

3. CONTENTS (s. 4c)A date on which the hiring startsThe number of installments to be paid by hirerThe amounts of each of installments and the person to whom and the place at which the payments are made.The time for the payment of each of those instalmentsA description of goods sufficient to identify themThe address where the goods are to kept

ContinueThe table of HP agreement:The cash price of the goodsThe deposit showing separately the amount paid in cash and the amount provided by consideration other than cashDelivery or freight charges, if anyVehicle registration fees, if applicableInsuranceThe total amount referred to above less depositTerm chargesThe annual percentage rate for term charges (calculated in accordance with the formula set out in the seventh schedule)

Continue.Section 4C2 provides that any agreement which does not comply with this requirement would render the HP agreement voidsection 4C(3). If the owner enters into agreement without stating the above contents, apart from the agreement being void, the owner shall be guilty an offence as prescribed bysection 46 The penalty for the above offence is fine not more than RM3,000 or imprisonment 6 months or both.

4. Separate Agreement Section 4D(1)There shall be a separate hire purchase agreement in respect of every item of goods purchased under this ActSection 4D(2)A hire purchase agreement that does not comply with subsection (1) shall be voidSection 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

Statutory Rights and Duties of Hirer

1. Right to copy Statement in Relating to his Financial StatementSection 9At any time before the final payment has been made under a hire purchase agreement the owner shall, within fourteen days after he has received a request writing from the hirer, supply to the hirer a statement signed by the said person or his agent showingThe amount paid to the owner by or on behalf of the hirerThe amount due to the owner but remained unpaidThe amount that is become payable under the agreementThe amount derived from interest on overdue installment

2. Right to appropriation of PaymentSection 10When 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.

3. Right to Apply for an Order for Goods to be removedSection 11It is a duty of a hirer to keep the goods comprised in the agreement in his possession or control at a particular place and not to removed

On the application of the Hirer, a Court of a magistrate may make an order approving the removal of goods to some other place.

4. Right to assign hirers rightSection 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 LawSection 13The right, title and interest of a hirer under a hire-purchase agreement can pass by operation of law to the personal representative of the hirer

If the hirer is a company, the liquidator may exercise the same right under the agreement as the company. In effect, the liquidators succeeds to the hirers right and liabilities under a hire purchase agreement.

5. Right to Early Completion of the AgreementsSection 14(1)The hirer gives a notice in writing to the owner of his intention to early completion of the agreements, on or before the day specified for the purpose in the notice, complete the purchase of the goods by paying or tendering to the owner the net balance due under the agreement

6. Right to Terminate the AgreementSection 15(1)The hirer of any goods comprised in a hire purchase agreement may terminate the agreement by returning the goods to the owner during ordinary business hours at the place at which the owner ordinarily carries on business or to the place specified for that purpose in the agreement.

Methods of Interest CalculationEffective Rate of Interest or Annual percentage rate Method.Sum of years Digits MethodStraight Line Method

Effective Rate of Interest Steps:1. Find HP principal = Cost of asset Down Payment2. Find total HP Amt. = (HP principal x Flat rate of int. x HP period of years)3. Find total HP amount = ( Step 1 + Step 2)4. Find annual installment amt. = (Step 3 / No. of installments)5. Find effective rate of interest (ERI) =Rate of Int. = PV of future annual installments = PV of HP principal amount payable.6. Find Annual Interest Amt. = Total principal OS at the beginning x ERI

Sum of years digits Method Annual amt of int. = (Number of years of remaining HP period including the current year / Total of all digits representing the period of HP)

Where :Total amount of interest for HP period = Total Amt. payable x Flate rate of interest.

Straight line Method

Annual amt. of interest = Total amt. of interest for HP period / No. of HP period

Method of ReportingDisclosure in Hirer BooksDisclosure in Hire vendor Books

Hire Purchase EvaluationStep 1: Calculate annual interest amount.

Step 2 : Find Principal amount outstanding at the beginning of each year = Total outstanding Principal principal paid in the previous year

Step 3: Find principal paid in the previous year = Annual installment amt. Annual int.

Step 4: Find Annual ITS = Annual Interest x Tax Rate

Step 5: Find annual Depreciation

Step 6:Find Annual DTS = Annual depreciation x Tax rate

Step 7: Find total TS = Step 4 + Step 6

Step 8: Find annual installment amt. = Total HP amt. + [ HP Amt. x Flate rate of interest] % NO. of HP years]

Step 9: Find PV Salvage value of asset = SV x PVF capital

Step 10: Find net cash outflow of HP = Step 8 Step 7

Step 11: Find PV of net cash outflow of HP at the appropriate discount rate = Step 10 x PVF

Step 12: Find Total PV net cash out flow of HP = Step 11 Step 9

Lease EvaluationStep 12: Find tax shield on annual lease rentals = Annual lease rental x Tax rate

Step 13: Find net cash outflow of leasing= Annual Lease rental Step 12.

Step 14: Find total PV of net cash outflow of leasing at the appropriate discount rate = Net cash outflow of leasing x PVAF

Step 15: Make a decision:Hp is desirable if total PV of net cash outflow of HP is less than that of leasing.

IntroductionMeaning 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 tax-deductable 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 The owner (Lessor) of the Asset(Equipment) Transfers the possession / right to use the Asset (Equipment) to another/user Lessee) For an agreed period of time in return for rental.

At the end of the period The asset reverts to the Lessor, orProvision for the renewal of the Lease Contract, orOption to transfer the ownership to the Lessee.

Essential Elements of LeasingParties 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 under a Lease contract.Lessor and Lessee can be Individual or legally recognised party.Lease broker big ticket Leases use him. Major Players in Lease Market:Banks- Indian & Foreign /FIssubsidiaries of Banks/FIs,NBFCs

Essential Elements of LeasingAsset 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.

Leasing ProcessOperating LeaseFinancial LeaseLessor Lease FinancierLessee ( 6) Posses Ownership lease Asset(4) Financing Arrangement(1)Financing Contract(5) Hand over leased asset after leased period(3) Takes Asset on lease(1) Lease Contract

Implications of Sales Tax Provision Covered:1. On Purchase Equipment2. On lease Rentals3. Sale of Asset

Difference Leasing & Hire Purchase

LeasingHire Purchase1. Ownership: Never Transferred to the lessee

2. Depreciation: Lessor and not lessee is entitled to claim depreciation tax shield

3.Capitalization: Capitalization of the asset is done in the nooks of the lessor, the leasing companyTransferred to the hirer on the payment of the last instalment

Hirer (owner) is entitled to claim depreciation tax shield

Done in the books of the hirer

4. payments: Entire lease payments are eligible for tax computation the books of lessee

5. Salvage Value: Lessor right to claim benefit of salvage value6. 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 asset8. 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.Hire interest is eligible for tax computation in the books of hirer.

Hirer can claim benefit

Hire purchase is used source of finance usually relatively low cost of assets such as automobiles, office equipments etc.,

20-25% down payment is required

The asset bought on hire purchase will be shown as an asset and the amount of instalments payable to the lessor as a liability.

Hirer has responsibility maintenance

10. Suitability: It is not suitable for low capital enterprises which desire to show a strong asset position in their B/S11. Name of Asset: An asset given on lease by a leasing company is considered as the fixed asset of the lessor12. 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.It is highly suitable low capital enterprises.

The hire vendor normally shows the asset let under HP either as stock in trade or as receivablesOnly the interest portion is taken into the hire ventors P&L acc.In the case of HP transactions, finance charges are allocated to the HP period equally.

Lease EvaluationStep 1: Find tax shield on annual lease rentals = Annual lease rental x Tax rateStep 2: Find net cash outflow of leasingAnnual 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 PVAFStep 4: Make a decision:Hp is desirable if total PV of net cash outflow of HP is less than that of leasing.

Types of LeaseFinancial Lease : Operating LeaseConveyance Type leaseLeveraged LeaseSale and LeasebackPartial Pay-Out LeaseConsumer LeasingBallon LeaseClose end leasingSwap LeasingWrap LeasingImport LeasingCross Border leasingInternational Leasing

Financial LeaseAlso called Capital LeaseA 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 maintenance of the asset leased.The lease generally provides for the renewal of the lease on expiry of the lease contract.Variants : full payout lease , True Lease

Operating LeaseAn operating lease is a type of lease whereby the asset is not fully amorktized during the non-cancelable period of the lease , and where the lessor does not rely on the lease rentals for profits. Short term lease on a period to period basis. Period of the lease is less than useful life of the asset.

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 periodAsset 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: - repairs, maintenance, servicing of lease property - purchasing parts and accessories. - loan of a replacement/substitute - purchase of insurance for the lessee.

Conveyance Type Lease :Very long type of lease applicable to immovable property.Objective to convey the title in property.Lease periods as long as 99 to 999 years.

Leveraged LeaseWhere a financier is involved for the whole or a part of the financial requirement.Used for high value asset. The financier will have charge over the leased asset, over and above the lease rentals.

Sale and Leaseback:Owner of the asset sells it to the lessor, and gets the asset back under the lease agreement.Ownership transfer from the original owner to the lessor, who again leases out the asset.Immediate financing to the seller company, whose funds are tied up in the asset.

Partial pay out lease: Full payment of the lease in several leases.

Consumer Leasing :Leasing of consumer durables like Refrigerator, televisions, etc.

Balloon Lease : a lease which has zero residual value at the end of the lease period. i.e. low lease rentals at the inception, high in the mid years, and low again at the end of the lease.

Close end leasing : the asset is reverted to the lessor at the end of the lease.

Open end leasing : the lessee guarantees a minimum value to the lessor , from the sale of the asset at the end of the lease term. If on sale of the asset, the residual value is less , then lessee pays to the lessor the difference amount.

Import Leasing : - leasing of imported capital goods. - beneficial to the lessee, because arranging other sources of funds takes long. Lenders do not usually finance the import duty which forms sizable portion of the cost. - during which the prices of imported goods may rise + fluctuation in exchange rates may happen.

Cross Border Leasing :A lease where the lessor is in one country and 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 in various countries through its branches. International leasing is active in countries like U.S., Japan, HongKong etc.

Advantages of LeasingFlexibility- Lease rental fixed suiting the cash flow of the Lessee ( Equated, Stepped up, Ballooned and Deferred).User oriented variants: upgrade Lease (to beat risk of obsolescence or cross border lease risks, service related lease, etc.).Tax benefits: Lessor shares the tax benefits with Lessee lower lease rentals.Less paper work and expeditious disbursementConvenience100% financingBetter utlisation of locked funds ( say, release of office equipments).Off-Balance Sheet financing.

Advantages of Leasing to LesseeEasy and 100% Financing of Capital goods.An additional source of FinanceLess costlyOwnership preservedAvoids cumbersome Institutional finance.Flexibility in structuring of rentals.Simplicity of documentation and terms.Tax benefits.Obsolescence Risks averted

Advantages of Leasing to LessorFull security as ownership retainedTax benefitHigh 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).