Hire purchasing

Nowadays, in addition to lease financing, hire purchasing is also emerging as a popular source of long term financing whereby the company can acquire long term infrastructural facilities, say fixed assets. It will be pertinent to note here the relationship between lease financing and hire purchasing.

Hire purchase indicates an agreement between the owner of goods, called as “the hiree” and the user of the goods, called as “the hirer” whereby the hiree deliver the goods to the hirer but the ownership of the goods remains with the hiree. In return, the hirer makes the periodical payments of hire charges which are partly against the capital repayment and partly against the interest payable. For accounting and tax purposes, only the interest is treated as revenue expenditure and is considered to be a tax deductible expenditure. The hirer capitalises the asset purchased under the hire purchase agreement though he is not the owner of the assets. Depreciation is considered by the hirer as an expenditure, debiting the same to profit and loss account and hence becomes the tax deductible expenditure. The further hire purchase installments towards capital which are not yet due are shown as liability on the balance sheet.

After the hire charges are paid by the hirer in full, he gets an option of purchasing the asset entirely in which the installments paid earlier are converted into the purchase price and the ownership of the asset is transferred to the hirer. If the hirer fails to pay nay installment, hiree can take the possession of the asset without refunding any installment paid earlier. It is the duty of the hirer to keep the asset in good condition. As such, the hirer may stipulate that the assets should be properly insured, the premium being paid by the hirer. Further, it may also be stipulated that the hirer will not sell or exchange the asset till he becomes the owner of the asset. The hirer has a right to put an end to the agreement before the last installment is paid, but the installment paid by him previously are not refunded to him.