- 3 Marks
Question
a) Compare and contrast Hire Purchase and Lease as a mode of acquiring an asset.
Answer
- Ownership:
- Hire Purchase: Ownership of the asset is transferred to the hirer only after all installments are fully paid.
- Lease: Ownership remains with the lessor. In the case of a finance lease, the lessee may have the option to purchase the asset at the end of the lease term, but not in an operating lease.
- Duration:
- Hire Purchase: The term for hire purchase is typically shorter than a lease.
- Lease: Leases, especially finance leases, often extend over a longer period compared to hire purchase agreements.
- Accounting Treatment:
- Hire Purchase: Installments include both principal and interest, and the asset is recognized on the balance sheet from the start, with depreciation charged accordingly.
- Lease: Under IFRS 16, a finance lease is treated similarly to hire purchase, but in an operating lease, the asset remains off the lessee’s balance sheet.
- Interest and Payments:
- Hire Purchase: Interest is charged on the outstanding balance, and the total cost is usually higher than leasing.
- Lease: Lease payments are considered rental expenses, and in finance leases, interest is charged over the lease term based on the outstanding liability.
- Governance:
- Hire Purchase: Governed by contract terms but not subject to specific accounting standards.
- Lease: Governed by IFRS 16 (previously IAS 17), with strict rules on recognition, measurement, and presentation.
- Tags: Asset Acquisition, Hire Purchase, IAS 17, IFRS 16, Lease
- Level: Level 2
- Topic: Professional and Ethical Issues in Financial Reporting
- Series: MAY 2017
- Uploader: Theophilus