Accounting and Reporting
Hire purchase, as a form of financing, differs from lease financing in one basic respect, while in a purchase transaction, the hire has the option to purchase the asset at the end of the period, on payment of the last installment of hire charge, the lessee does not have the option to acquire ownership of the leased asset. A hire purchase transaction has, therefore. some typical features m the point of view of accounting and reporting. First, although the legal title over the equivalent remains with the hire vendor (finance company), all risks and rewards associated with it and transferred to the hire (purchaser) at the inception of the transaction. The accounting plication is that the asset should be recorded in the books of the hire. The hire vendor should record them as hire assets stock in trade or as receivables. Secondly, the hire should be entitled to depreciation claim. Finally, the hire charges, like the lease rental in a financial lease, have two ponents: (i) interest finance charge, (ii) recovery of principal. But there is no accounting guidelines note for accounting treatment of hire purchase in India. There is no specific regulation to governing hire purchase contracts. The issues aspects that have a bearing on the accounting and reporting of hire purchase deals are the timing of the capitalization of the asset option vs conclusion of the deal, the price, the depreciation charge and the treatment of hire. The prevalent accounting practices relating to hire purchase transactions in the books of hire as well as the hire vendor are briefly highlighted below.