INTRODUCTION

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

The property in the

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

Hirer
only
obtains
posses
sion
over
the
goods.

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 goods
Motor vehicles
Industry & 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

FORMATION OF
A HIRE
PURCHASE
AGREEMENT

1. Notice of the 2nd Schedule before entering HPA

Before 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 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

3. CONTENTS (s. 4c)

A date on which the hiring starts
The number of installments to be paid by hirer
The 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
instalments
A description of goods sufficient to identify
them
The address where the goods are to kept

Continue

The table of HP agreement:

The cash price of the goods
The deposit showing separately the amount paid
in cash and the amount provided by consideration
other than cash
Delivery or freight charges, if any
Vehicle registration fees, if applicable
Insurance
The total amount referred to above less
deposit
Term charges
The 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 void
section 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 by
section 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 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

Statutory Rights and

Duties of Hirer

1. Right to copy Statement in

Relating to his Financial
Statement
Section 9
At 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 showing
a.The amount paid to the owner by or on behalf of the hirer
b.The amount due to the owner but remained unpaid
c.The amount that is become payable under the agreement
d.The amount derived from interest on overdue installment

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.

3. Right to Apply for an Order

for Goods
to be removed
Section 11
It 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 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

The 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 Agreements
Section 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

Agreement
Section 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
Calculation
1.
Effective Rate of Interest or Annual
percentage rate Method.
2. Sum of years Digits Method
3. Straight Line Method

Effective Rate of Interest

Steps:
1. Find HP principal = Cost of asset Down
Payment
2. 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 Reporting
1. Disclosure in Hirer Books
2. Disclosure in Hire vendor Books

Hire Purchase Evaluation

Step 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
depreciation x Tax rate

DTS

Annual

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 Evaluation

Step 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.

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

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, or
Provision for the renewal of the Lease Contract, or
Option to transfer the ownership to the Lessee.

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

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 /FIs
subsidiaries of Banks/FIs,
NBFCs

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

(5) Hand over

leased asset
after leased
period

( 6) Posses
Ownership
lease Asset

(4) Financing
Arrangement

(1)
1)Financing
Contract

Leasing Process
Financial Lease

Lessor

Lessee

Implications of Sales Tax

Provision Covered:
1. On Purchase Equipment
2. On lease Rentals
3. Sale of Asset

Difference Leasing & Hire

Purchase
Leasing

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

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 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.

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/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.

It is highly suitable low capital

enterprises.

The hire vendor normally

shows the asset let under HP
either as stock in trade or as
receivables
Only 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 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

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 Lease
An 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 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:

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 Lease
Where 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 Leasing
Flexibility- 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 disbursement
Convenience
100% financing
Better utlisation of locked funds ( say, release of office
equipments).
Off-Balance Sheet financing.

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).