Compare and contrast Hire Purchase and Lease as a mode of acquiring an asset. (3 marks)
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- An arrangement to finance the use of the asset, in which one party pays consideration to the other party in periodical installments, is known as Hire purchasing. Leasing is a business deal in which one party buys the asset and grants the other party to use it, in return for lease rentals.
- In Hire Purchasing, the ownership is transferred to the hirer only if he pays the outstanding installments. On the other hand, in a finance lease, the lessee gets the option to buy the asset at the end of the term by paying a nominal amount, but in operating lease, there is no such option available to the lessee.
- Leasing is governed by International Financial Reporting Standard (IFRS)- IAS 17, IFRS 16 whereas there is no specific accounting standard for Hire Purchase.
- Hire purchase is a must in hire-purchasing but not in leasing.
- The duration of leasing is longer than hire purchase.
- The installment paid in hire purchasing includes the principal amount and interest. In contrast to leasing where the lessee has to pay the cost of using the asset only. (Any 3)