The accountancy treatment of hire purchase contracts, as for
finance leases, is governed by SSAP21 ‘Accounting for leases
and hire purchase contracts’.
Most hire purchase contracts are of a financing nature.
Generally, the option to purchase the asset is exercisable at below
market value - often at a nominal amount - such that the hirer can
be expected from the outset to take up the option. SSAP21 provides
that such hire purchase contracts should be accounted for on a
basis similar to that set out for finance leases, see
BIM61030 onwards. In commercial reality
such a contract is one of sale and purchase of goods, the agreement
is a means of financing the transaction, and the ‘hire’
(revenue expenditure) element of the payments is equivalent to
‘interest’ on the finance provided.
Less commonly, there are hire purchase contracts which are
not of a financing nature. For example, the option to purchase may
be exercisable at a relatively high price such that the hirer may
not take it up. SSAP21 provides that such hire purchase contracts
should be accounted for on a similar basis to that set out for
operating leases, see
BIM61075.
For hire purchase contracts that are of a financing nature
the accountancy treatment spreads the ’hire' or
’interest' element of the payments over the term of the
agreement. A number of different methods for spreading are
permitted by SSAP21. The method used in accounts prepared in
accordance with SSAP21 should be followed for tax purposes.
