Accounting for hire purchase (finance company)

Accounting for hire purchase contract for finance company

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Hi, 

To clarify a basic accounting issue. Let's say there's a hire purchase contract with three parties. The buyer (the end customer), the seller (the car dealer) and the finance company who provides the loan. 
 

The question is accounting from the perspective of the finance company. If the finance company reports under FRS 102 (although I'd imagine this would also be the same under IFRS), is the finance company a lessor? 
 

Even though the finance company didn't originally own the underlying asset, they effective buy the car from the dealer and then lease it out to the customer?

And given that a lease is where the lessor conveys a right to control the asset over a specified period of time, would this make the finance company a lessor as it conveys the right through providing the HP contract and finance etc? 
 

and therefore the finance company would account for the HP contract as a finance lease (as lessor) under FRS 102 Section 20 for leases?

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Scalloway Castle
By scalloway
02nd Dec 2023 13:36

I used to be the accountant for a company that did HP finance.
We bought the asset then sold it to the customer with a VAT invoice. The customer paid their deposit then paid the balance due plus interest over the time of the agreement.
The sum outstanding was treated as a loan in our books and the customer's.

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John Toon
By John Toon
04th Dec 2023 12:48

If the company is providing the debt then the accounting follows normal accounting rules, they aren't a lessor as no lease exists because this is a hire purchase contract they have provided to the customer. Accounting under FRS 102 vs IFRS would be wildly different as a consequence of IFRS 9 and the requirement to consider the expected credit loss model.

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