What is factoring?
Factoring is a financial option for the management of receivables. In simple definition it is the conversion of credit sales into cash. In factoring, a financial institution (factor) buys the accounts receivable of a company (Client) and pays up to 80%(rarely up to 90%) of the amount immediately on agreement.
Factoring company pays the remaining amount (Balance 20%-finance cost-operating cost) to the client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client depending upon the type of factoring.
The account receivable in factoring can either be for a product or service.
Examples are factoring against goods purchased, factoring for construction services (usually for government contracts where the government body is capable of paying back the debt in the stipulated period of factoring.
Characteristics of factoring
Usually the period for factoring is 90 to 150 days. Some factoring companies allow even more than 150 days.
Factoring is considered to be a costly source of finance compared to other sources of short term borrowings.
Factoring receivables is an ideal financial solution for new and emerging firms without strong financials. This is because credit worthiness is evaluated based on the financial strength of the customer (debtor). Hence these companies can leverage on the financial strength of their customers.
Bad debts will not be considered for factoring.
Credit rating is not mandatory. But the factoring companies usually carry out credit risk analysis before entering into the agreement.
Factoring is a method of off balance sheet financing.
Cost of factoring=finance cost + operating cost. Factoring cost vary according to the transaction size, financial strength of the customer etc. The cost of factoring vary from 1.5% to 3% per month depending upon the financial strength of the client's customer.
Indian firms offer factoring for invoices as low as 1000Rs
For delayed payments beyond the approved credit period, penal charge of around 1-2% per month over and above the normal cost is charged (it varies like 1% for the first month and 2% afterwards).
Different types of Factoring
Disclosed and Undisclosed
Recourse and Non recourse
A single factoring company may not offer all these services.
Disclosed
In disclosed factoring client's customers are notified of the factoring agreement. Disclosed type can either be recourse or non recourse.
Undisclosed
In undisclosed factoring, client's customers are not notified of the factoring arrangement. Sales ledger administration and collection of debts are undertaken by the client himself. Client has to pay the amount to the factor irrespective of whether customer has paid or not. But in disclosed type factor may or may not be responsible for the collection of debts depending on whether it is recourse or non recourse.
Recourse factoring
In recourse factoring, client undertakes to collect the debts from the customer. If the customer don't pay the amount on maturity, factor will recover the amount from the client. This is the most common type of factoring. Recourse factoring is offered at a lower interest rate since the risk by the factor is low. Balance amount is paid to client when the customer pays the factor.
Non recourse factoring
In non recourse factoring, factor undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. The advantage of non recourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization.
Factoring companies in India
Canbank Factors Limited: http://www.canbankfactors.com
SBI Factors and Commercial Services Pvt. Ltd: http://www.sbifactors.com
The Hongkong and Shanghai Banking Corporation Ltd: http://www.hsbc.co.in/1/2/corporate/trade-and-factoring-services
Foremost Factors Limited: http://www.foremostfactors.net
Global Trade Finance Limited: http://www.gtfindia.com
Export Credit Guarantee Corporation of India Ltd: https://www.ecgc.in/Portal/productnservices/maturity/mfactoring.asp
Citibank NA, India: http://www.citibank.co.in
Small Industries Development Bank of India (SIDBI): http://www.sidbi.in/fac.asp
Standard Chartered Bank: www.standardchartered.co.in
FORFAITING
What is Forfaiting?
Forfaiting is a mechanism of financing exports:
by discounting export receivables
evidenced by bills of exchange or promissory notes
without recourse to the seller (viz., exporter)
carrying medium to long term maturities
on a fixed rate basis (discount)
upto 100 per cent of the contract value.
Benefits to exporter from forfaiting?
Benefits to exporter from forfaiting?
Converts a deferred payment export into a cash transaction, improving liquidity and cash flow.
Frees the exporter from cross-border political or commercial risks associated with export receivables.
Finance upto 100 per cent of the export value is possible as compared to 80-85 per cent financing available from conventional export credit programmes.
As forfaiting offers without recourse finance to an exporter, it does not impact the exporter’s borrowing limits. Thus, forfaiting represents an additional source of funding, contributing to improved liquidity and cash flow.
Wednesday, September 22, 2010
Monday, September 6, 2010
Hire Purchase
Hire-Purchase Finance
CONCEPTUAL FRAMEWORK
LEGAL FRAMEWORK
TAXATION ASPECTS
ACCOUNTING AND REPORTING
FINANCIAL EVALUATION
CONCEPTUAL FRAMEWORK
Hire-purchase is a mode of financing the price of goods to be sold on a future date.
It is an agreement relating to a transaction in which goods are let on hire, the purchase price is to be paid in installments and the hirer is allowed the option to purchase the goods paying all the installments.
Though the option to purchase the goods/assets is allowed in the very beginning, it can be exercised only at the end of the agreement.
The essence of the agreement is that the property in the goods does not pass at the time of the agreement but remains in the intending seller (hire-vendor) and only passes when the option is exercised by the hirer (intending hire-purchaser).
In contrast, in installment sale the ownership in the goods passes on to the purchaser simultaneously with the payment of the initial/first installment.
Leasing Hire-Purchase
1. Equipment etc., chosen from manufacturer As opposite; or direct from manufacturer.
but leased from bank subsidiary leasing company.
2. Lessee never becomes the owner. The user becomes the owner — usually on finally on final payment.
3. No deposit required. Often 20% (or so) deposit called for.
4. Capital allowance claimed by lessor. Claimed by hirer.
5. Some allowance for (4) passed on by lesser Not relevant.
so that leasing rentals are reduced.
6. Lease can be ‘financial’ with a primary period Terms of H/P agreement can cover, items and thereafter continued leasing at nominal rent. covered by ‘financial’ or ‘operational’ basis mentioned opposite.
or
‘Operational’ where the items are often
leased from the manufacturer being
responsible for the maintenance and
upkeep of equipment.
7. The latter in (6) is advantageous for leased As opposite, but only if agreement allows items which are subject to technological users change/update items.
change.
Under the down payment plan of hire-purchase, the hirer has to make a down payment of 20-25 per cent of the cost and pay the balance in equated monthly installments (EMIs).
As an alternative, under a deposit-linked plan the hirer has to invest a specified amount in the fixed deposit of the finance company which is returned together with interest after the payment of the last EMI by the hirer.
The hire-purchase installment has two components: (i) interest/finance charge and (ii) recovery of principal.
The interest component is based on a flat rate of interest while effective rate is applied to the declining balance of the original amount to determine the interest component of each installment.
During the hire-period, the hirer can opt for early repayment/purchase of the equipment/asset by paying the remaining installments minus an interest rebate.
The hirer has the right to terminate the contract after giving due notice.
LEGAL FRAMEWORK
There is no exclusive legislation dealing with hire purchase transactions in India.
The Hire-Purchase Act was passed in 1972. A bill was introduced in 1989 to amend some of the provisions of the Act.
However, the Act has not been enforced so far. In the absence of any specific law, the hire-purchase transactions are governed by the general laws. The hire-purchase transaction has to aspects: (i) an aspect of bailment of goods
which is covered by the Indian Contract Act, (ii) an element of sale when the option to purchase is exercised by the hirer which is covered by the Indian Sales of Goods Act.
The hire-purchase agreements also contain provisions for the regulation of hire-purchase deals.
TAXATION ASPECTS
There are three aspects of taxation of hire-purchase deals: (i) income-tax, (ii) sales tax and, (iii) interest tax.
Though the hirer is not the owner of the asset, he is entitled to claim depreciation as a deduction on the entire purchase price.
He can also claim deduction on account of consideration for hire, that is, finance charge.
The amount of finance charge to be deducted each year is to be spread evenly over the term of the agreement on the basis of a method chosen from amongst the alternatives: SOYD, ERI, SLM.
The consideration is viewed as a rental charge rather than interest and no deduction of tax at source is made.
The hire-purchase transaction can be used as a tax planning device in two ways: (i) by inflating the net income (finance income — interest on borrowings by the finance company) at the rear-end of the deal and (ii) by using hire-purchase as a bridge between the lessor and the lessee, that is, introduction of an sales, are liable to sales tax.
However, hire-purchase transaction structured by finance companies (which are not hire-vendors), being essentially a financing arrangement, do not attract sales tax.
An interest tax has to be paid on the interest earned less bad debts. The tax is treated as a tax-deductible expense for the purpose of computing the taxable income under the Income-Tax Act.
ACCOUNTING AND REPORTING
There was no accounting standard/guidance note for accounting treatment of hire-purchase in India.
According to the current reporting practices, in the books of the hirer, the cash purchase price of the equipment is capitalised and an equal amount less down payment, if any, is recorded as a liability.
The depreciation is charged on the cash purchase price in conformity with the general depreciation policy for similar assets.
As far as the finance company is concerned, the hire installment receivable is shown as a current asset under the head stock on hire.
The direct costs are expensed immediately/amortised over the accounting period. The ICAI has recently issued AS-19: Leasing, 2001. It defines leasing to include hire-purchase for accounting and reporting purposes.
FINANCIAL EVALUATION
The decision-criterion for evaluation of a hire-purchase deal from the point of view of a hirer is the cost of hire-purchase vis-a-vis the cost of leasing.
If the discounted cost of hire-purchase is less than the discounted cost of leasing, the hire-purchase alternative should be preferred and vice versa.
The preference for the alternative implies that the equipment should be acquired under that alternative. The decision-criteria from the viewpoint of the financial intermediary is based on a comparison of the NPVs of the hire-purchase and the leasing alternatives. The finance company would choose the financing plan with higher NPV.
CONCEPTUAL FRAMEWORK
LEGAL FRAMEWORK
TAXATION ASPECTS
ACCOUNTING AND REPORTING
FINANCIAL EVALUATION
CONCEPTUAL FRAMEWORK
Hire-purchase is a mode of financing the price of goods to be sold on a future date.
It is an agreement relating to a transaction in which goods are let on hire, the purchase price is to be paid in installments and the hirer is allowed the option to purchase the goods paying all the installments.
Though the option to purchase the goods/assets is allowed in the very beginning, it can be exercised only at the end of the agreement.
The essence of the agreement is that the property in the goods does not pass at the time of the agreement but remains in the intending seller (hire-vendor) and only passes when the option is exercised by the hirer (intending hire-purchaser).
In contrast, in installment sale the ownership in the goods passes on to the purchaser simultaneously with the payment of the initial/first installment.
Leasing Hire-Purchase
1. Equipment etc., chosen from manufacturer As opposite; or direct from manufacturer.
but leased from bank subsidiary leasing company.
2. Lessee never becomes the owner. The user becomes the owner — usually on finally on final payment.
3. No deposit required. Often 20% (or so) deposit called for.
4. Capital allowance claimed by lessor. Claimed by hirer.
5. Some allowance for (4) passed on by lesser Not relevant.
so that leasing rentals are reduced.
6. Lease can be ‘financial’ with a primary period Terms of H/P agreement can cover, items and thereafter continued leasing at nominal rent. covered by ‘financial’ or ‘operational’ basis mentioned opposite.
or
‘Operational’ where the items are often
leased from the manufacturer being
responsible for the maintenance and
upkeep of equipment.
7. The latter in (6) is advantageous for leased As opposite, but only if agreement allows items which are subject to technological users change/update items.
change.
Under the down payment plan of hire-purchase, the hirer has to make a down payment of 20-25 per cent of the cost and pay the balance in equated monthly installments (EMIs).
As an alternative, under a deposit-linked plan the hirer has to invest a specified amount in the fixed deposit of the finance company which is returned together with interest after the payment of the last EMI by the hirer.
The hire-purchase installment has two components: (i) interest/finance charge and (ii) recovery of principal.
The interest component is based on a flat rate of interest while effective rate is applied to the declining balance of the original amount to determine the interest component of each installment.
During the hire-period, the hirer can opt for early repayment/purchase of the equipment/asset by paying the remaining installments minus an interest rebate.
The hirer has the right to terminate the contract after giving due notice.
LEGAL FRAMEWORK
There is no exclusive legislation dealing with hire purchase transactions in India.
The Hire-Purchase Act was passed in 1972. A bill was introduced in 1989 to amend some of the provisions of the Act.
However, the Act has not been enforced so far. In the absence of any specific law, the hire-purchase transactions are governed by the general laws. The hire-purchase transaction has to aspects: (i) an aspect of bailment of goods
which is covered by the Indian Contract Act, (ii) an element of sale when the option to purchase is exercised by the hirer which is covered by the Indian Sales of Goods Act.
The hire-purchase agreements also contain provisions for the regulation of hire-purchase deals.
TAXATION ASPECTS
There are three aspects of taxation of hire-purchase deals: (i) income-tax, (ii) sales tax and, (iii) interest tax.
Though the hirer is not the owner of the asset, he is entitled to claim depreciation as a deduction on the entire purchase price.
He can also claim deduction on account of consideration for hire, that is, finance charge.
The amount of finance charge to be deducted each year is to be spread evenly over the term of the agreement on the basis of a method chosen from amongst the alternatives: SOYD, ERI, SLM.
The consideration is viewed as a rental charge rather than interest and no deduction of tax at source is made.
The hire-purchase transaction can be used as a tax planning device in two ways: (i) by inflating the net income (finance income — interest on borrowings by the finance company) at the rear-end of the deal and (ii) by using hire-purchase as a bridge between the lessor and the lessee, that is, introduction of an sales, are liable to sales tax.
However, hire-purchase transaction structured by finance companies (which are not hire-vendors), being essentially a financing arrangement, do not attract sales tax.
An interest tax has to be paid on the interest earned less bad debts. The tax is treated as a tax-deductible expense for the purpose of computing the taxable income under the Income-Tax Act.
ACCOUNTING AND REPORTING
There was no accounting standard/guidance note for accounting treatment of hire-purchase in India.
According to the current reporting practices, in the books of the hirer, the cash purchase price of the equipment is capitalised and an equal amount less down payment, if any, is recorded as a liability.
The depreciation is charged on the cash purchase price in conformity with the general depreciation policy for similar assets.
As far as the finance company is concerned, the hire installment receivable is shown as a current asset under the head stock on hire.
The direct costs are expensed immediately/amortised over the accounting period. The ICAI has recently issued AS-19: Leasing, 2001. It defines leasing to include hire-purchase for accounting and reporting purposes.
FINANCIAL EVALUATION
The decision-criterion for evaluation of a hire-purchase deal from the point of view of a hirer is the cost of hire-purchase vis-a-vis the cost of leasing.
If the discounted cost of hire-purchase is less than the discounted cost of leasing, the hire-purchase alternative should be preferred and vice versa.
The preference for the alternative implies that the equipment should be acquired under that alternative. The decision-criteria from the viewpoint of the financial intermediary is based on a comparison of the NPVs of the hire-purchase and the leasing alternatives. The finance company would choose the financing plan with higher NPV.
leasing
Theoretical and Regulatory Framework of Leasing
Concept
Conceptually, a lease is a contractual arrangement/transaction in which the owner of an asset/ equipment (lessor) provides the asset for use to another/transfers the right to use the asset to the user (lessee) for an agreed period of time in return for periodic payment (rental).
At the end of the lease period the asset reverts back to the owner. Leasing essentially involves the divorce of ownership from the economic use of an equipment/asset.
Classification
Leasing can be classified into four categories:
Finance and operating lease,
Direct lease and sale and lease back lease,
Single investor and leveraged lease
Domestic lease and international lease
Of these, the classification of lease into finance and operating is of fundamental importance. The distinction between the two types of leases is based on the extent to which the risks and rewards of ownership are transferred from the lessor to the lessee.
Risk means the possibility of loss arising out of under- utilisation or technological obsolescence of the leased asset, while reward refers to the incremental net cash flows generated by the usage of the equipment over its economic life and the realisation of the anticipated residual value on the expiry of the economic life.
If a lease transfers a substantial part of the risks and rewards, it is called finance lease;
Otherwise, it is operating lease.
The cut-off criterion in India is that if the lease term exceeds 75 per cent of the useful life of the asset or if the present value of the minimum lease rentals exceeds 90 per cent of the fair market value of the equipment at the inception of the lease, the lease is classified as finance lease.
Profile/Structure of Leasing in India
The major players in leasing in India are independent leasing companies, other finance and investment companies, manufacturer-lessors, development finance institutions, in-house lessors and banks.
Product Profile
As far as the product profile of leasing in India is concerned, by and large leases, are of finance type and operating leases are not very popular.
The lease rentals are payable generally in equated monthly instalments at the beginning of every month.
The rental structures are related to the requirements of the lessee and projected cash flow pattern.
They are structured so as to recover the entire investment during the primary period.
Further, most of the transactions are direct lease; sale and lease back type are rare. Equipment leasing covers a wide range of assets and equipment but project leasing and cross-border leasing are not popular.
Significance/Advantaes and Limitations
The significance of lease financing is based on several advantages both to the lessors and the lessees such as:
flexibility,
user-orientation,
tax-based benefits,
convenience, expeditious disbursements of funds, hundred per cent financing and better utilisation of own funds and so on.
REGULATORY FRAMEWORK
There is no law/legislation/act/direction which exclusively applies to equipment leasing. Such transactions are governed by the relevant provisions of number of acts/laws/directions and so on.
Some of these are quite intricate involving fine points of law.
The main elements of the framework are: Indian Contract Act, RBI NBFCs Directions and Lease Documentation and Agreement.
Obligations of Lessor and Lessee
Since the features of an equipment lease transaction closely resemble the features of bailment, the provision of Contract Act in general and those relating to contracts of bailment in particular apply to equipment lease transactions.
The implied obligations of the bailor (lessor) and bailee (lessee) are defined by this enactment. However, one implied obligation of lessor, namely, fitness of the bailed goods is inapplicable.
As in a typical equipment lease transaction, the lessor plays the role of a financier, the implied obligation of the lessor (bailor) relating to fitness of the goods/assets is expressly negatived by the lease agreement.
Other Acts/Laws:
Some provisions of Motor Vehicle Act and Stamp Act also apply to equipment leasing.
RBI NBFCs Directions:
With a view to coordinate, regulate and control the functioning of all the NBFCs, RBI has issued directions under the RBI Act. These also apply to leasing companies.
Lease Documentation
The lease documentation process is fairly simple. It starts with the submission of a proposal by the lessee.
On approval, the lessor issues a letter of offer detailing the terms and conditions of the lease.
The letter of offer is accepted by the lessee by passing a Board resolution.
This is followed by the lessor and lessee entering into a formal lease agreement.
Lease Agreement
The lease agreements provide for a number of obligations on the part of the lessee which do not form part of his implied obligations under the Contract Act.
While the exact contents of the lease contract differ from case to case, a typical lease contract provides :
for nature of lease,
description of the equipment,
delivery and re-delivery period,
lease rentals, repairs and maintenance,
alteration, peaceful possession, charges,
indemnity clause, inspection,
prohibition of sub-leasing, defaults and remedies and so on.
Accounting/Reporting Framework and Taxation of Leasing
IAS-17 FRAMEWORK
AS-19: LEASES
TAX ASPECTS OF LEASING
IAS-17 FRAMEWORK
An appropriate method of accounting is necessary for income recognition for the lessor and asset disclosure for the lease.
Recognising the need for a proper accounting system for lease transactions, IAS-17 was issued in 1982.
The ICAI issued a guidance note in 1988 which favoured the adoption of IAS-17 in the long run but recommended for the interim period a set of accounting guidelines in the context of the state of leasing industry in India and the income-tax framework.
However, due to court intervention its recommendatory character was kept in abeyance. After judicial pronouncement, the ICAI Revised Guidances Notes was issued in September 1995.
The Reserve Bank of India constituted a study group on the guidance note and on its recommendations made it compulsory on the leasing companies.
The ICAI issued the AS-1 9: Lease based on IAS-1 7 in January 2001.
Accounting for Leases by a Lessee
According to the IAS-17, in case of operating lease, the lease has to allocate the aggregate lease rental over the lease term on straight line basis or any other systematic basis which better reflects the pattern of the timing of the benefit of the use of the equipment to the lessee (user).
Finance lease should be shown in the balance sheet of lessee as an asset to properly account for the economic resources and as a liability to reflect the level of its obligations.
The asset and liability should be recorded at the inception of the lease at an amount equal to the fair market value of the asset or the present value of the minimum lease payment whichever is lower;
The lease rentals should be apportioned into interest and capital components using the effective rate of interest/actuarial method or any other acceptable approximation (e.g., sum of the year’s digits);
The interest/finance charge should be expensed;
The leased asset should be depreciated in line with the depreciation policy of the firm in respect of owned asset. It must be fully depreciated over the lease term or the useful life whichever is shorter.
The interest/finance charge should be expensed;
The leased asset should be depreciated in line with the depreciation policy of the firm in respect of owned asset. It must be fully depreciated over the lease term or the useful life whichever is shorter.
Accounting for Leases by Lessors
As regards the lessor, the IAS-17 guidelines require that a finance lease should be recorded as a receivable in his books equal to the net investment in lease;
that is, gross investment in lease minus unearned finance income.
The unexpired finance income should be allocated according to effective rate of interest method to the relevant accounting period.
Concept
Conceptually, a lease is a contractual arrangement/transaction in which the owner of an asset/ equipment (lessor) provides the asset for use to another/transfers the right to use the asset to the user (lessee) for an agreed period of time in return for periodic payment (rental).
At the end of the lease period the asset reverts back to the owner. Leasing essentially involves the divorce of ownership from the economic use of an equipment/asset.
Classification
Leasing can be classified into four categories:
Finance and operating lease,
Direct lease and sale and lease back lease,
Single investor and leveraged lease
Domestic lease and international lease
Of these, the classification of lease into finance and operating is of fundamental importance. The distinction between the two types of leases is based on the extent to which the risks and rewards of ownership are transferred from the lessor to the lessee.
Risk means the possibility of loss arising out of under- utilisation or technological obsolescence of the leased asset, while reward refers to the incremental net cash flows generated by the usage of the equipment over its economic life and the realisation of the anticipated residual value on the expiry of the economic life.
If a lease transfers a substantial part of the risks and rewards, it is called finance lease;
Otherwise, it is operating lease.
The cut-off criterion in India is that if the lease term exceeds 75 per cent of the useful life of the asset or if the present value of the minimum lease rentals exceeds 90 per cent of the fair market value of the equipment at the inception of the lease, the lease is classified as finance lease.
Profile/Structure of Leasing in India
The major players in leasing in India are independent leasing companies, other finance and investment companies, manufacturer-lessors, development finance institutions, in-house lessors and banks.
Product Profile
As far as the product profile of leasing in India is concerned, by and large leases, are of finance type and operating leases are not very popular.
The lease rentals are payable generally in equated monthly instalments at the beginning of every month.
The rental structures are related to the requirements of the lessee and projected cash flow pattern.
They are structured so as to recover the entire investment during the primary period.
Further, most of the transactions are direct lease; sale and lease back type are rare. Equipment leasing covers a wide range of assets and equipment but project leasing and cross-border leasing are not popular.
Significance/Advantaes and Limitations
The significance of lease financing is based on several advantages both to the lessors and the lessees such as:
flexibility,
user-orientation,
tax-based benefits,
convenience, expeditious disbursements of funds, hundred per cent financing and better utilisation of own funds and so on.
REGULATORY FRAMEWORK
There is no law/legislation/act/direction which exclusively applies to equipment leasing. Such transactions are governed by the relevant provisions of number of acts/laws/directions and so on.
Some of these are quite intricate involving fine points of law.
The main elements of the framework are: Indian Contract Act, RBI NBFCs Directions and Lease Documentation and Agreement.
Obligations of Lessor and Lessee
Since the features of an equipment lease transaction closely resemble the features of bailment, the provision of Contract Act in general and those relating to contracts of bailment in particular apply to equipment lease transactions.
The implied obligations of the bailor (lessor) and bailee (lessee) are defined by this enactment. However, one implied obligation of lessor, namely, fitness of the bailed goods is inapplicable.
As in a typical equipment lease transaction, the lessor plays the role of a financier, the implied obligation of the lessor (bailor) relating to fitness of the goods/assets is expressly negatived by the lease agreement.
Other Acts/Laws:
Some provisions of Motor Vehicle Act and Stamp Act also apply to equipment leasing.
RBI NBFCs Directions:
With a view to coordinate, regulate and control the functioning of all the NBFCs, RBI has issued directions under the RBI Act. These also apply to leasing companies.
Lease Documentation
The lease documentation process is fairly simple. It starts with the submission of a proposal by the lessee.
On approval, the lessor issues a letter of offer detailing the terms and conditions of the lease.
The letter of offer is accepted by the lessee by passing a Board resolution.
This is followed by the lessor and lessee entering into a formal lease agreement.
Lease Agreement
The lease agreements provide for a number of obligations on the part of the lessee which do not form part of his implied obligations under the Contract Act.
While the exact contents of the lease contract differ from case to case, a typical lease contract provides :
for nature of lease,
description of the equipment,
delivery and re-delivery period,
lease rentals, repairs and maintenance,
alteration, peaceful possession, charges,
indemnity clause, inspection,
prohibition of sub-leasing, defaults and remedies and so on.
Accounting/Reporting Framework and Taxation of Leasing
IAS-17 FRAMEWORK
AS-19: LEASES
TAX ASPECTS OF LEASING
IAS-17 FRAMEWORK
An appropriate method of accounting is necessary for income recognition for the lessor and asset disclosure for the lease.
Recognising the need for a proper accounting system for lease transactions, IAS-17 was issued in 1982.
The ICAI issued a guidance note in 1988 which favoured the adoption of IAS-17 in the long run but recommended for the interim period a set of accounting guidelines in the context of the state of leasing industry in India and the income-tax framework.
However, due to court intervention its recommendatory character was kept in abeyance. After judicial pronouncement, the ICAI Revised Guidances Notes was issued in September 1995.
The Reserve Bank of India constituted a study group on the guidance note and on its recommendations made it compulsory on the leasing companies.
The ICAI issued the AS-1 9: Lease based on IAS-1 7 in January 2001.
Accounting for Leases by a Lessee
According to the IAS-17, in case of operating lease, the lease has to allocate the aggregate lease rental over the lease term on straight line basis or any other systematic basis which better reflects the pattern of the timing of the benefit of the use of the equipment to the lessee (user).
Finance lease should be shown in the balance sheet of lessee as an asset to properly account for the economic resources and as a liability to reflect the level of its obligations.
The asset and liability should be recorded at the inception of the lease at an amount equal to the fair market value of the asset or the present value of the minimum lease payment whichever is lower;
The lease rentals should be apportioned into interest and capital components using the effective rate of interest/actuarial method or any other acceptable approximation (e.g., sum of the year’s digits);
The interest/finance charge should be expensed;
The leased asset should be depreciated in line with the depreciation policy of the firm in respect of owned asset. It must be fully depreciated over the lease term or the useful life whichever is shorter.
The interest/finance charge should be expensed;
The leased asset should be depreciated in line with the depreciation policy of the firm in respect of owned asset. It must be fully depreciated over the lease term or the useful life whichever is shorter.
Accounting for Leases by Lessors
As regards the lessor, the IAS-17 guidelines require that a finance lease should be recorded as a receivable in his books equal to the net investment in lease;
that is, gross investment in lease minus unearned finance income.
The unexpired finance income should be allocated according to effective rate of interest method to the relevant accounting period.
Tuesday, August 31, 2010
Leasing Assignment
Explain following:
Q.1)define lease.What are its essential features,sinificance and limitations.
Q.2)what is finance lease?Discuss its features.
Q.3)Give a brief account of important of aspects of
i)lease documentation
ii)lease Agreement
Solve following problems from textbook,MY Khan
1)3.4(pg no 3.14)
2)4.1(pg no 4.2)
3)4.5(pg no 4.21)
4)4.6(pg no 4.22)
Q.1)define lease.What are its essential features,sinificance and limitations.
Q.2)what is finance lease?Discuss its features.
Q.3)Give a brief account of important of aspects of
i)lease documentation
ii)lease Agreement
Solve following problems from textbook,MY Khan
1)3.4(pg no 3.14)
2)4.1(pg no 4.2)
3)4.5(pg no 4.21)
4)4.6(pg no 4.22)
Saturday, August 14, 2010
some basics of Mutual Fund
Investment in mutual funds and their types
If you plan to invest your money in mutual funds or have already plunged into the market with little research, you must read this. To begin with, you must understand the concept of mutual funds. Mutual funds collect money from investors and invest these funds in different avenues in order to earn money. Since the volume of transaction is high, mutual funds enjoy the benefit of lower transaction costs. Further, investors automatically get a diversified portfolio with mutual fund investments. This is because fund houses invest money in different sectors, different companies and different types of investments. So, if you are a novice to the stock markets, mutual funds are a better option for you.
How well a mutual fund does largely depends upon the performance of companies in which its funds have been invested. So, before choosing a mutual fund you have to understand the companies that these funds are investing in. Mutual funds are basically categorized into three: Small Cap, Mid Cap and Large Cap. Most fund houses offer products in all three categories.
Cap stands for capitalization. It is the market value of the total shares of a company. So, you can get the market cap of a company by multiplying the total number of shares by its current market price. As the name suggests, small cap funds invest in companies that have small market capitalization. Small, mid and large are relative terms and each fund house decides the limit for themselves. Some fund houses relate their cap with BSE cap index. For example, a small cap fund invests a majority of its funds( 65 - 100 percent) in companies whose market cap are lower than or equal to the market capitalization of the stock in BSE Cap Small Cap Index with the largest capitalization.
What you should know though is which funds are good for you? The answer to that question depends upon your appetite for risk and the current market situation. Small cap and mid cap funds are generally considered to be riskier than large cap funds. This is because the former invest in startups and smaller, less established companies while the latter mostly invest in blue chip, reputed companies.
Small and mid cap companies have a larger potential to grow hence they promise greater returns on your investment. Start ups generally fall in this category and offer the opportunity of greater capital appreciation. Here there is potential for high returns but they are unpredictable too. Large cap companies have generally established their growth and have stable, predictable pattern of returns.
Small and mid cap companies have the ability to instantly react to market situations. Large companies with tiered management may not have that ability built into their system. Hence, small and mid cap funds can react faster to market opportunities. However, they are more volatile too compared to large cap funds.
The advantage of large cap funds is that they invest in reputed companies with large profits. Hence the probability of regular returns is high! However, since these companies are giants in their sector, they are also priced higher. Further, they have a greater ability to stand thick in bad economic times.
Sundaram BNP Paribas Select Midcap, Kotak Indian Mid Cap Fund and HSBC Midcap Equity Fund are some of the popular mid cap funds in India. HDFC Top 200, Kotak 30, Reliance Growth Fund and UTI Large Cap Fund are some of the large cap funds. BNP Sundaram Paribas, HSBC Small Cap Fund etc are some of the notable small cap funds in India.
If you plan to invest your money in mutual funds or have already plunged into the market with little research, you must read this. To begin with, you must understand the concept of mutual funds. Mutual funds collect money from investors and invest these funds in different avenues in order to earn money. Since the volume of transaction is high, mutual funds enjoy the benefit of lower transaction costs. Further, investors automatically get a diversified portfolio with mutual fund investments. This is because fund houses invest money in different sectors, different companies and different types of investments. So, if you are a novice to the stock markets, mutual funds are a better option for you.
How well a mutual fund does largely depends upon the performance of companies in which its funds have been invested. So, before choosing a mutual fund you have to understand the companies that these funds are investing in. Mutual funds are basically categorized into three: Small Cap, Mid Cap and Large Cap. Most fund houses offer products in all three categories.
Cap stands for capitalization. It is the market value of the total shares of a company. So, you can get the market cap of a company by multiplying the total number of shares by its current market price. As the name suggests, small cap funds invest in companies that have small market capitalization. Small, mid and large are relative terms and each fund house decides the limit for themselves. Some fund houses relate their cap with BSE cap index. For example, a small cap fund invests a majority of its funds( 65 - 100 percent) in companies whose market cap are lower than or equal to the market capitalization of the stock in BSE Cap Small Cap Index with the largest capitalization.
What you should know though is which funds are good for you? The answer to that question depends upon your appetite for risk and the current market situation. Small cap and mid cap funds are generally considered to be riskier than large cap funds. This is because the former invest in startups and smaller, less established companies while the latter mostly invest in blue chip, reputed companies.
Small and mid cap companies have a larger potential to grow hence they promise greater returns on your investment. Start ups generally fall in this category and offer the opportunity of greater capital appreciation. Here there is potential for high returns but they are unpredictable too. Large cap companies have generally established their growth and have stable, predictable pattern of returns.
Small and mid cap companies have the ability to instantly react to market situations. Large companies with tiered management may not have that ability built into their system. Hence, small and mid cap funds can react faster to market opportunities. However, they are more volatile too compared to large cap funds.
The advantage of large cap funds is that they invest in reputed companies with large profits. Hence the probability of regular returns is high! However, since these companies are giants in their sector, they are also priced higher. Further, they have a greater ability to stand thick in bad economic times.
Sundaram BNP Paribas Select Midcap, Kotak Indian Mid Cap Fund and HSBC Midcap Equity Fund are some of the popular mid cap funds in India. HDFC Top 200, Kotak 30, Reliance Growth Fund and UTI Large Cap Fund are some of the large cap funds. BNP Sundaram Paribas, HSBC Small Cap Fund etc are some of the notable small cap funds in India.
basics of insurance policy
.Basic Life Insurance terms everyone must know
When you go shopping, would you rather be knowledgeable or ignorant about some basic things that can help you make a smarter decision about buying the product? The answer is obvious. The same discipline and shopping habits should also be used when buying financial products such as Life Insurance. Here we share with you basic terms that everyone must be knowledgeable about, followed by an example to help you relate to these terms.
1) Insured: The insured is the person who life is being insured.
2) Nominee / Beneficiary: This is the person who will receive the policy proceeds in case of death of the insured. The owner of the policy designates the nominee but the nominee is not a part of the insurance contract. The nominee is not required to pay any premium. The name of the nominee can be changed, unless the policy says otherwise.
3) Insurer: The insurer is the Life Insurance Company that undertakes the responsibility to pay the policy amount to the nominee on the occurrence of the insured event. For example, LIC, Birla Sunlife, ICICI Prudential, HDFC Standard Life, SBI Life are all insurers.
4) Policy holder: This is the person who buys the policy or the one who owns the policy. The insured and the policy holder can be one and the same person, or they can be two different people.
For example, if Rahul buys a policy on his own life, he is both the policy holder and the insured. But if Asha, his wife, buys a policy on Rahul's life, she is the owner and he is the insured. The policy owner is the person who undertakes the guarantee to pay the premiums. The insured is a part in the contract, but not legally bound to it to follow its terms.
5) Sum assured: This is the minimum amount of money that the policy will pay out to the nominee in case of the insured's death or the occurrence of the insured event.
6) Premium: A periodic or a single payment that a policy holder makes to the insurance company in exchange for the insurance company's obligation to pay out the sum assured.
7) Maturity: Some insurance policies are valid up to a certain period of time only. When this period expires, the policy is said to have reached maturity. At this date the policy holder receives a sum of money from the insurance company.
8) Lapse: When the policy holder is unable to or does not pay the premium any more, within the specified grace period, the policy is said to have lapsed. If certain conditions are met, a revival of a lapsed policy might be possible.
9) Free look period: Once you get an insurance policy, the rules offer you 15 days within which you can revisit your purchase decision. This gives you the time to go through the policy's fine print, understand how the policy is going to work and be convinced that you need such a policy before deciding to commit funds every year over the insurance plan's tenure.
Here are the above terms explained with a stylized example.
Raj and Sonali are a newly married couple. Raj is the sole breadwinner in the family. Raj plans to buy an insurance policy on his life so that in case of his untimely death Sonali's financial future can be secure. He decides to take a policy from LIC for a coverage of Rs 5 lakhs. He agrees to pay an annual premium of Rs 1,500 per annum for a period of 10 years. Going ahead with his plans, he applied for a policy and received the policy document on 15th December, 2009.
In this case study the following are the relevant details:
Insured: Raj
Policy holder: Raj
Nominee: Sonali
Insurer: LIC
Sum assured: Rs 5 lakhs
Premium: Rs 1,500 annually
Free look period: 15 days from 15th December, 2009
When you go shopping, would you rather be knowledgeable or ignorant about some basic things that can help you make a smarter decision about buying the product? The answer is obvious. The same discipline and shopping habits should also be used when buying financial products such as Life Insurance. Here we share with you basic terms that everyone must be knowledgeable about, followed by an example to help you relate to these terms.
1) Insured: The insured is the person who life is being insured.
2) Nominee / Beneficiary: This is the person who will receive the policy proceeds in case of death of the insured. The owner of the policy designates the nominee but the nominee is not a part of the insurance contract. The nominee is not required to pay any premium. The name of the nominee can be changed, unless the policy says otherwise.
3) Insurer: The insurer is the Life Insurance Company that undertakes the responsibility to pay the policy amount to the nominee on the occurrence of the insured event. For example, LIC, Birla Sunlife, ICICI Prudential, HDFC Standard Life, SBI Life are all insurers.
4) Policy holder: This is the person who buys the policy or the one who owns the policy. The insured and the policy holder can be one and the same person, or they can be two different people.
For example, if Rahul buys a policy on his own life, he is both the policy holder and the insured. But if Asha, his wife, buys a policy on Rahul's life, she is the owner and he is the insured. The policy owner is the person who undertakes the guarantee to pay the premiums. The insured is a part in the contract, but not legally bound to it to follow its terms.
5) Sum assured: This is the minimum amount of money that the policy will pay out to the nominee in case of the insured's death or the occurrence of the insured event.
6) Premium: A periodic or a single payment that a policy holder makes to the insurance company in exchange for the insurance company's obligation to pay out the sum assured.
7) Maturity: Some insurance policies are valid up to a certain period of time only. When this period expires, the policy is said to have reached maturity. At this date the policy holder receives a sum of money from the insurance company.
8) Lapse: When the policy holder is unable to or does not pay the premium any more, within the specified grace period, the policy is said to have lapsed. If certain conditions are met, a revival of a lapsed policy might be possible.
9) Free look period: Once you get an insurance policy, the rules offer you 15 days within which you can revisit your purchase decision. This gives you the time to go through the policy's fine print, understand how the policy is going to work and be convinced that you need such a policy before deciding to commit funds every year over the insurance plan's tenure.
Here are the above terms explained with a stylized example.
Raj and Sonali are a newly married couple. Raj is the sole breadwinner in the family. Raj plans to buy an insurance policy on his life so that in case of his untimely death Sonali's financial future can be secure. He decides to take a policy from LIC for a coverage of Rs 5 lakhs. He agrees to pay an annual premium of Rs 1,500 per annum for a period of 10 years. Going ahead with his plans, he applied for a policy and received the policy document on 15th December, 2009.
In this case study the following are the relevant details:
Insured: Raj
Policy holder: Raj
Nominee: Sonali
Insurer: LIC
Sum assured: Rs 5 lakhs
Premium: Rs 1,500 annually
Free look period: 15 days from 15th December, 2009
Wednesday, August 11, 2010
Assignment2
Q.1) Highlight major role of a central bank in financial System.Also explain how does the monetary policy of RBI helps it in effectively executing its role.
Q.2)Describe different types of NBFCs.Also explain the regulations relating to registration and mobilizations of funds for NBFCs.
Q.3)What are restrictions on accepting deposits from public by NBFCs?
Q.4)Write a note on role of NBFCs in Financial System.
OR
Explain the role and importance of NBFCs in development of Financial structure.
Q.2)Describe different types of NBFCs.Also explain the regulations relating to registration and mobilizations of funds for NBFCs.
Q.3)What are restrictions on accepting deposits from public by NBFCs?
Q.4)Write a note on role of NBFCs in Financial System.
OR
Explain the role and importance of NBFCs in development of Financial structure.
Subscribe to:
Posts (Atom)