Lease Finance Limited
Lease Finance Limited
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UK SMEs Prefer Hire Purchase Agreements Over Finance Lease Agreements Under ASC 842

14.09.23 07:56 AM Comment(s) By Andy Molyneux

UK SMEs Prefer Hire Purchase Agreements Over Finance Lease Agreements Under ASC 842

Introduction

The United Kingdom's small and medium-sized enterprises (SMEs) have long relied on various financing options to acquire essential assets for their businesses. Two common methods for acquiring assets are through hire purchase agreements and finance lease agreements. However, since the implementation of the new lease accounting standard, ASC 842, many UK SMEs are showing a clear preference for hire purchase agreements over finance leases. This shift in preference is driven by several factors, including accounting treatment, flexibility, and economic benefits. In this article, we will delve into why UK SMEs are favouring hire purchase agreements in the post-ASC 842 era.

 

Understanding ASC 842

ASC 842, also known as the International Financial Reporting Standard (IFRS) 16 for UK companies, was introduced to bring transparency to lease accounting. It requires lessees to recognise most leases on their balance sheets, treating them as finance leases. This change has had a significant impact on how businesses account for leases, and SMEs have had to rethink their leasing strategies.

 

Hire Purchase Agreements vs. Finance Lease Agreements

 

Improved Balance Sheet Presentation

One of the primary reasons for SMEs' preference for hire purchase agreements is the improved balance sheet presentation under ASC 842. With finance lease agreements, lessees must recognise both the asset and liability associated with the lease on their balance sheets, resulting in higher reported liabilities. In contrast, hire purchase agreements allow SMEs to report only the asset on the balance sheet, reducing their overall liabilities. This improved financial appearance can be crucial for SMEs seeking financing or presenting their financial statements to stakeholders.

 

Simplified Accounting and Reporting

Hire purchase agreements simplify the accounting and reporting process. Under ASC 842, finance lease accounting can be complex, requiring the calculation of interest expenses and lease liabilities. In contrast, hire purchase agreements typically involve straightforward monthly payments, making it easier for SMEs to manage their financial statements and comply with accounting standards.

 

Greater Ownership Rights

Hire purchase agreements provide SMEs with greater ownership rights over the asset. While finance lease agreements can technically transfer ownership at the end of the lease term, hire purchase agreements often involve smaller final payments, allowing SMEs to acquire the asset more easily and at a lower cost. This increased ownership can lead to significant long-term cost savings.

 

Tax Benefits

Hire purchase agreements may offer better tax benefits for SMEs. In the UK, interest and capital repayments on hire purchase agreements can often be tax-deductible, reducing the overall cost of financing. This can result in substantial savings over the life of the lease.

Flexibility

 

Hire purchase agreements offer greater flexibility for SMEs. They can structure the payments and terms to align with their cash flow and budget constraints. This flexibility is particularly valuable for businesses with fluctuating income streams or seasonal variations.

 

Conclusion

The implementation of ASC 842 has prompted UK SMEs to rethink their leasing strategies, and many are now favouring hire purchase agreements over finance leases. The improved balance sheet presentation, simplified accounting and reporting, greater ownership rights, tax benefits, and flexibility offered by hire purchase agreements make them an attractive option for SMEs seeking to acquire assets while maintaining financial transparency and control. As SMEs continue to adapt to the new lease accounting standard, it is clear that hire purchase agreements are becoming a preferred choice in the UK business landscape.

 

However, businesses should always consult with financial professionals to determine the most suitable leasing option for their specific needs and circumstances.

Andy Molyneux

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