1.20     Query

 Disclosure of instalments due

under hire purchase sales

 1. A Government of India undertaking is supplying machinery and equipment to small industrial units on hire purchase basis under its Hire Purchase Scheme. As per the terms and conditions of the Scheme, the Corporation does not ask for any security in respect of the machinery supplied on hire purchase basis costing upto Rs. 6 lakhs. However, for the machines costing over 6 lakhs, the Corporation demands collateral security. The full hire purchase value of machines is payable in 13 instalments. In case of existing units, first instalments falls due after 12 months from the date of delivery of machines. Whereas in the case of new units the 1^st instalment becomes due for payment after 1.5 years. The subsequent instalments are payable half-yearly thereafter.

2. The accounting entries passed by the Corporation in this regard in its books of account are given below:

(i)  When machinery is acquired on behalf of hirer

                Purchase A/c. Dr.

                To Account Payable/Bank A/c.

(ii) When machine is delivered to the hirer

Machinery Out-on-Hire Purchase A/c Dr.

To Sales A/c.

To Interest Receivable A/c. 85-86

To Interest Receivable A/c. 86-87

To Interest Receivable A/c 87-88

To Interest Receivable A/c. 88-89 and so on yearwise.

At the end of each year, i.e., on 31^st March, the interest portion of that year which was credited to Interest Receivable A/c. is transferred to Interest Earned A/c.

(iii) When instalment becomes due

Hirer A/c. Dr.

To Machinery Out-on-Hire Purchase A/c.

To Insurance A/c.

(iv) When payment is received

Bank A/c Dr.

To Hirer A/c.

3. Sometimes instalments become due in the month of February March, i.e., during the current financial year while the payment from hirer is received in the next financial year. There are also some instances when the hirers fail to pay the amount due against instalments. The amounts of instalments due and not received are shown in the balance sheet as a current asset under Sundry Debtors as Sundry Debtors: Accrued Instalments-Secured against Machines, in accordance with the relevant accounting policies followed by the Corporation, which are reproduced below:

For machines sold on Hire Purchase Basis the hirers are treated as debtors to the extent of accounting policies already fallen due and are shown under the head Sundry Debtors accrued Instalments . The unaccrued instalments are reflected separately in the balance sheet under Machines out on hire purchase accounts.

            Sundry Debtors in respect of machines delivered, the titles of which rest with the Corporation, are treated as fully secured though the market value of those machines cannot be readily ascertained .

4. The statutory auditors have given the following comments in this regard in their audit report:

            Except to the extent of security other than machinery, if any, held by the Corporation, the same should have been shown as unsecured as the ownership of the machine kept as security passes on to the hirer only on the payment of the last instalment, and, therefore, the Corporation s own machines cannot form security for such accrued instalments .

5.The querist has sought the opinion of the Expert Advisory Committee that keeping in view the fact that the ownership of the machine delivered under a hire purchase agreement rests with the Corporation till the final instalment is received, can it form a security for accrued instalments fallen due but not received?

6.The Corporation is also making the provision for bad and doubtful debts in respect of these debtors who fail to pay their dues and fall under the following categories:

(i) All the cases where the amount have become over-due for 3 years or more,

(ii) All cases which are under litigation or arbitration,

(iii) In addition to the above, the cases where the Regional Office is doubtful about the recoveries of the dues for any special reason.

7. The above provisions for bad and doubtful debts work out to 40% to 50% of the total sundry debtors.

8.The Government Auditors have observed that since the debtors are secured against machinery, provision is not required to be made.

9. The querist has sought the opinion of the Expert Advisory Committee as to whether it is proper to make a provision for bad and doubtful debts in respect of debtors which are considered to be secured against machinery sold on hire purchase basis.

                                                                            Opinion                                  August 10, 1987

1. The Committee notes that the Statement on Auditing Practices published by the Research Committee of the Institute of Chartered Accountants of India, has made recommendations regarding hire purchase transactions, though from the point of view of the purchasers. Para 9.4(d) of the Statement states: Future instalments under hire purchase agreements for the purchase of assets should be shown separately, preferably as secured loans.

2. Para 9.4(c) of the aforesaid statement also states:

Occasionally, the value of the security falls below the amount of the loan. This may happen for example, when the market values of the assets drop suddenly, or when the company has defaulted in the payment, so that the total liability exceeds the value of the security. In such cases, the loan should be classified as secured, only to the extent of the market values of the securities.

(a) debts which are not fully covered by the market value of the machine ; and

(b) debts in respect of which, repossession of the machine (and its subsequent sale) does not seem probable.

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