Lease Financing - Hire, Purchase & Factoring Notes

Introduction
In order to start and sustain a business one needs finance. In the unit one on feasibility study, you have already seen the process of estimating financial requirements. The process involved (a) making a list of all the assets (b)identifying the sources of supply (c) estimating the cost of acquisition when the assets are to be acquired on outright basis. Then investment requirements as well as entrepreneur’s fear will increase. To scare away the entrepreneur’s fear, the emphasis should be given to resources and not to the ownership. In this unit we intend to familiarize you with some important financial innovations i.e., leasing, hire purchase and factoring.

Objectives
After going through this unit you should be able to
• Describe the meaning of leasing
• Explain the role and importance of lease financing in economic development of a
country
• Distinguish between the various types of leases
• Describe the meaning of hire purchase
• Distinguish between leasing and hire purchase
• Describe the meaning of factoring

Concept of Lease Financing
Lease financing denotes procurement of assets through lease. The subject of leasing falls in the category of finance. Leasing has grown as a big industry in the USA and UK and spread to other countries during the present century. In India, the concept was pioneered in 1973 when the First Leasing Company was set up in Madras and the eighties have seen a rapid growth of this business. Lease as a concept involves a contract whereby the ownership, financing and risk taking of any equipment or asset are separated and shared by two or more parties. Thus, the lessor may finance and lessee may accept the risk through the use of it while a third party may own it. Alternatively the lessor may finance and own it while the lessee enjoys the use of it and bears the risk. There are various combinations in which the above characteristics are shared by the lessor and lessee.

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Project Financing - A Report

Role of Infrastructure in Development
It is now well recognized that a country’s development is strongly linked to its infrastructure strength. Infrastructure helps determine a country’s ability to expand trade, cope with population growth, reduce poverty and a host of other factors that define economic and human development. Good infrastructure raises productivity and lowers production cost, but must also expand fast enough to accommodate growth. The precise links between infrastructure and development have been subject to extensive debate. The link between infrastructure and economic growth has been studied extensively in literature, the World Bank report (1994) of the World Bank for instance. The results show that infrastructure development can have a significant impact on the economic growth. For low-income countries basic infrastructure such as water, irrigation and to a lesser extent transportation are more important. As the economies mature into a middle-income category, their share of power and telecommunications in the infrastructure and investment increases. An estimate however shows that a 1% increase in infrastructure stock* is positively associated with a corresponding growth in GDP across countries.

Infrastructure is a necessary but not a sufficient condition for growth. Adequate complements of other resources must be present as well. In developing countries like India, infrastructure development and financing has largely been the prerogative of the government. Since infrastructure is typically a natural monopoly, the government considered it necessary to keep control of the same, in public interest. The success and failure of infrastructure to meet the needs of the people is largely a story of the government’s performance.

In the case of India, the government has taken great strides in improving the infrastructure stock of the nation since independence. However, when compared to developed countries we still have a long way to go. For instance, per capita power consumption in India is a meagre 282 KWH compared to 18,117 KWH for Canada. The situation has worsened in the 90’s with frequent revisions being made to the eighth plan document owing to the government’s inability to bear the cost of infrastructure anymore.

The simple truth is that public money is no longer sufficient to meet the burgeoning needs of the nation in line with its economic aspirations. Reluctantly, therefore the government has to throw open the doors to private participation in infrastructure.

Public Sector in Infrastructure Development
Infrastructure represents a strong public interest and so mer5its the attention of the government. The dominant role, that the public sector has assumed in the infrastructure

• Recognition of the economic importance of infrastructure
• Belief that the problems with supply and technology require highly active intervention by the government.
• Faith that the government could succeed where markets appear to fail

There is enough evidence to show that, despite significant growth in a number of developing countries infrastructure facilities have fallen far short of the requirements, Though each sector has special problems, there are common patterns in the provision of infrastructure services and shortcomings such as:
• Operational deficiencies
• Inadequate maintenance
• Extensive dependence on fiscal resources
• Lack of responsiveness to the needs
• Limited benefits to the poor

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Creating & Measuring Shareholders Value Project Report

When managers consider alternative strategies, those expected to develop the
greatest sustainable competitive advantage will be those that will also create the
greatest value for shareholders.

Companies can choose excellence in operations that is closely related to the
profitability. They can get their financial structure right, which is closest to free
cash flow among the fundamental drivers. They can also choose to be focused
and this is linked most closely to profitability. Those are areas of comparative
advantage. They can also create value through credible earnings growth, which
matches the fundamental driver growth and many other ways are in place to
create shareholder value.

The research issue arises from this variety of different ways to create value.
There is always scope for creating value in companies and they avail themselves of value-creating advice. The strategies are put in practice within the framework of that scope. We then find it worthwhile to investigate how strategies are handled in practice in some selected Swedish companies. However, it is not enough to have strategies in place, there is need for some indicators to ensure whether value had been created. Thus the companies need to measure and make sure that they are being successful in creating value for shareholder. “What gets measured gets done” this was a famous statement by Percy Barnevik’s (Dalborg, 1999). That statement underlines the importance of measurement.

In order to better answer the research issue, creating shareholder value will be studied in general as background to the research issue. The research issue will cover the different valuation methods used by companies to measure shareholder value creation and also the advantages and shortcomings of those methods whenever identified.

Objective of the study
The purpose is to conduct an analytical study of different methods used by companies to measure shareholder value creation. The study also aims to give a
general picture of how shareholder value is created as a background to measuring shareholder value. Furthermore all that will be done will be based on an empirical study.

Scope and limitations
Creating and measuring shareholder value can be studied from different perspectives. When studied from the shareholder or other stakeholder perspective, the research is mostly based on the information collected from the shareholder or stakeholders. When it is the stock market perspective, the information used in the study is collected mainly from the stock market. If the study is based on the company perspective then the information used will mainly be collected from the company. Every perspective is very important to investigate. However due to the time limit and the scope of the problem we are obliged to make some limitations.

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Notes on Accounting of Fixed Assets

ACCOUNTING FOR FIXED ASSETS
Introduction
An asset is a resource acquired for use in a business. A distinction is made in accounting between "current assets" and " "fixed assets". Current assets are those assets that form part of the working capital of a business. They are assets whose benefits are expected to be realized within one accounting period. They are replaced frequently or converted into cash during the course of trading and therefore they are short term in nature e.g. stock, prepayments, debtors, cash and bank. A fixed asset is an asset of a business intended for continuing use, rather than a hort-term, temporary asset such as stocks. Fixed assets are assets acquired for use in the business and not for resale in the ordinary course of business. Their use value extends beyond one accounting period and therefore they are long-term in nature e.g. furniture, buildings, plant and machinery, motor vehicles, fittings
etc. This chapter will present the accounting for fixed assets. This chapter overs the recognition, valuation and presentation of fixed assets and the provision of depreciation expense.

Objectives:
After studying this chapter you should be able to:
• Identify the various types of long term assets
• Distinguish between capital and revenue expenditure
• Identity the relevant cost of fixed assets.
• Appreciate methods of estimating depreciation expense
• Draw ledger accounts for fixed assets and depreciation
• Account for disposal of assets
• Draw schedule of fixed assets

Key Terms
Assets: Resources acquired for use in the business e.g. stock, motor vehicles

Tangible Assets: Assets with a physical existence land, buildings and machinery.

Intangible Assets: Assets without a physical existence e.g. goodwill, patent rights.

Current Assets: Assets expected to be realised within one accounting period eg cash, debtors

Fixed Assets: Fixed assets are assets acquired for use in the business and not for resale in the ordinary course of business.

Classification of Long-term assets-
Fixed assets can be classified in a company's balance sheet as intangible, tangible, or investments. Tangible fixed assets are those fixed assets with a physical existence e.g. Land and buildings, furniture and fitting, etc. Intangible fixed assets are those fixed assets without physical existence. Examples of intangible fixed assets include:
1. Goodwill; this is an asset created by a business over time through its location,
reputation skills of workers etc.

2. Patent right and trademarks; legal right to a product or an art or device of production.

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