CAT / FIA FFM Syllabus D. Financing Decisions - Medium term finance - Notes ^{1 / 1}

are those that a company pays back in 1 to 5 years, and they include bank loans, hire purchases and leases.

Advantages:

1. You can complete your loan in short period. Responsibility is over

2. You can take  other loan if you need in future

Disadvantages

1. Normally banker is charging higher rate of interest for Medium Term loan

2. There is a risk if we fail to pay within the allotted period.

Hire Purchase

A method of buying goods through making installment payments over time.

Under a hire purchase contract, the buyer is leasing the goods and does not obtain ownership until the full amount of the contract is paid.

Finance lease

A finance lease is where the LESSEE takes the majority of the risks and rewards of the underlying asset.

Therefore with a finance lease the lessee would show the asset on their SFP (and the related finance lease liability).

When classifying look for substance rather than the form.

Finance Lease Indicators:

• The lessee gets ownership of the asset at the end of the lease term

• The lessee can buy the asset at such a low price that it is reasonably certain that the option will be exercised;

• The lease term is for the major part of the economic life

• The PV of the lease payments is substantially the fair value of the leased asset; and

• Only the lessee can use the asset as it is so specialised