Post on 06-Apr-2018
8/3/2019 Session 3 IFAS 2
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WORKSHOP ON ACCOUNTING OFIJARAH UNDER IFAS – 2
Presentation By:
Omar Mustafa Ansari
Partner – Islamic Financial Services
Ford Rhodes Sidat Hyder & Co.
8/3/2019 Session 3 IFAS 2
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Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.
OUTLINE
What is Ijarah?
Difference of treatment
Accounting by Bank as Lessor
Purchase of asset and lease
Additional treatments
Sale and lease back transaction – Operating Ijara;
Sale and lease back transaction – Ijarah Muntahia
Bittamleek
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Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.
Ijarah – Difference of Treatment
The IFAS – 2 issued by ICAP, as well as, the AAOIFIstandard suggest the accounting treatmentsimilar to an operating lease transactions withcertain exceptions.
On the other hand, the conventional banks, aswell as, Islamic banks currently operating inPakistan are accounting for Ijarah as a financingtransaction, just like finance lease – in
accordance with IAS-17. Modarabas, arehowever, not following IAS-17.
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Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.
Ijarah – Accounting by Islamic Bank as Lessor
Asset is recognized at historical cost anddepreciated as per normal depreciation policywith an expected realizable value at the end.
According to AAOIFI standard, these arepresented as Investments in Ijarah Assets, while asper IFAS – 2, these are included in property, plantand equipment with separate disclosure.
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Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co.
Ijarah – Accounting by Islamic Bank as Lessor
Depreciation has to be calculated in line with themethods allowed by IAS – 16. Most suitablemethod is generally the straight line methodbecause, the rentals are generally also
accounted for on a straight line basis.
Depreciation term shall generally be equal to thelease term, except where it is expected that theasset will be given on Ijarah again, to same or
some other customer, in which case, thedepreciable life shall be equal to the asset’suseful economic life.
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Ijarah – Accounting by Islamic Bank as Lessor
Lease rentals including other associated chargesand Ijarah related expenses are allocatedproportionately in financial periods over the leaseterm.
Initial direct cost is amortized over the lease term.However, IFAS-2 allows that the same may becharged to income as and when incurred.
Repairs undertaken are recognized as expense.
According to AAOIFI Standard, a provision for repairs is established if repairs are material anddiffer in amount from year to year.
8/3/2019 Session 3 IFAS 2
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Lease rentals of Rs. 12million over lease term
RecordsAssets at
historical cost
Rs. 10 MLessor Rs. 2+10 M Lessee
DepreciationRepair and Maintenance – including provision for repairsExpenses incidental to ownership
Purchase of Assets and Lease
Deposit – recorded as
liabilityMonthly rentals – recorded as revenueover the term (whendue)
8/3/2019 Session 3 IFAS 2
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Ijarah Muntahia Bittamleek – AdditionalTreatments
IFAS – 2 does not deal with Ijarah Muntahia Bittamleek
separately.
Same accounting treatment should be applied as in
case of Ijarah, as according to the substance of
transaction, all the risks and rewards remain with thelessor.
In case of expected selling price is Nil or fixed or
equivalent to some pre agreed amount, the residual
value for the purpose of depreciation should be
equivalent to such amount.
8/3/2019 Session 3 IFAS 2
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Impairment
In case where a leased asset has becomeimpaired, that is when the expected futureeconomic benefits from that asset are lower thanits carrying amount, the IAS – 36 shall be applied
to work out the recoverable amount and anyresultant impairment shall be recognized as a loss.
Impairment provisions according to prudentialregulations should also be recorded in addition to
specific impairment as discussed above.However, the matter of applicability of prudentialregulations needs certain clarifications from SBP.
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Sale and Lease Back Transaction – OperatingIjarah – Lessee’s Perspective
Sale and lease back resultinginto an Ijarah:
If the sale price is same asthat of its fair value any gainor loss shall be recognized inperiod in which suchtransaction occurs; and
If the sale price is differentfrom its fair value any gain or loss shall be amortized /allocated as an adjustmentto Ijarah expenses over thelease term.
Equal to fairvalue
Gain or lossrecognized in
period in
whichtransaction
occurs
Different fromfair value
Sale price
Gain or lossallocated as
an adjustmentto Ijarah
expenses /amortized
over the leaseterm
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Sale and Lease Back Transaction – IjarahMuntahia Bittamleek – Lessee’s Perspective
According to AAOIFI Standard, in case of saleand lease back resulting into Ijarah MuntahiaBittamleek, gains or losses resulting from sale shallbe allocated as an adjustment to Ijarah expenses
over the lease term.