WORKSHOP ON ACCOUNTING OF IJARAH UNDER IFAS – 2Presentation By: Omar Mustafa Ansari Partner – Islamic Financial Services Ford Rhodes Sidat Hyder & Co. Sale and lease back transaction – Ijarah Muntahia Bittamleek 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. . is expected to be transferred to the lessee after the end of the lease term. Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co. Ijarah and Ijarah Muntahia Bittamleek are by nature purely leasing transactions in which the subject matter is the usufruct of the asset and not the amount of money as in case of a finance lease. the ownership of the subject asset. it is a substitute to financing transactions. Ijarah Muntahia Bittamleek / Ijarah wa Iqtina is an Ijarah transaction in which. . transfer its usufruct to another person for an agreed period for an agreed consideration.What is Ijarah? Ijarah is a contract whereby the owner of an asset. In other words it is not a “financing” transaction and instead. other than consumables. as well as. the conventional banks. are however. .Ijarah – Difference of Treatment The IFAS – 2 issued by ICAP. the AAOIFI standard suggest the accounting treatment similar to an operating lease transactions with certain exceptions. just like finance lease – in accordance with IAS-17. not following IAS-17. On the other hand. Modarabas. Islamic banks currently operating in Pakistan are accounting for Ijarah as a financing transaction. Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co. as well as. Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co. . According to AAOIFI standard. plant and equipment with separate disclosure. while as per IFAS – 2.Ijarah – Accounting by Islamic Bank as Lessor Asset is recognized at historical cost and depreciated as per normal depreciation policy with an expected realizable value at the end. these are included in property. these are presented as Investments in Ijarah Assets. the rentals are generally also accounted for on a straight line basis. Most suitable method is generally the straight line method because. the depreciable life shall be equal to the asset’s useful economic life.Ijarah – Accounting by Islamic Bank as Lessor Depreciation has to be calculated in line with the methods allowed by IAS – 16. . to same or some other customer. except where it is expected that the asset will be given on Ijarah again. Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co. Depreciation term shall generally be equal to the lease term. in which case. Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co. Repairs undertaken are recognized as expense. Initial direct cost is amortized over the lease term. However.Ijarah – Accounting by Islamic Bank as Lessor Lease rentals including other associated charges and Ijarah related expenses are allocated proportionately in financial periods over the lease term. According to AAOIFI Standard. a provision for repairs is established if repairs are material and differ in amount from year to year. Presentation By: . IFAS-2 allows that the same may be charged to income as and when incurred. Purchase of Assets and Lease Lease rentals of Rs. 2+10 M Lessee Depreciation Repair and Maintenance – including provision for repairs Expenses incidental to ownership Deposit – recorded as liability Monthly rentals – recorded as revenue over the term (when due) Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co. 10 M Records Assets at historical cost Rs. . 12 million over lease term Lessor Rs. Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co. In case of expected selling price is Nil or fixed or equivalent to some pre agreed amount. Same accounting treatment should be applied as in case of Ijarah.Ijarah Muntahia Bittamleek – Additional Treatments IFAS – 2 does not deal with Ijarah Muntahia Bittamleek separately. all the risks and rewards remain with the lessor. . the residual value for the purpose of depreciation should be equivalent to such amount. as according to the substance of transaction. Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co. However.Impairment In case where a leased asset has become impaired. that is when the expected future economic benefits from that asset are lower than its carrying amount. Impairment provisions according to prudential regulations should also be recorded in addition to specific impairment as discussed above. the matter of applicability of prudential regulations needs certain clarifications from SBP. . the IAS – 36 shall be applied to work out the recoverable amount and any resultant impairment shall be recognized as a loss. Sale price Equal to fair value Different from fair value Gain or loss recognized in period in which transaction occurs Gain or loss allocated as an adjustment to Ijarah expenses / amortized over the lease term Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co. and If the sale price is different from its fair value any gain or loss shall be amortized / allocated as an adjustment to Ijarah expenses over the lease term.Sale and Lease Back Transaction – Operating Ijarah – Lessee’s Perspective Sale and lease back resulting into an Ijarah: If the sale price is same as that of its fair value any gain or loss shall be recognized in period in which such transaction occurs. . Sale and Lease Back Transaction – Ijarah Muntahia Bittamleek – Lessee’s Perspective According to AAOIFI Standard. gains or losses resulting from sale shall be allocated as an adjustment to Ijarah expenses over the lease term. Presentation By: Omar Mustafa Ansari – Partner – Ford Rhodes Sidat Hyder & Co. in case of sale and lease back resulting into Ijarah Muntahia Bittamleek. .