session 3 ifas 2

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.



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




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.




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.





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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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.



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)



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.



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.



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



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.

session 3 ifas 2

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