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