Accounting Treatment of Murabaha

Measurement of Asset Value

1. Measurement at acquisition by bank Historical cost shall be the basis

2. Measurement After acquisition a. Purchase orderer is obliged to fulfill his promise Historical cost should be used b. Purchase orderer is NOT obliged to fulfill his promise The asset value shall be measured at the cash equivalent value. If there is a decline in the value of asset, a provision for decline in the asset value shall be created.

Measurement of Asset Value

3. Discount on asset acquired by the bank Generally any discount received by the bank from the supplier shall not be considered as part of revenue but it will reduce the cost of goods by the amount of discount.

Murabaha Receivables
Short term & long term Murabaha receivable shall be recorded at the time of contract at their face value. Murabaha receivable are measured at the end of the end of

financial period at their cash equivalent value i.e. amount due from the customers at the end of financial period less any provision for doubtful debts.

Profit Recognition
a. On cash (or credit less then the financial period) May be recognized at the time of contracting b. On credit (lump sum or installment) a. Proportionate allocation of profits over the period of credit irrespective of whether cash is received or not. (preferred) b. As and when the installments are received. However, in both a & b, the revenue & cost of goods sold shall be recognized at the time of Sale, subject to the deferral of profit Deferred profit Deferred profit shall be offset against Murabaha receivables in the statement of financial position.

Early Settlement with Deduction of Part of Profit

If the client accelerates payment of one or more installments prior to the date specified for such payment, the Islamic bank may adopt one of the following steps: * a) At the time of settlement The Islamic bank may deduct part of the profit and the deducted to agreed at the time of settlement. The deducted amount shall be credited to the Murabaha receivables account and excluded from the profit recognized in respect of the installment ) After settlement b) The Islamic bank may ask the client to pay the full amount and thereafter the Islamic bank reimbursed the client with part of the profit. The amount reimbursed shall be credited to the Murabaha receivables account and excluded from the profit recognized in respect of the installment.
* subject to the approval of SSB of the bank.

Insolvency

If it becomes evident that the clients non-payment is due to insolvency, than the Islamic bank cannot ask to pay additional amount by way of penalty

Case Study for Advance Murabaha

Below is the case study for the understanding of Murabaha transactions carried out in Meezan Bank in various scenarios:
Example Purchase price/Cost/Principal Profit Rate Tenure Total profit on transaction Sale price (Contract price) D of Date f Disbursement Di b to supplier li / customer Date of Murabaha Contract i.e. Date of Possession Date of Culmination Date of Maturity of Murabaha Amount in Rs./% Rs /% 1000 10% 1 Year 100 1,100 J January 01 01,2010 2010 January 15,2010 January 15,2010 December 31, 2010

Scenario - 1
When there is bullet payment of profit and Cost (Principal) at the end of the period: 1- At the time of payment to the client for the purchase of goods on behalf of bank or directly to the 1
supplier by the bank the transaction will be accounted for as follows:

January 01, 2010

Dr Advance against Murabaha Cr Pay Order / Party Account 1,000 1,000

2- On January 15, 2010, at the time of signing of Declaration i.e. customer acting as an agent of
f the bank that he has utilized z the amount for f procurement p of f goods, g the the bank informs following entries would be passed:

January 15, 2010

Dr Inventory Cr Advance against Murabaha 1,000 1,000

Scenario 1 Cont
3- On January 15, 2010, at the culmination of Murabaha i.e. at the time of sale of goods to the January 15, 2010
Dr Dr Cr Cr customers with signing of Murabaha Contract by the bank and the client, the following entries would be passed: 1,000 100

Murabaha Financing Murabaha Profit Receivable Inventory Deferred Murabaha Income

1,000 100

4- At the time of Booking of Accrual @ 10% profit rate each month the following entry would be
passed. For instance at the end of January 31, 2010 [(1000 x 10%) x 31 / 365]

January 31, 2010

Dr Deferred Murabaha Income 8.49 Cr Income on Murabaha Financing 8.49 And so on this entry will be passed at the end of EACH month till maturity.

Scenario 1 Cont
5- On Maturity of Murabaha transaction i.e. on December 31, 2010 and at the time of receiving of
final payment following entry would be passed:

January 01, 2011

Dr D Cr Cr

Party B P Bank k A/c A/ Murabaha Financing Murabaha Profit Receivable

1 100 1,100

1,000 100

In case Declaration & Murabaha Contract is not received on January 15, 2010 and is received on February 15, 2010:

6- At the time of payment to the client for the purchase of goods on behalf of bank or directly to the
supplier by the bank the transaction will be accounted for as follows: 1,000

J January 01 01, 2010

Dr Cr Advance against Murabaha Pay Order / Party Account 1,000

7- On January 15, 2010

No entry would be passed

Scenario 1 Cont
8- At the end of First Month i.e. January 31, 2010
No entry would be passed for accruals of profit, as Declaration has not been received from the customer.

9- On February 15, 2010, at the time of signing of Declaration i.e. customer acting as an agent of

the bank informs the bank that he has utilized the amount for procurement of goods, the following entries would be passed: 1,000

February 15, 2010

Dr C Cr

Inventory Ad Advance against i tM Murabaha b h

1 000 1,000

Scenario 1 Cont
10- On February 15, 2010, at the culmination of Murabaha i.e. at the time of sale of goods to the
customers with signing of Murabaha Contract by the bank and the client, the following entries would be passed:

February 15, 2010

Dr Dr Cr Cr

Murabaha Financing Murabaha Profit Receivable Inventory Deferred Murabaha Income

1,000 100

1,000 100

11- At the time of Booking of Accrual @ 10% profit rate each month the following entry would be

passed. In this case the accrual would be for TWO months and would be passed on February , 2009 in the following f g manner: 28, [(1000 x 10%) x (31+28) / 365] 16.164 16.164

February 28, 2010

Dr Cr

Deferred Murabaha Income Income on Murabaha Financing

NOTE: In case the Murabaha declaration is NOT received on the due date, NO Entry would be passed until the Murabaha Declaration is received.

Scenario 2
When there is a bullet payment of Cost (Principal) at the end and profit is payable on monthly basis: 1- At the time of payment to the client for the purchase of goods on behalf of bank or directly to the
supplier by the bank the transaction will be accounted for as follows:

January 01, 2010

Dr Cr

Advance against Murabaha Pay Order / Party Account

1,000

1,000

2- On J January y 15, 2010, at the time of f signing g g of f Declaration i.e. customer acting g as an agent g of f January 15, 2010
Dr Cr the bank informs the bank that he has utilized the amount for procurement of goods, the following entries would be passed: 1,000 1,000

Inventory Advance against Murabaha

Scenario 2 Cont
3- On January 15, 2010, at the time of culmination of Murabaha i.e. at the time of sale of goods to the customers with signing of Murabaha Contract by the bank and the client, the following entries would be passed:

January 15, 2010

Dr Dr Cr Cr

Murabaha Financing Murabaha Profit Receivable Inventory Deferred Murabaha Income

1,000 100

1,000 100

4- At the time of Booking of Accrual @ 10% profit rate EACH month the following entry would be passed. For instance at the end of January 2010 [(1000 x 10%) x 31 / 365]

January 31, 2010

Dr Cr

Deferred Murabaha Income Income on Murabaha Financing

8.49

8.49

And so on this entry will be passed at the end of EACH month till maturity.

Scenario 2 Cont
5- At the time of receiving of Profit amount at the end of EACH month the following entry would be passed:

January 31, 2010

Dr D Cr

Party B P Bank k A/c A/ Murabaha Profit Receivable

8 49 8.49

8.49

6- At the maturity of the Murabaha period the last months remaining Murabaha income (December 2010) will be booked as per the following entry:

December 31, 2010

Dr Cr

Deferred Murabaha Income Income on Murabaha Financing

8.49

8.49 8. 9

7- Now at the end of the period the amount received from the client includes the whole amount of principal and last months profit, so the entry would be as follows:

January 01, 2011

Dr Cr Cr

Party A/c / Bank Murabaha Financing Murabaha Profit Receivable

1,008.49

1,000 8.49

Scenario 3
When there is a bullet payment of profit at the end of Murabaha period and Cost (Principal) is payable on monthly basis: 1- At the time of payment to the client for the purchase of goods on behalf of bank or directly to the
supplier by the bank the transaction will be accounted for as follows: 1,000

January 01, 2010

Dr Cr

Advance against Murabaha Pay Order / Party Account

1,000

2- On January 15, 2010, at the time of signing of Declaration i.e. customer acting as an agent of the bank informs the bank that he has utilized the amount for procurement of goods, the following entries would be passed:

January 15, 2010

Dr Cr

Inventory Advance against Murabaha

1,000

1,000

Scenario 3 Cont
3- At the Culmination of Murabaha i.e. at the time of sale of goods to the customers with signing of Murabaha Contract by the bank and the client on January 15, 2010 following entries
would be passed:

January 15, 2010

Dr Dr Cr Cr

Murabaha Financing Murabaha Profit Receivable Inventory Deferred Murabaha Income

1,000 100

1,000 100

4- At the time of Booking of Accrual @ 10% profit rate EACH month the following entry would be passed. For instance at the end of January 2010 ( x 10%) ) x 31 / 365] [(1000

January 31, 2010

Dr Cr

Deferred Murabaha Income Income on Murabaha Financing

8.49

8.49

And so on this entry will be passed at the end of EACH month till maturity.

Scenario 3 Cont
5- As the principal is payable EVERY month the entry passed would be passed when installment is
received from the customer: [1000 / 12 = 83.33]

January 17, 2011 (On any date on which the installment is received)
Dr Cr Party A/c / Bank Murabaha Financing

83.33

83.33

6- As the amount of Profit is payable at the end of the period, the entry would be as follows:

January 01, 2011

Dr Cr

Party A/c / Bank Murabaha Profit Receivable

100

100

Case Study for Credit Murabaha

Below is the case study for the understanding of Credit Murabaha transactions carried out in Meezan Bank in various scenarios:
Example Murabaha Purchase price/Cost/Principal Supplier Credit available to customer/Client Tenure for Financing Total profit on transaction Contract Price of Goods Sold D of Date f Declaration D l i (Goods (G d Receiving R i i Date) D ) Date of Disbursement/ Payment to the Client Date of Payment from Customer (Cost+Profit) Amount in Rs./% Rs /% 1000 2-Months (60 Days) 1 Month (30 Days) 100 1,100 1 A 10 1-Apr-10 30-May-10 29-June-10

Credit Murabaha- Scenario

1- On April 01, 2010, at the time of signing of Declaration i.e. customer acting as an agent of the bank informs the bank that he has utilized the amount for procurement of goods, the following entries would be passed:

April 01, 2010

Dr Cr

Inventory against Credit Murabaha (NON FUNDED) Payable to Supplier-Credit Murabaha (NON FUNDED)

1,000

1,000

(Off Balance Sheet Accounting Entry) 2- At the Culmination of Murabaha i.e. at the time of sale of goods to the customers with signing of
Murabaha Contract by the bank and the client on April 01, 2010 following entries would be passed p d 1,000

April 01, 2010

Dr Cr

Credit Murabaha Financing (NON FUNDED) Inventory against Credit Murabaha (NON FUNDED

1,000

(Off Balance Sheet Accounting Entry)

Credit Murabaha- Scenario

3- At the time of payment to the client for the purchase of goods on behalf of bank or directly to the supplier by the bank the transaction will be accounted for as follows:

May 30, 2010

Dr Cr Dr Dr Cr Cr

Payable to Supplier-Credit Murabaha (NON FUNDED) Credit Murabaha- Financing (NON FUNDED) (FUNDED) (FUNDED) ( )

1,000

(Reversal of Off balance Sheet Accounting entry)

1,000 100

1,000

Murabaha- Financing Profit Receivable on Murabaha Party y account Deferred profit on Murabaha

(Recording of On Balance sheet Financings)

1,000 , 100

Credit Murabaha- Scenario

4- At the end of First Month i.e. May 31, 2010 Accrual of Profit for the lapse period (from Disbursement till date) Dr Deferred profit on Murabaha 3.33 (100/30*1) Cr Income on Murabaha 5- Disclosure at Balance Sheet on May 31, 2010 Murabaha

3.33

Less:

1,100 (100 ) 1,000

Profit receivable (shown other asset) Murabaha-net

Credit Murabaha- Scenario

6- At the maturity of the Murabaha period the Accrual of Profit for the lapse period (from June 1, 2010 till maturity i.e. June 29, 2010) will be booked

June 29, 2010

Dr Cr Deferred profit on Murabaha Income on Murabaha 96.67 96.67

7- Now at the end of the period the amount received from the client includes the whole amount of principal and last months profit, so the entry would be as follows:

June 29, 2010

Dr Cr Cr Party Bank A/c Murabaha Profit receivable on Murabaha 1,100 1,000 100

FE25 Murabaha

All the procedure would remain the same, as is mentioned above in various cases, except for the fact that the amount would be in foreign currency.

Islamic Export Refinance Scheme (IERS)

Below is the case study for the understanding of IERS transactions carried out in Meezan Bank in various scenarios: For IERS the example in the First case would remains the same except for the following:
Example Profit Rate Tenure Profit on Transaction (Contract Price) ) Sale Price ( Date of Disbursement to client/ Payment to the Supplier Date of Culmination (Signing of Murabaha Contract) Date of Maturity of Murabaha Amount in Rs./% 10% 180 Days 49.31/1,49.31/January-01-2010 January-15-2010 June-29-2010

Islamic Export Refinance Scheme (IERS)

1- At the time of payment to the client for the purchase of goods on behalf of bank or directly to the supplier by the bank the transaction will be accounted for as follows:

January 01, 2010

Dr Cr

Advance against Murabaha (458) Pay Order / Party Account

1,000

1,000

2- On January 15, 2010, at the time of signing of Declaration i.e. customer acting as an agent of the bank informs the bank that he has utilized the amount for procurement of goods, the following f g entries would be passed: p

January 15, 2010

Dr Cr

Inventory against ERF Advance against Murabaha

1,000

1,000

Islamic Export Refinance Scheme (IERS)

3- At the Culmination of Murabaha i.e. at the time of sale of goods to the customers with signing of Murabaha Contract by the bank and the client on January 15, 2009 following entries would be passed.

January 15 15, 2010

Dr Dr Cr Cr

ERF From SBP (Part-I or Part II) Murabaha Profit Receivable ERF Inventory against ERF Deferred Murabaha Income ERF

1,000 49.31

1,000 49.31

4- At the time of Booking of Accrual @ 10% profit rate EACH month the following entry would be passed. For instance at the end of January 2010 ( x 10%) ) x 31 / 365] [(1000

January 31, 2010

Dr Cr

Deferred Murabaha Income ERF Income from ERF

8.21

8.21

And so on this entry will be passed at the end of EACH month till maturity.

Islamic Export Refinance Scheme (IERS)

5- At the time of receiving of Profit amount at the end of EACH Quarter the following entry would be passed:

March 31, 2009

Dr D Cr Party B P Bank k A/c A/ Murabaha Profit Receivable ERF 24 65 24.65 24.65

6- At the maturity of the Murabaha period the remaining Murabaha income (June 29, 2009) will be booked as per the following entry:

June 29, 2009

Dr Cr Deferred Murabaha Income ERF Income f from ERF 8.21 8.21

7- Now at the end of the period the amount received from the client includes the whole amount of principal and last months profit, so the entry would be as follows:

January 01, 2007

Dr Cr Cr Party A/c / Bank ERF From SBP (Part-I or Part II) Murabaha Profit Receivable ERF 1,024.65 1,000 24.65

Financing of Imported Merchandize (FIM)-SPOT

Below is the case study for the understanding of FIM (SPOT) transactions carried out in Meezan Bank in various scenarios:
E Example l Murabaha Price Profit Rate Tenure Date of Disbursement to client/ Payment to the Supplier Date of Declaration (Goods Receiving Date) Date of First Partial culmination of 1 Million i.e. Date of signing of partial Murabaha Contract Date of First Partial culmination of 3 Million i.e. Date of signing of partial Murabaha Contract Date of Maturity of Murabaha A Amount t in i R Rs./% /% 4,000,000 15% 90 Days January-01-2010 January-15-2010 February-15-2010 March-31-2010 March-31-2010

Financing of Imported Merchandize (FIM)-SPOT

1- At the time of payment to the client for the purchase of goods on behalf of bank or directly to the pp by y the bank the transaction will be accounted f for as f follows: supplier

January 01, 2010

Dr Cr

Advance against Murabaha Pay Order / Party Account

4,000,000

4,000,000

2- On January 15, 2010, at the time of signing of Declaration i.e. customer acting as an agent of the bank informs the bank that he has utilized the amount for procurement of goods, the following entries would be passed:

January 15, 2010

Dr Cr

Inventory Advance against Murabaha

1,000

1,000

Financing of Imported Merchandize (FIM)-SPOT

3- At the end of First Month i.e. January 31, 2010

No entry would be passed for accruals of profit, as Murabaha Contract has not been received from the customer.
4- At the First Partial Culmination of Murabaha i.e. at the time of sale of goods worth PKR 1 Million to the customers with signing of Murabaha Contract by the bank and the client on February 15, 2010 following entries would be passed.

February 15, 2010

Dr Party Bank A/c Cr Inventory Cr Income on Murabaha Financing 1,024,246.6 1,000,000 24,246.6

Financing of Imported Merchandize (FIM)-SPOT

5- At the end of Second Month i.e. February 28, 2010

No entry would be passed for accruals of profit

6- At the Second Partial Culmination of Murabaha i.e. at the time of sale of goods worth PKR 3 Million to the customers with signing of Murabaha Contract by the bank and the client on March 31, 2010 following entries would be passed.

March 31, 2010

Dr Party Bank A/c Cr Inventory Cr Income on Murabaha Financing 3 110 956 3,110,956 3,000,000 110,956

Thank You