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Wadiah Musharakah
Mudharabah Mudharabah
Murabahah Murabahah
Qard* Ijarah
Istisna’a
Salaam
Recognition
Define the basic principles that determine the timing of
revenue, expense, gain and loss
Measurement
Define the broad principles that determine the amount at
which assets, liabilities, owners equity etc. are
recognised
Islamic Accounting Recognition
Revenue Recognition
Recognized when realised
The right to receive not necessarily when the payment is received
(i.e. accrual basis – MASBi-1 para 22; AAOIFI) e.g. when a bank
delivers the service
Shariah Requirement: the amount of revenue should be known
and collectible
Expense Recognition
Realisation either because the expense relates to the earning of
revenue (e.g. transportation cost for services), or because it relates
to the period of income statement
Types of Shariah Contracts
FEE-BASED OTHERS
Home Mortgage Interest based lending Bai Bithaman Ajil (deferred payment sale) Asset-backing
Musharakah (partnership) Ownership of Assets
Credit Card Interest based lending Bai Inah (sell & buy back) , Ujrah (fee) Selling & buying of assets /
fee based
Personal Loan Interest based lending Bai Inah (sell & buy back) Selling & buying of assets
Tawaruk (Commodity Murabahah)
Savings / Current Interest earning Al Wadiah (Savings with guarantee) Profit determination upon
Accounts savings Mudharabah (profit sharing) maturity
Fixed / Term Interest earning Mudharabah (profit sharing) Profit sharing upon
Deposit savings maturity
Bonds (SUKUK) Interest earning Musharakah (partnership) Asset-backing transactions
investments Ijarah (leasing)
Istisna (Sale by order)
…for Islamic finance, the need for external financing can be met by Equity Financing & Debt Financing.
Within each respective domain, different types of contracts, securities and institutions usually evolve.
No. Transactions/Events Dr Cr
No. Transactions/Events Dr Cr
The IAH shall bear the losses arising from the assets funded
under the mudharabah contract or commonly known as
profit-sharing investment account (PSIA), except in the case
of misconduct, negligence or breach of contracted terms by
the Islamic banking institutions.
Mudharabah/ Profit Sharing Investment Accounts
Significant accounts.
No. Transactions/Events Dr Cr
Equity of
Deposit received from capital Unrestricted
1 provider/ rab al-mal Cash Mudharabah
Investment
Equity of
2 Deposit paid to capital provider/ rab Unrestricted Cash
al-mal Mudharabah
Investment
The capital provider or the Islamic bank (rab al-mal) and the
small entrepreneur (mudharib) become a partner
i.The profit sharing ratio between the rab al mal and the
mudharib is agreed upfront
No. Transactions/Events Dr Cr
The key characteristic of Murabahah is that the seller discloses the actual cost
he has incurred in acquiring the asset and then adds some profit thereon
The profit may be in lump sum or on a percentage
The payment can be on spot or on deferred payment
Murabahah transaction
1 2
1) The bank buys the goods for murabahah sale from the vendor and pays
for it.
2) The bank enters into a murabahah contract with a customer and delivers
the goods.
3) The customer pays the bank in installments over the contract period.
Murabaha to the Purchase Orderer
transaction
3
2
4
No. Transactions/Events Dr Cr
No. Transactions/Events Dr Cr
Termination or repayment of
2 Cash Musharaka Financing
capital by partner
The accounting rules for recognition and measurement for Musharaka capital is
similar to those of Mudaraba except for losses. The following are some of the rules.
1)The Islamic bank’s share in Musharaka capital (cash or kind) is recognized when it
is handed over to the partner or made available to the partnership under the title
“Musharaka financing” in the balance sheet.
2)If the bank’s share is in the form of trading or non-monetary assets, it should be
valued at fair value and any difference between the carrying amount of the assets
in the bank’s books and the fair value, is recognized as profit and loss in the income
statement.
3)Normally, contracting expenses (e.g. feasibility studies, legal expenses) are not
recognized as part of the capital unless agreed by both parties.
Measurement of the Islamic bank’s share in Musharaka capital after contracting at
the end of a financial period
4)In the case of constant Musharaka the Islamic bank’s share in the constant
Musharaka capital should be measured at the end of the financial period at historical
cost (the amount which was paid or at which the assets was valued at the time of
contracting).
5)However, if the Musharaka is a diminishing (musharaka mutanaqqisa), then the
Islamic bank’s share in the diminishing Musharaka should be measured at the end of
a financial period at historical cost after deducting the historical cost of any share
transferred to the partner (such transfer being by means of a sale at fair value). Any
difference between historical cost and fair value of the portion of share sold should
be recognized as profit or loss in the Islamic bank’s income statement.
6)If the diminishing Musharaka is liquidated before complete transfer is made to the
partner, the amount recovered in respect of the Islamic bank’s share shall be
credited to the Islamic bank’s Musharaka financing account and any resulting profit
or loss, namely the difference between the book value and the recovered amount,
shall be recognized in the Islamic bank’s income statement.
7)If the Musharaka is terminated or liquidated and the Islamic bank’s due share of
the Musharaka capital (taking account of any profits or losses) remains unpaid when
a settlement of account is made, the Islamic bank’s share shall be recognized as a
receivable due from the partner.
FAS 4: Musharaka Financing
Recognition of the Islamic bank’s share in Musharaka profits or losses
8)Profits or losses in respect of the Islamic bank’s share in Musharaka financing transactions that
commence and end during a financial period shall be recognized in the Islamic bank’s accounts at
the time of liquidation.
9)In the case of a constant Musharaka that continues for more than one financial period, the
Islamic bank’s share of profits for any period, resulting from partial or final settlement between the
Islamic bank and the partner, shall be recognized in its accounts for that period when the profits
are distributed; the Islamic bank’s share of losses for any period shall be recognized in its accounts
for that period to the extent that such losses are being deducted from its share of the Musharaka
capital.
10)The same as in (9) above applies to a diminishing Musharaka which continues for more than
one financial period, after taking into consideration the decline in the Islamic bank’s share in
Musharaka capital and its profits or losses.
11)If the partner does not pay the Islamic bank its due share of profits after liquidation or
settlement of account is made, the due share of profits shall be recognized as a receivable due
from the partner.
12)If losses are incurred in a Musharaka due to the partner’s misconduct or negligence, the partner
shall bear the Islamic bank’s share of such losses. Such losses shall be recognized as a receivable
due from the partner.
13)The Islamic bank’s unpaid share of the proceeds as mentioned above shall be recorded in a
Musharaka receivables account. A provision shall be made for these receivables if the are doubtful.
FAS 4: Musharaka Financing
Disclosure requirements
No. Transactions/Events Dr Cr
Depreciation Accumulated
2 Depreciation of Ijarah assets
expense depreciation
No. Transactions/Events Dr Cr
Transfer of ownership –
3 Cash Ijarah Asset
equivalent price
FAS 8: Ijarah and ijarah Muntahia Bittamleek
Operating Ijarah in the books of the Lessor
2) Ijarah Revenue
Ijarah revenue should be allocated proportionately to
the financial period of the lease term. Ijarah revenue
is presented in the income statement as Ijarah
revenue.