Professional Documents
Culture Documents
SECTION 2
GROUP MEMBERS :
RASHIDAH BT JAMAIN
0725480
ZUREEN SHAHIZAN BT ZULKIFLI
0727854
INSTRUCTOR :
DR. SHERLIZA PUAT NELSON
INTRODUCTION
different situations. In first situation, it means to employ services of a person on wages given to
him as a consideration for his hired services. The employer is called musta’jir while the
employee is called ajir. The second situation in ijarah is related to the usufruct of assets and
properties, and not the services of human beings. Ijarah in this sense means to transfer the
usufruct of a particular property to another person in exchange for a rent claimed from him. In
this case, the term ijarah also called leasing. Here the lessor is called mu’jir, the lessee is called
musta’jir. The rules of ijarah are very analogous to the rules of sale because in both cases,
something is transferred to another person for a valuable consideration. The only different
between ijarah and sale is that in sale, the right of the property is transferred to the purchaser,
while in the case of ijarah, the rights of the property remains in the ownership of the lessor, but
only the right to use it is transferred to the lessee. Ijarah can be divided into two types which are
In finance Ijarah, it provides the lessor with full recovery of its investment and a
reasonable profit over the initial non-cancellable lease term. The lessor retains ownership of the
equipment but transfers to the lessee substantially all of the risks and rewards of ownership of the
asset. The lessee is responsible for the insurance, registration and maintenance of the equipment.
Financial leases have some similar feature to secured loans. Both allow a business to use an
asset, such as equipment, over a fixed period, in return for regular payments. The business client
chooses the equipment it requires and the bank buys it on behalf of the business. After all the
payments have been made, the business client becomes the owner of the equipment. The lessor's
rate of return is fixed and is not dependent upon the asset-value, performance, or any other
extraneous costs. The fixed lease rentals give rise to an ascertainable rate of return on
investment. Therefore, by spreading payments out over the lifecycle of the asset, the business is
able to align the cost with the benefit derived from the use of the leased asset. The lessor
generally would not provide any services relating to operation of the asset. In addition, financial
leases are non-cancellable; in fact, the lessee cannot return the asset and not pay the whole of the
lessor's investment.
lease it is getting access to the risks and rewards of the asset and accordingly the lessee reflects
substance by recognizing the asset in its own accounts. When a lessee enters into a finance lease
it is obliged to make the lease rental payments for the duration of the lease, and accordingly the
lessee reflects the substance by recognising a liability. The lessee strictly capitalises the present
value of the minimum lease payments as the fixed asset and this is the amount also recorded as
the liability. The asset has to be depreciated over the shorter of the period of the lease and the
useful life of the asset. The loan accrued interest which should be recognized to give a constant
periodic return on the balance of the outstanding loan. The rental payment is not therefore simply
a revenue expense but represents partly the repayment of the capital element of the loan and
partly the finance charge on the loan. The total finance charge is the difference between the
minimum lease payments and the present value of the minimum lease payments. On the balance
sheet the finance lease creditor obligation under finance leases will have to be split between
current and long-term creditors. In the notes to the balance sheet a separate listing in the fixed
asset schedule is required to distinguish assets legally owned and those held subject to finance
leases. In the notes to the profit and loss account the amount of the interest charged that was in
Accounting treatment for lessor is when entering into a finance lease the lessor is in
substance making a loan which will be repaid with interest. Despite having legal title to the asset
subject to the lease, the lessor does not recognize this as an asset on its balance sheet, as it does
not control the asset and does not have access to the future economic benefits. The lessor does
however have the asset of a future income stream and accordingly recognizes a debtor ‘net
Al Ijarah Tasghiliyah also known as operating Ijarah. This type of ijarah does not include
the promise that the legal title in the leased asset will pass to the lessee at the end of the lease. In
the situation where the bank will purchases and maintains assets which have a high degree of
marketability. The bank rents these assets to other parties on terms and conditions agreed upon
for a specific time. After the termination of the period the asset is returned to the bank. The bank
then leases the same asset to a new lessee. The bank bears the risk of recession or diminishing
demand for these assets. At the end the bank may choose to scrap or dispose the asset.
The standard states that, operating Ijarah doesn’t result in ownership transfer at the end of
the leased period. This is similar with conventional operating lease. The standard further
addresses the recognition method in the books of the lessor. That is relevant as the income
recognition and the frequency of revenue receivable will ascertain only through that process.
Section 3 sub-section 1/1/1 asset acquired for Ijarah, indicates that, “asset acquired shall be
recognised at historical cost”. This tells us that, the original cost of acquisition is the basis for
valuations. The cost includes “net purchasing price plus expenditure necessary to bring the asset
to its intended use”. The values that the tangible asset is value at will include every associated
cost that enables the lessor to bring the asset to his possession. (AAOIFI 2008: 244)
AAOIFI FAS 8 Juristic Rule 1/5/2 outlines that “the lessee must use the leased asset in a
suitable manner or in conformity with common practice and comply with conditions which are
acceptable in the Shari’ah. He must also avoid causing damage to the leased asset by misuse
This condition of ownership is the general rule in Islamic finance. The only difference the
retaining by the lessor the corpus of the asset whilst in trade the buyer acquires ownership.
Given an example of A the lessor leased his property to B the lessee, for any tax expenses to be
paid, A has to pay tax due on the property whilst B takes care of the expenditure associated with
i) Book of lessor
The IFAS-2 issued by ICAP, as well as, the AAOIFI standard suggest the accounting
treatment of ijarah tasghiliyah is similar to an operating expenses with certain exception. On the
other hand, conventional banks, as well as, Islamic banks currently operating in Pakistan are
accounting are accounting for ijarah as financing transaction, just like finance lease, in
Asset is recognized as 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
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.
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
The lessee treated the lease asset as the lease rental or lease payment over the lease
period. They did not responsible in any expenditure incurred for the leased asset.
• If the sale price is same as that of its fair value any gain or loss shall be
• If the sale price is different from its fair value any gain or loss shall be
term.
CONCLUSION
Ijarah is the kind of leasing in Islamic way. Ijarah is not very different from conventional
lease. However it has some differences. First is the rental rate decided at the time of the
agreement and cannot be fluctuate. Secondly, some expenses under ijarah is different between
lessor and lessee. Other than that, for the lessor it is an expenses relating to the corpus of the
asset i.e. insurance, accidental repairs etc. will be borne by the lessor. Actual operating/overhead
expenses related to running the asset will be borne by the lessee. Two contracts into one contract
is not permissible in shariah therefore, we cannot have the agreement of hire and purchase into
one agreement, only we can undertake/promise to purchase the leased asset. Lastly, Ijara rental