GROUP 2 (Tutorial Week 10)

Lekshmi a/p vijayan 133979

Melissa young jia lin 133989

Tay Yen Shan 134061

Nuranis Qhaleeda Binti Ahmad Pesal 141846

Nuranis Qhaleezah Binti Ahmad Pesal 141894

1. Discuss the accounting treatment of Murabaha, Mudharaba, Musharaka and Ijarah

financing.

Murabaha
 Recognition of Assets
AAOIDI FAS2 discussed two alternatives for the recognition of Assets available for
deferred payment sale:
(a) Recognition of assets available for sale at the time of contracting;
(b) Recognition of assets available for sale at the time of delivery
 Measurement of Asset
AAOIFI FAS 2 considered two alternatives on this issue. The first alternative was to
measure the asset available for deferred payment sale at their purchase price. The
other alternative was to measure those assets at their acquisition cost, which is the
purchase price plus any direct expenses associated with the acquisition process.
AAOIFI preferred the second alternative, which capitalizes direct expenses
associated with the acquisition process.
 Accounting treatment of unrealized gains and losses
Alternative 1: Record the unrealised gains and losses in income statement at the end
of financial period
Alternative 2: Record the unrealised gains and losses resulting from the valuation of
assets available for deferred payment sale in a reserve account, and present this
account in the statement of financial position at year end.

Mudharaba

 Mudaraba capital (cash or in kind) recognized when paid to the mudarib. If in

installments, then when each installment is paid.
 Present in financial statements under ‘Mudaraba Financing’ or ‘nonmonetary
Mudaraba assets’ if not paid in cash.
 If Mudaraba capital is paid in kind, it should be measured at fair market value. If
valuation is different from book value, then the difference should be recognized in
the books of the Islamic bank as income/expense.
 Expenses incurred by either party is not considered as Mudaraba capital unless
agreed upon by both parties.
 Any repayment of Mudaraba capital shall be deducted from Mudaraba capital.
 Any loss (other than due to mudarib negligence) of capital suffered prior to
inception shall be borne by the Islamic bank

Musharaka
  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.
 If the bank’s shares is in the form of trading or non-monetary assets, it should be
valued at fair value and any difference between carrying amount of the assets in
the bank’s books and the fair value, is recognized as profit and loss in the income
statement
 Normally, contracting expenses (e.g. feasibility studies, legal expenses) are not
recognized as part of the capital unless agreed by both

Ijarah financing

 AAOIFI FAS 8 states that the fulfilment of the benefit should be of a permissible
nature and the benefit should be in accordance with sharia’ah. This is to ensure that
ijarah only signifies such an arrangement where both the usufruct and the return are
permissible by sharia’ah.
 AAOIFI’s classifies ijarah financing into 2 types I.e Operating Ijarah and Financing
Ijarah (Ijarah Muntahia Bittamleek)
 AAOIFI recognised that Operating Ijarah is where the title of assets is not transferred
to the lessee. Whereby Ijarah Muntahia Bitamleek involves two contracts I.e. a lease
over the lease period and transfer of ownership at the end of contract. Title of the
assets is then transferred to the lessee based on one of the following method
depending on the types of asset:
1. By way of gift
2. Token price or pre-determined price
3. Equivalent price
4. Gradual transfer of share holding

2. Write down all the relevant journal entries for Murabaha, Mudaraba, Musharaka and
Ijarah.

MURABAHA
At the time of contracting:
Dr.Murabahah/BBA Financing (cost+Profit)
Cr. Cash or payable account
Unearned Financing income account

When the instalment is received:

Dr. Cash account
Cr. Murabahah/BBA financing account

When instalment is due but not yet received:

Dr. Receivable account
Cr. Murabahah

When income is due to recognise(accrual basis)

Dr. Unearned financing income account
Cr. Profit and loss account
MUDARABA
Dr. Mudharabah financing account
Cr. Cash account
(Being provided mudharabah financing to mudarib)

Dr. Cash account

Cr. Mudharabah financing account
(Being repayment or mudharabah capital repaid by mudarib)

Dr. Cash account

Cr. Profit & Loss account
(Being received profit from mudarib)

Dr. Profit & Loss account

Cr. Mudharaba financing account
(Being set-off mudharaba loss borne by rab al-mal)

MUSHARAKA
Dr. Musharaka financing account
Cr. Cash account
(Financing for Customers/partners)

Dr. Cash account

Cr. Musharaka financing account
(Repayment by customers/partners)

Dr. Cash account

Cr. Profit and loss account
(Profit received from musharakah financing)

IJARAH
For Ijarah muntahia bitamleek
Dr. Ijarah Asset account
Cr. Cash or Payable account
(Purchase of ijarah asset by the lessor)

Dr. Cash account

Cr. Ijarah Revenue account
(Receipt of rental income)

Dr. Ijarah revenue account

Cr. Profit and loss account (Income)
(Recognition of profit at the end of the year)
 AITAB
Dr. AITAB financing account(cost+profit)
Cr. Cash or payable account
Cr. Unearned financing income account
(Recognition of ijarah financing)

Dr. Cash account

Cr. AITAB financing account
(Rental receipt)

Dr. Unearned financing income account

Cr. Profit and Loss account
(Recognition of ijarah income)

3. Identify and state the differences between the conventional and Islamic banks’ FS (I).

Deposits are collected from savers under both type of institutions for reward irrespective a
bank is operating under conventional system or Islamic system. The difference lies in
agreement of reward. Under conventional system reward is fixed and predetermined while
under Islamic deposits are accepted through Musharaka and Mudaraba.

Under conventional banking return is higher on long-term deposits and lower for short-term
deposits. Same is the practice in Islamic banking to share profit with depositors. Higher
weight for profit sharing is assigned to long-term deposits being available to bank for
investing in longer term projects yielding superior returns and lower weight for short-term
deposits which cannot be invested in long term project.

Under conventional system total risk is born by the bank and total reward belongs to it after
servicing the depositors at fixed rate while under Islamic system risk and reward both are
shared with depositors. Reward of depositors is linked with outcomes of investments made
by IFIs.

The next difference lies in financing agreement. Conventional banks are offering loan for a
fixed reward while IFIs cannot do that because they cannot charge interest. IFIs can charge
profit on investments but not interest on loans. In conventional banking three types of loans
are issued to clients including short term loans, overdrafts and long-term loans. Islamic
banks cannot issue loans except interest free loans.