Understanding Islamic Finance - Doha Academy of Tertiary Studies

272 Understanding Islamic FinanceBox 10.11:(Continued)• The balance of the Istisna‘a billing account shall be offset against the Istisna‘awork in progress account.• Any precontract cost shall be recognized as deferred costs and transferred to theIstisna‘a work in progress account upon signing of the contract.Contract costs in Parallel Istisna‘a• Istisna‘a costs shall include the price fixed in a Parallel Istisna‘a contract.• Progress billings to al-Mustasni (buyer) shall be debited to the Istisna‘a receivableaccount and credited to the Istisna‘a billing account.• The balance of the Istisna‘a billing account shall be offset against the Istisna‘a workin progress account.Istisna‘a revenue and profitIstisna‘a revenue is the price agreed, including the Islamic bank’s profit margin on thecontract, and recognized in the financial statements using either of the following methods:• percentage of completion method;• completed contract method.Deferred profitsThese shall be recognized using either of the following methods:• proportionate allocation (preferred method);• as and when each instalment is received.Early settlement• On advance payment made by the buyer, the Islamic bank may waive part of its profitthat shall be deducted from both the Istisna‘a receivable account and the deferredprofits account.• The above shall apply if the facts are the same except that the bank did not granta partial reduction of the profit when the payment was made, but reimbursed thisamount to the buyer after receiving the payments.Parallel Istisna‘a revenue and profit• Revenue and profit in Parallel Istisna‘a shall be measured and recognized accordingto the percentage of completion method.• The recognized portion of Istisna‘a profit shall be added to the Istisna‘a cost account.• If the contract price or part is to be paid following the completion of the contract,accounting treatments of deferred profits shall be applicable.Change orders, additional claims and maintenance costsChange orders and additional claims• The value and cost of change orders shall be added to Istisna‘a revenue and costs,respectively.• If the required conditions for additional claims are met, an amount of revenue shallbe recognized equal to the additional cost caused by the claim.