Understanding Islamic Finance - Doha Academy of Tertiary Studies

Forward Sales: Salam and Istisna‘a 273• If the required conditions are not met in full or in part for recognizing additionalclaims, the estimated value of these claims shall be disclosed in notes to the financialstatements.• If Parallel Istisna‘a exists, accounting treatments as mentioned above shall apply;however, the cost of such shall be determined by the contractor with the approval ofthe Islamic bank.Maintenance and warranty costs• These shall be recognized on an accrual basis and matched with recognized revenue.Actual costs shall be charged against the maintenance and warranty allowanceaccount.• If Parallel Istisna‘a exists, these shall be accounted for on a cash basis.Measurement at the end of the financial period• Istisna‘a work in progress shall be measured and reported at cash equivalent value ifapplying the percentage of completion method for recognition of profit and revenue.• Any expected loss at the end of the financial period shall be recognized and reportedin the income statement.• In the case of Parallel Istisna‘a, the Istisna‘a cost shall be treated as mentioned above.• Additional costs due to failure of a subcontractor shall be recognized as loss in theincome statement.Box 10.12:Istisna‘aAccounting Treatment by Islamic Banks (as Buyer) inIstisna‘a billings of completed jobs• Progress billings shall be debited to the Istisna‘a cost account and presented asassets in financial statements and corresponding credit shall be made to the Istisna‘aaccounts payable account.• The above accounting treatments shall also be applicable to a Parallel Istisna‘acontract.Receipt of commodity• The commodity received, if meeting the specifications required, shall be recorded athistorical cost.• If Parallel Istisna‘a exists, on delivery of the commodity to the client, the balance ofthe Istisna‘a costs account shall be transferred to an asset account.