Understanding Islamic Finance - Doha Academy of Tertiary Studies

Ijarah – Leasing 305• is presented as Ijarah revenue.Initial direct costs• material costs are allocated over the lease term or otherwise charged directly as anexpense.Repairs of leased assets• a provision for repairs is established if repairs are material and differ in amount fromyear to year;• repairs undertaken by the lessee with the consent of the lessor are to be recognizedas an expense.At the end of the financial period/lease term• legal title passes, subject to settlement of Ijarah instalments and on purchase of theasset by the lessee;• if the lessee is not obliged to purchase and decides not to do so, the asset shall bepresented as assets acquired for Ijarah and valued at the lower of the cash equivalentvalue or the net book value. If the cash equivalent is less than the net book value,the difference between the two shall be recognized as loss;• if the lessee is obliged to purchase the asset due to his promise but decides not todo so, and the cash equivalent value is lower than the net book value, the differencebetween the two amounts shall be recognized as a receivable from the lessee.Permanent impairment/sale of lease asset• if the Ijarah instalments exceed the fair rental amount and impairment is not due toaction or omission of the lessee, the difference between the two amounts shall berecognized as liability due and charged to the income statement.4. Ijarah Muntahia-bi-Tamleek through sale prior to the end of the lease termfor a price equivalent to the remaining Ijarah instalmentsAssets acquired• are recognized at historical cost;• are presented as Ijarah Muntahia-bi-Tamleek assets and measured at book value;• depreciate as per normal depreciation policy.Ijarah revenue/expense• is allocated proportionately in financial periods over the lease term;• is presented as Ijarah revenue.Repairs of leased assets• a provision for repairs is established if repairs are material and differ in amount fromyear to year;• repairs undertaken by the lessee with the consent of the lessor are to be recognizedas expense.Permanent impairment/sale of lease asset• as in the above case.