Understanding Islamic Finance - Doha Academy of Tertiary Studies

Measurement at the end of the financial periodParticipatory Modes: Shirkah and its Variants 345• apply the same measurement criteria as used at the time of contracting, however,any repayment made to the bank is to be deducted from the Mudarabah capital;• any loss at the inception of work shall be borne by the Islamic bank and if the lossoccurs after the inception of work, it shall not affect the measurement of Mudarabahcapital;• if the whole of the capital is lost without any misconduct or negligence of theMudarib, the Mudarabah shall be terminated and the Islamic bank shall recognize itas loss;• if the Mudarabah is terminated or liquidated and capital is not paid, it shall berecognized as a receivable due from the Mudarib.Recognition of the bank’s share in profits or losses• profits or loss on Mudarabah transactions which commence and end during the samefinancial period are recognized at the time of liquidation (constructive or actual);• the Islamic bank’s share of profits on Mudarabah financing that continues for morethan one financial period is recognized to the extent of profit distribution and theloss is deducted from the Mudarabah capital;• share of profits is recognized as a receivable due from the Mudarib if he does notpay after liquidation or settlement of account is made;• losses are recognized at the time of liquidation by reducing the Mudarabah capital.Box 12.7: Accounting Treatment of Musharakah 99Recognition of the bank’s share in Musharakah capital at the time of the contract• recognized when it is paid to the partner or made available to him on account ofMusharakah;• presented as “Musharakah financing” in the financial statements.Measurement of the bank’s share in Musharakah capital at the time of contracting• capital provided in cash is measured by the amount paid or made available to thepartner on account of Musharakah;• capital provided in kind is measured at fair value of the assets and any differencebetween the fair value and the book value is recognized as profit or loss;• expenses incurred are not to be considered part of Musharakah capital, unless otherwiseagreed by both parties.99 The author is grateful to Mr Omer Mustafa Ansari of Fords Rhodes Sidat Hyder & Co., Karachi for his help in respect of theaccounting treatment in various modes of financing.