ijara .docx - Ijara Accounting for Islamic Banks Ijara 1...

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Ijara Accounting for Islamic Banks Ijara 1 Introduction Ijara is a product wherein an owner of an asset offers the buyer usufruct of an asset in exchange for consideration. There is prima facie evidence that it is similar to the modern lease. However in Ijara contract, the legal ownership of the asset remains with the lessor. But, to meet the needs of customers and to compete with the conventional banking products, Islamic banks, through a parallel contract, transfer the ownership to the lessee at the end of lease term such Ijara are called Ijara Muntahia Bittamleek. (Ijara ending with a transfer of ownership). FAS 8: Ijara and Ijara Muntahia Bittamleek prescribe the accounting treatment of both of Ijara transactions. 1.1 Scope of the standard This standard applies the accounting of operating Ijara and Ijara muntahia Bittamleek and covers acquisition of assets for Ijara , Ijara expenses, revenues, gains, and losses. However, FAS 8 does not address the following: Ijara agreement for exploration or use of natural resources, such as oil, gas, timber, metal and the like. Ijara transactions concerning licensing agreements of certain items such as motion pictures, video recording, manuscripts, patents and copyrights. Labor contracts and hiring of professional services (though this term Ijara also includes service contracts wherein a person offers his services to another person in exchange of remuneration.) 1.2 Key terms and definitions From appendix FAS 8 Ijarah Ijarah is the transfer of ownership of a service for an agreed upon consideration. According to fuqaha , it has three major elements: A form, which included an offer and a consent. Two parties: a lessor (the owner of the leased asset), and a lessee (the party who reaps the services of the leased asset) AAOIFI FAS 8: Ijara and Ijara Muntahia Bittamleek Page 1 of 19
Ijara Accounting for Islamic Banks The object of the ( Ijarah ) contact, which includes the rental amount and the service (transferred to the lessee). Operating Ijarah Ijarah contracts that do not end up with the transfer of ownership of leased assets to the lessee. Ijarah Muntahia Bittamleek Ijarah contracts that end up with the transfer of ownership of leased assets to the lessee. Ijarah Muntahia Bittamleek may take one of the following forms: 1. Ijarah Muntahia Bittamleek that transfers the ownership of leased assets to the lessee- if the lessee so desires – for a price represented by the rental payments made by the lessee over the lease term. At the end of the lease term and after the last installment is paid, legal title of leased assets passes automatically to the lessee on the basis of a new contract. 2. Ijarah Muntahia Bittamleek that gives the lessee the right of ownership of leased assets at the end of the lease term on the basis of a new contract for a specified price, which may be a token price.

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