Islamic Accounting and Reporting Assignment Example | Topics and Well Written Essays - 1750 words

Islamic Accounting and Reporting - Assignment Example The time period is also referred to as Ijarah period (Siddiqui, n.d.). The Ijarah contract is based on Islamic principles and has emerged as a popular asset financing concept. This contract is also used for transactions related to employment and hire of services. This contract of Ijarah is a mode of financing which provides customers with short to medium term financing to lease items such as buildings, real estates, computers, equipments, machineries and other items which are not forbidden of haraam. The contract is almost similar to conventional leasing contract but not identical to it (Ibrahim, 2001). The Ijarah rental amount is paid in installments over the time to cover the costs or the value of the investment for the bank in addition to the fair return on the investment (Ghuddah, 2007). In Ijarah the ownership of the asset is not transferred to the lessee. Risk associated with the ownership of the assets should remain with the banks and the asset is supposed to be reverted to th e bank at the end of Ijarah period. The cash flows of the asset are structured in such a way that they cover the price of the asset and provide a return on the same. Some of the important features of the Ijarah contract are as follows: ïÆ'Ëœ The asset which has been leased must have a valuable use that is compliant with the Shari’a laws. ïÆ'Ëœ ... Usufruct means the right of using another’s property for profit (Abdullah, 2010). The rental payment must occur after the delivery of the leased asset. For example by giving the keys of the building to the lessee musta’jir. If there is a loss to the usufruct then the Ijarah contract stands terminated (Shariff and Rahman, n.d.) Islamic accounting is less accepting towards the concept of time value of money and that is why in Ijarah accounting the lease and the transfer amount will be accounted as separate transaction even if these transactions are linked with each other (Malaysian Accounting Standards Board, 2010). In conventional leasing it is acceptable to have a lease and sale in one accounting transaction; however to have more than one accounting transaction with more than one result is prohibited in Islamic accounting. The results derived from the lease transaction differ from the sale transaction and that is why they cannot be combined into a single transaction und er Islamic accounting which is also known as Akad. In conventional leasing finance there are usually two types of leases known as operating lease and financial lease. In operating lease the lessor owns the asset and bears the risk and the maintenance costs. In financial lease the ownership of the asset remains with the lessor and the risk and operating costs are borne by the lessee. Conventional leasing provides options to the lessor and lessee to terminate the lease contract unanimously. Ijarah contract on the other hand gives option to the lessor and lessee to terminate the contract within a stipulated time frame. This option is valid for a particular time period under the framework of Al-Khiyar. In conventional leasing, in case of termination of the contract, the remaining rental payment