ifrs 16 finance lease & "Ijarah"

[ibrahim.ferozi8]

Hi,

We are a real estate company and in process to obtain loan from islamic bank through financing tool called "Ijarah / finance lease" . The deal with bank is that our company must transfer existing property ownership to bank. And the property is worth USD 100 and bank will give us loan usd 60 (60% of property worth) through finance tool "Ijarah / finance lease" to operate property and reap the rewards from property to repay loan with interest in a ten years tenure and the property legal title will be transferred back to us after repayment of loan.

My question is once we transfer legal title of property @ 60 USD then it will be deemed as we dispose the property and incurred a book loss USD 40
Entry 1
DR. cash usd 60
dr. loss usd 40 (or classify as partial asset withheld by bank and amortize yearly to right of use of asset )
cr. property usd 100

on signing finance lease agreement the entry should be :

Entry 2
dr. right of use of asset USD 60
cr. Finance lease liability USD 60

after 10 years the loan is repaid and property value in the market is lets say remain same USD 100, ignoring the depreciation on right of use of asset

ENTRY 3
dr. property USD 100
cr. right of use of asset usd 60
cr. gain on property usd 40

kindly give your valuable suggestion if the above scenario is wrong, appreciate your inference and valuable suggestion.

 

[Dave In Capital]

Since an Ijarah arrangement would fall under the guidelines of AAOIFI, I'm not going to delve too deeply into this. Also, the terms that you're describing don't appear to meet the criteria for an Ijarah or an Ijarah muntahia bittamleek. The former is an operating lease that does not involve transfer of ownership. And the latter involves transfer of ownership to the lessee at the end of the lease.

Also, at cursory glance it appears that the requirement for asset recording under AAOIFI is similar to IFRS or GAAP: historical cost. In other words, the $40 loss in your JEs is an arbitrary loss, and would be not be in conformance with any accounting standards setting body including AAOIFI.

For example, a football card is purchased for $10. 15 years later it's worth $5k. That person then sells it for $2.5k. In that person's books, the sale is recorded with a gain of $2.49k. It would not be a loss of $2.5k since that person did not incur any expenses beyond the initial $10. Of course I will add a ceteris paribus in there since there might be other factors not immediately relevant to this example.

I might be able to provide more help if you want to elaborate on exactly what type of an Ijarah arragement this is.