Ijarah (FRS 117 and GP8i vs.

FAS 8)

Bank Muamalat Malaysia Berhad follows FRS 117 and GPP8i while Al Baraka
Islamic Bank Bahrain follow AAOIFI FAS 8 in recording Ijarah. For BMMB, it offers
operating ijarah and Al Ijarah Thumma Al Bay (AITAB) while Al Baraka offer operating
Ijarah and Ijarah Muntahiya Bittamleek.

The definition of Ijarah according to AAOIFI (FAS 8) is "the ownership of the right
to the benefit of using an asset in return for consideration". While in Financial Reporting
Standard 117 ("FRS 117"), a lease is "an agreement whereby the lessor conveys to the lessee
in return for a payment or series of payments the right to use an asset for an agreed period of
time".

BMMB offers both Ijarah and AITAB. FRS 117 is using in disclose the Operating
ijarah while GP8i is using to disclose AITAB in financial statement. Al Ijarah Thumma Al
Bay' (AITAB) is the innovation of Islamic hire purchase mode of financing. Islamic hire
purchase is a unique contract involving a combination of leasing (Ijarah) and sale at different
stages of transactions. AITAB combines a lease contract and sale contract in one trading
document, but the contract of leasing and sales works separately. First the contract of leasing
will operate, whereby the lessee will pay monthly rental to the lessor within a fixed period.
Upon the end of the leasing period, the hirer (lessee) has the option to enter into a second
contract to purchase the goods from the owner (lessor) at an agreed-upon price. The price is
based on market condition, goods and necessary profit to the bank. The purchase price cannot
be set at the beginning of hire purchase agreement, because a predetermined contract is
clearly prohibited by Shari'ah.

Ijarah Muntahiah Bitamleek can best define as a lease that concludes with the legal
title in the leased asset passing to the lessee. Ijarah Muntahiah Bitamleek has different kind
of transferring the asset which is:

a) Ijarah Muntahia Bitamleek through gift (transfer of legal title for no consideration).

b) Ijarah Muntahia Bitamleek through transfer of legal title (sale) at the end of a lease
for a token consideration or other amount as specified in the lease.

c) Ijarah Muntahia Bitamleek through transfer of legal title (sale) prior to the end of
the lease term for a price that is equivalent to the remaining Ijarah installments.
 d) Ijarah Muntahia Bitamleek through gradual transfer of legal title (sale) of the
leased asset.

Both banks transfer the asset at the end of leasing contract by sale. But, there is a different
where BMMB treat Operating ijarah as operating lease and AITAB as finance lease while Al
Baraka treat both Operating ijarah and Ijarah Muntahiya Bitamleek as operating lease.

Asset Recognition
Based on AAOIFI FAS 8 “asset acquired shall be recognized at historical cost”. This
tells us that, the original cost of acquisition is the basis for valuations. The cost includes “net
purchasing price plus expenditure necessary to bring the asset to its intended use”. The values
that the tangible asset is value at will include every associated cost that enables the lessor to
bring the asset to his possession.
FRS 117 clarifies that leases in the Financial Statements of lessee in the initial
recognition shall recognize finance leases as assets and liabilities in their balance sheets at
amounts equal to the fair value of the leased property or, if lower, the present value of the
minimum lease payments, each determined at the inception of the lease. Any initial direct
cost of the lessee is added to the amount recognized as an asset. A finance lease gives rise to
depreciation expense for depreciable assets as well as finance expense for each accounting
period. While in the Financial Statements of Lessors, during the initial recognition, the
lessors shall recognize assets held under a finance lease in their balance sheets and present
them as a receivable at an amount equal to the net investment in the lease.

Revenue (Expenses) Recognition

In FRS 117, GP8i and FAS 8, Ijarah (leasing) revenue and expense (when Islamic
bank is a lessee) should be recognize when the ijarah (leasing) instalment become due (when
it occur).

Disclosure (Financial treatment)

FRS 117: The journal entries to record the lease in the lessor book for the period would be as
follows: Beginning of the transactions:
Dr Lease receivable
 Cr Unearned interest income
Cr Machinery
(Record the finance lease)

At the end of the accounting period:

Dr Cash
Cr Executor expenses payable
(Record receipt of executor costs)

Dr Cash
Cr Lease receivable
(Record receipt of lease payment)

Dr Unearned interest income

Cr Interest income
(Recognize interest income)

FAS 8: The journal entries to record the lease in the lessor book in the AAOIFI for the
period would be as follows:
Dr Equipment
Cr Cash
(Cash purchase of equipment for Ijarah financing)

Dr Ijarah Financing Asset

Cr Equipment
(Provides Ijarah financing to lessee)

Dr Cash
Cr Profit & Loss
(Repayment received from lessee & income recognition)

Dr Profit & Loss

Cr Depreciation
(Depreciation cost of Ijarah Financing asset)