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Islamic Accounting: Ijarah Contract - Essay Example

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Islamic Accounting: Ijarah Contract

There can be various types of Ijarah contracts which have been discussed in this study. The features of Ijarah contracts have also been studied in details. Although Ijarah contracts are similar to leasing contracts, still some differences exist. Accounting and Auditing Organisation for Islamic Financial Institutions, (AAOIFI), sets out standards for accounting of Ijarah contracts. The impact of International Financial Reporting Standards (IFRS) on Ijarah contract accounting has also been discussed in this study. Ijarah Contracts Ijarah It means leasing. It includes a contract where the financial institution buys equipment, machinery and other different assets and then leases it to the owner of a business firm for a rent or fee. The contract has provisions for the lease duration and the amount of fees to be set out in advance. The financial institutions possess the ownership title of the leased assets during the lease period. From the view of Islamic finance, financial contracts like real estate financing, project financing, vehicle financing, etc. are usually included in the Ijarah concept (Bank Negara Malaysia, n.d., p. 3). Ijarah wa Iqtina Ijarah wa-Iqtina contract is another version of the Ijarah contract where on completion of the lease contract the client can take over the ownership of the leased asset (Abou-Gabal, Khwaja & Klinger, 2011, p.10). It is implied as lease-to-purchase. It is similar to hire purchase system. Here the lessor can purchase the asset at the end of the contract. It is very much identical to Ijarah contract with the exception that the business owner has the option to buy the asset at the end of the contract. Previously paid fees are considered to be a portion of the purchase price of the asset. These types of lease agreements are very common in case of home financing. Ijarah Thumma Al-Bai This is a combination of two types of contracts. One is the Ijarah contract meaning leasing of the assets. The other one is Bai contract meaning the contract of purchasing the assets. Ijarah-wa-Iktina This is a type of lease contract where there is an agreement and undertaking taken by the lessor to purchase the assets at an agreed predetermined price during the tenure of the lease contract. It is also similar to the agreement related to hire purchase with one exception that the lease agreement can be terminated before the completion of the tenure of the contract and the asset can be bought by the client. On expiry of this type of lease contract, the leased asset is transferred to the lessee on fulfilment of all the terms and conditions of the contract. The lessee also has the option to buy the asset during the tenure of the lease contract at a price which was set out when the lease contract was formulated. The purchase price is usually set with reference to the market value of the asset or the residual value of the asset and is agreed in advance during the signing of the lease contract (Jonson, 2006, p.540-541). Features of Ijarah Contract Ijarah contract comprises of various features. Some of its primary features have been ...Show more


ISLAMIC ACCOUNTING Table of Contents Table of Contents 2 Introduction 4 Ijarah Contracts 4 Ijarah 4 Ijarah wa Iqtina 4 Ijarah Thumma Al-Bai 5 Ijarah-wa-Iktina 5 Features of Ijarah Contract 5 Services and Usufruct 5 Assets under Ijarah 6 Liabilities and Ownership Rights 6 Utilisation of Assets under Lease 6 Period of Lease 6 Payment of Lease Amounts 6 Enhanced Features 7 Default and Compensation 7 Promise in Ijarah Contract 7 Termination of Ijarah Contract 7 Selling of Leased Assets 8 Takaful for Ijarah 8 Leasing and Ijarah – Similarities and Differences 8 Differences in Accounting Treatment of Ijarah and Financial Lease 10 Ijarah – Accounting Treatments 11 Asset Recognition 11 Revenue Rec…
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