An E xploratiory Study o f Accounting on Ijarah ...

58 An E xploratiory Study o f Accounting on Ijarah ...

o v e r t h e l e a s e t e r m . I n a d d i t i o n , P a r a g r a p h 4 9 in t h e M A S B 1 0 a l s o m e n t i o n s t h e s a m e thing. Both the IAS 17 and MASB 10 use the phrase “recognized on a straight-line basis over the

be allocated p r o p o r t i o n a t e l y o v e r t h e l e a s e t e r m . H e n c e , it h a s b e e n a c o m m o n p r a c t i c e in M a l a y s i a that

lease term”.

In

other words,

the

rental

revenues should

Ijarah revenues are allocated proportionately over the lease period.

The second highest score is for the statement that

Ijarah r e v e n u e s h a l l b e p r e s e n t e d in

the income statement as

Ijarah revenue. Most of the Ijarah practitioners in Malaysia also

a g r e e d w i t h t h i s s t a n d a r d . T h e r e f o r e , it is c l e a r t h a t w h a t h a s b e e n p r a c t i c e d in t h i s m a t t e r c o n f o r m s t o t h e A A O I F I ’s s t a n d a r d . N e v e r t h e l e s s , P a r a g r a p h 4 9 i n t h e M A S B 1 0 s t a t e s t h a t l e a s e i n c o m e f r o m o p e r a t i n g l e a s e s s h o u l d b e r e c o g n i z e d in i n c o m e o n a s t r a i g h t - l i n e b a s i s o v e r t h e l e a s e t e r m . W h i l e , in P a r a g r a p h 2 7 o f t h e

IAS 17, under o p e r a t i n g l e a s e s , rt s t a t e s t h a t r e n t a l s r e c e i v a b l e a r e i n c l u d e d in i n c o m e o v e r t h e l e a s e term. Both the IAS 17 and MASB 10 agree that the lease income or the rental receivable

is r e c o g n i z e d a s i n c o m e o r r e v e n u e . H e n c e , t h e s t a n d a r d s e t b y t h e A A O I F I in t h i s particular matter does not contradict the standards set by the IAS and the MASF.

The statements by the AAOIFI on initial direct cost also fall under the category that has

a m e a n o f 3 a n d a b o v e . T h e f i r s t s t a t e m e n t m e n t i o n s t h a t i f t h e i n i t i a l d i r e c t c o s t is material, it shall be allocated to periods in the lease term. In this matter, the study

a s s u m e s t h a t w h a t h a s b e e n p r a c t i c e d in M a l a y s i a r e g a r d i n g t h e i n i t i a l d i r e c t c o s t is b y

c h a n c e i s a c o m m o n s e n s e . I f t h e c o s t i s m a t e r i a l , it s h o u l d b e a l l o c a t e d t o p e r i o d s in t h e l e a s e t e r m a n d i f i t i s i m m a t e r i a l , it s h o u l d b e c h a r g e d a s a n e x p e n s e . I n a d d i t i o n , t h e I A S

17 and MASB 10 also have the same standard, which applies to the initial direct cost. Paragraph 30 of the IAS 17 states that initial direct costs incurred specifically to earn revenues from an operating lease are either deferred and allocated to income over the l e a s e t e r m i n p r o p o r t i o n t o t h e r e c o g n i t i o n o f r e n t a l i n c o m e o r a r e w r i t t e n o f f in t h e

period in which they are incurred. The MASB 10 also states the same thing about initial direct cost under the operating leases (please refer to Paragraph 51 of the MASB 10).

However, both standards set by the MASB 10 and the IAS 17 did not mention the level of materiality of the initial direct cost. It is only mentioned that initial direct costs are

e i t h e r a l l o c a t e d t o i n c o m e o v e r t h e l e a s e t e r m o r a r e r e c o g n i z e d a s a n e x p e n s e . T h i s is

d i f f e r e n t f r o m t h e A A O I F I ’s s t a n d a r d , w h i c h h a s s e g r e g a t e d t h e t r e a t m e n t o f t h e i n i t i a l direct cost according to its level of materiality.

The AAOIFI’s standard also states that the acquiring of assets for

Ijarah shall be

recognized at historical cost. However, the IAS 17 and the MASB 10 are silent on the

a c q u i r i n g o f a s s e t s u n d e r o p e r a t i n g l e a s e s . N e v e r t h e l e s s , P a r a g r a p h 8 o f t h e I A S 17 d i d mention that the rights and obligations arising from a finance lease are recorded at the beginning of the lease term at the fair value of the leased property. In addition, Paragraph 15 of the MASB 10 also states the same thing. As for the case of operating leases, there is no statement regarding the recognition of the asset.

Vol. 13, N o.I/2,D esem ber 2005 © Centre f o r Indonesian A ccounting a n d M anagem ent Research Postgraduate Program , B raw ijaya University

The International Journal o f Accounting and Business Society 59

The AAOIFI standard on

a l s o s t a t e s t h a t a r e d u c t i o n in t h e e s t i m a t e d r e s i d u a l value should be recognized as a loss. Nevertheless, the IAS 17 and MASB 10 are also s i l e n t o n t h e c a s e o f r e d u c t i o n in e s t i m a t e d r e s i d u a l v a l u e u n d e r o p e r a t i n g

Ijarah

Ijarah. The

t r e a t m e n t f o r a r e d u c t i o n in e s t i m a t e d r e s i d u a l v a l u e is o n l y s t a t e d u n d e r t h e f i n a n c e lease. For example, Paragraph 17 of the

17 states that if there has been a permanent r e d u c t i o n in t h e e s t i m a t e d u n - g u a r a n t e e d r e s i d u a l v a l u e , t h e i n c o m e a l l o c a t i o n o v e r t h e l e a s e t e r m is r e v i s e d a n d a n y r e d u c t i o n in r e s p e c t o f a m o u n t s a l r e a d y a c c r u e d is c h a r g e d t o i n c o m e i m m e d i a t e l y . T h e s a m e t r e a t m e n t is u s e d u n d e r t h e M A S B 1 0 . P a r a g r a p h 3 9

IAS

o f t h e M A S B 1 0 s t a t e s t h a t a n y r e d u c t i o n in t h e e s t i m a t e d u n - g u a r a n t e e d r e s i d u a l v a l u e in r e s p e c t o f a m o u n t a l r e a d y a c c r u e d is r e c o g n i z e d i m m e d i a t e l y .

category is related to depreciation of leased assets. The statement states that leased assets shall be depreciated consistent w i t h t h e ' l e s s o r ’s n o r m a l d e p r e c i a t i o n p o l i c y .

The last statement bv the AAOIFI

t h a t f a l l? w i t h i n t h i s

T a b l e 2 : R e l a t i v e l y m e d i u m s u p p o r t f o r t h e A A O I F I ’s S t a n d a r d ( M e a n o f 2 . 5 t o 2.99).

Item Attributes Mean

2.83 depreciation policy.

Leased asset shall be depreciated according to lessor’s normal

2. At the end of a financial period, amortization of initial direct cost, if

2.83 material, shall be recognized as an expense.

3. At the end of financial period,

2.83 measured at their cash equivalent value.

Ijarah installments receivable shall be

4. Repair of leased assets, if material, shall be recognized in the

2.75 financial period.

Table 2 shows the AAOIFI statements that have a mean of between 2.5 to 2.99. This

c a t e g o r y o f m e a n is c o n s i d e r e d a s m e d i u m s u p p o r t f o r t h e A A O I F I ’ s s t a n d a r d . T h e r e a r e

5 statements that fall within this category.

T h e h i g h e s t m e a n s c o r e f r o m t h i s c a t e g o r y is f o r t h e s t a t e m e n t a s s e r t s t h a t a l e a s e d a s s e t s h a l l b e d e p r e c i a t e d a c c o r d i n g t o t h e l e s s o r ’s n o r m a l d e p r e c i a t i o n p o l i c y . I t is a s s u m e d t h a t i f a s t a t e m e n t in t h e A A O I F I s t a n d a r d is s i m i l a r t o o n e in t h e I A S 1 7 a n d M A S B 1 0 ,

VoL 13, No. l/2,D esem ber 2005 © Centre f o r Indonesian Accounting and M anagem ent Research Postgraduate Program, Brawijaya University