Recognition o f Income.

Recognition o f Income.

A s f o r t h e s e c o n d i s s u e , w h i c h is t h e r e c o g n i t i o n o f i n c o m e , B I M B is u s i n g c a s h b a s i s . Therefore, the bank does not recognize any accrual income. However, most of the financial institutions used Rule 78 and the Sum of Years’ Digits by Bank Negara Malaysia for recognition of income. This situation may be due to the reason that Bank

Negara provides the rule, thus, most of the financial institutions follow the guidelines of Bank Negara. The banks that use this rule are OCBC, Bumiputra Commerce, and Public Finance. However, IDB does not use the same method. Which regard to the recognition o f i n c o m e , t h e m e t h o d u s e d b y I D B is b a s e d o n a c t u a l i n c o m e d e r i v e d .

Repair of the Leased Asset.

T h e t h i r d i s s u e is r e l a t e d t o t h e r e p a i r o f th e . l e a s e d a s s e t . F o r t h i s m a t t e r , i t is n o t

a p p l i c a b l e f o r B I M B . T h i s is d u e t o t h e f a c t t h a t t h e r e p a i r o f t h e l e a s e d a s s e t is b o r n e b y t h e c u s t o m e r . E v e n t h o u g h t h e A A O I F I ’s s t a n d a r d s u g g e s t e d t h a t r e p a i r s h o u l d b e b o r n e by both lessor and lessee, BIMB decided that the repair should be the customer's responsibility as their leasing activities are a finance arrangement.

I t is a l s o n o t a p p l i c a b l e f o r I D B . T h i s is d u e t o t h e f a c t t h a t i n a c t u a l p r a c t i c e , t h e r e p a i r o f t h e l e a s e d a s s e t is b o r n e b y t h e c u s t o m e r . E v e n t h o u g h t h e A A O I F I ’ s s t a n d a r d suggests that the repair should be borne by both lessor and lessee, IDB like the rest of the

f i n a n c i a l i n s t i t u t i o n s d e c i d e d t h a t t h e r e p a i r s h o u l d b e t h e c u s t o m e r ’s r e s p o n s i b i l i t y .

As for OCBC, Bumiputra Commerce, and Public Finance these banks also do not r e c o g n i z e a n y r e p a i r o f l e a s e d a s s e t s i n t h e f i n a n c i a l p e r i o d . T h i s is d u e t o t h e r e a s o n t h a t

repair expenses are borne by the customer. Furthermore, the bank adopts the IAS and MASB. Neither of the standards mentions any accounting treatment on the repair of

leased assets.

Depreciation.

The fourth issue is related to the depreciation of the leased asset. It is also not applicable to BIMB. Even though the AAOIFI’s standard, the IAS and the MASB suggested that

l e a s e d a s s e t s s h o u l d 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 ,

B I M B is t h e o n l y f i n a n c i a l i n s t i t u t i o n t h a t d o e s n o t d e a l w i t h d e p r e c i a t i o n . T h i s is d u e t o the fact that the customer owns the asset. Therefore, the customer should deal with the depreciation of the asset and not the bank.

H o w e v e r , O C B C is u s i n g t h e i n c o m e t a x t a b l e . T h e r e f o r e , i t d o e s n o t u s e t h e b a n k ’s normal depreciation policy. While Bumiputra Commerce follows the IAS 17. According t o t h e I A S 1 7 , t h e l e a s e d a s s e t s h o u l d b e d e p r e c i a t e d a c c o r d i n g t o l e s s o r ’s n o r m a l depreciation policy.

Vol. 13, N o.l/2,D esem ber 2005 © Centre f o r Indonesian A ccounting a n d M anagem ent Research Postgraduate P rogram , Brawijaya University

The International Journal o f Accounting and Business Society 65

As for Public Finance, the bank depreciates the asset according to the market. The bank

h a s a m a r g i n o f f i n a n c e , w h i c h is 2 0 % e v e r y y e a r . O n l y I D B f o l l o w s t h e A A O I F I ’s s t a n d a r d fo .r d e p r e c i a t i o n . T h e r e f o r e , it is u s i n g t h e b a n k ’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 .

Initial Direct Cost.

A s f o r t h e f i f t h i s s u e , w h i c h is t h e i s s u e o f i n i t i a l d i r e c t c o s t , it is n o t a p p l i c a b l e t o B I M B o r I D B . T h e r e a s o n is t h a t n e i t h e r b a n k i n c u r s a n y i n i t i a l d i r e c t c o s t s u c h a s c o m m i s s i o n and fees for the leasing activities.

I t is a l s o n o t a p p l i c a b l e t o O C B C . T h e b a n k d o e s n o t i n c u r a n y c o m m i s s i o n o r l e g a l f e e s regarding the leasing activities.

property such as buildings, the bank has a s t a m p d u t y t h e c o s t o f w h i c h is b o r n e b y t h e c u s t o m e r . N e v e r t h e l e s s , t h e c o s t i s s e p a r a t e

However, for

f r o m t h e l e a s e r e n t a l . T h e r e f o r e , t h e b a n k d o e s n o t a l l o c a t e t h e c o s t t o p e r i o d s in t h e lease term.

As for Bumiputra Commerce, the bank follows the guidelines of the IAS 17. The initial

d i r e c t c o s t s h o u l d b e a l l o c a t e d t o t h e p e r i o d s in t h e l e a s e t e r m o r c h a r g e d d i r e c t l y in t h e income statement as an expense. However, only Public Finance follows the guidelines of Bank Negara Malaysia.

Valuation of

Ijarah Accounts Receivable.

T h e l a s t i s s u e , w h i c h is t h e m e a s u r e m e n t o f

Ijarah

T h e m e t h o d t h a t P u b l i c F i n a n c e u s e s is b a s e d o n m a r k e t v a l u e . T h e b a n k d o e s n o t u s e t h e c o s t e q u i v a l e n t v a l u e a s p r o p o s e d b y t h e A A O I F I ’s s t a n d a r d . I t a l s o h a s p r o v i s i o n f o r the account receivable.

T h e p o l i c y u s e d f o r t h e p r o v i s i o n is 1 . 5 % a s g i v e n b y B a n k Negara Malaysia (Garis Panduan 3).

However, the valuation that Bumiputra Commerce uses is based on the actual amount paid by the customer. The bank has provision for the account receivable.