Al Ijarah Tashghiliyah

Al Ijarah Tashghiliyah Tashghiliyah

Al Ijarah Tasghiliyah also known as operating Ijarah. This type of ijarah does not include the promise that the legal title title in the leased asset will will pass to the lessee at the the end of the lease. In the situation where the bank will purchases and maintains assets which have a high degree of  marketability. The bank rents these assets to other parties on terms and conditions agreed upon for a specific time. After the termination of the period the asset is returned to the bank. The bank  then leases the same asset to a new lessee. The bank bears the risk of recession or diminishing demand for these assets. At the end the bank may choose to scrap or dispose the asset.

The standard states that, operating Ijarah doesn’t result in ownership transfer at the end of the leased period. This is similar with conventional operating lease. The standard further addresses the recognition method in the books of the lessor. That is relevant as the income recognition and the frequency of revenue receivable will ascertain only through that process. Section 3 sub-section 1/1/1 asset acquired for Ijarah, indicates that, “asset acquired shall

 be recognised at historical cost”. This tells us that, the original cost co st 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. (AAOIFI 2008: 244)

AAOIFI FAS 8 Juristic Rule 1/5/2 outlines that “the lessee must use the leased asset in a suitable manner or in conformity with common practice and comply with conditions which are

acceptable in the Shari’ah. He must also avoid causing damage to the leased asset by misuse through misconduct or negligence”. This clearly stipulates the contractual duties or  responsibilities of the lessee. (Sharrif and Abdul Rahman)

This condition of ownership is the general rule in Islamic finance. The only difference the retaining by the lessor the corpus of the asset whilst in trade the buyer acquires ownership. Given an example of A the lessor leased his property to B the lessee, for any tax expenses to be paid, A has to pay tax due on the property whilst B takes care of the expenditure associated with the use of the property.

Accounting Treatment for Operating Ijarah i)

Book of lessor The IFAS-2 issued by ICAP, as well as, the AAOIFI standard suggest the accounting

treatment of ijarah tasghiliyah is similar to an operating expenses with certain exception. On the other hand, conventional banks, as well as, Islamic banks currently operating in Pakistan are accounting are accounting for ijarah as financing transaction, just like finance lease, in accordance with ISA-17. Asset is recognized as historical cost and depreciated as per normal depreciation policy with an expected realizable value at the end. According to AAOIFI standard, these are presented as Investments in Ijarah Assets, while as per IFAS  –  2, these are included in property, plant and equipment with separate disclosure. Depreciation has to be calculated in line with the methods allowed by IAS  –  16. Most suitable method is generally the straight line method because the rentals are generally also accounted for on a straight line basis. Depreciation term shall generally be equal to the lease term, except where it is expected that the asset will be given on Ijarah again, to same or some other customer, in which case, the depreciable life shall be equal to the asset’s useful economic life.

Lease rentals including other associated charges and Ijarah related expenses are allocated proportionately in financial periods over the lease term. Initial direct cost is amortized over the lease term. However, IFAS-2 allows that the same may be charged to income as and when incurred. Repairs undertaken are recognized as expense. According to AAOIFI Standard, a provision for repairs is established if repairs are material and differ in amount from year to year. ii)

Book of lessee The lessee treated the lease asset as the lease rental or lease payment over the lease period. They did not responsible in any expenditure incurred for the leased asset. Sale and lease back resulting into ijarah; 

If the sale price is same as that of its fair value any gain or loss shall be recognized in period in which such transaction occurs; and

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If the sale price is different from its fair value any gain or loss shall be amortized / allocated as an adjustment to Ijarah expenses over the lease term.

CONCLUSION Ijarah is the kind of leasing in Islamic way. Ijarah is not very different from conventional lease. However it has some differences. First is the rental rate decided at the time of the agreement and cannot be fluctuate. Secondly, some expenses under ijarah is different between lessor and lessee. Other than that, for the lessor it is an expenses relating to the corpus of the asset i.e. insurance, accidental repairs etc. will be borne by the lessor. Actual operating/overhead expenses related to running the asset will be borne by the lessee. Two contracts into one contract is not permissible in Shariah therefore, we cannot have the agreement of hire and purchase into one agreement, only we can undertake/promise to purchase the leased asset. Lastly, Ijara rental can only be charged after possession of asset to the lessee.