03-06-2011, 11:33 PM
Dear All,
I am facing difficulty in applying ICAP's IFAS 2, as the SECP has made it mandatory to apply IFAS 2 instead of IAS 17 for IJARAH transactions.
The issue is to account for a transaction as a operating lease which is in substance a Finance lease.
To further elaborate the issue following example will help
Lessor Islamic institutions
Lease type IJARAH
Lessee Manufacturing Company
Leased Asset Car
Lease amount Rs 2,000,000
Lease term 1 year
Down payment Rs 1,000,000
Lease facility Rs 1,000,000
Residual value at
the end of lease Rs 1,000
Ownership shall
be transferred at
the end of lease YES
ACCOUNTING UNDER IAS 17
The lease should be treated as finance lease as the ownership of the leased asset shall be transferred to the lessee at the end of the lease.
Accounting Entry for recognition
Vehicle (Debit) Rs 2,000,000
Finance lease obligation (Credit) Rs 1,000,000
Cash (Credit) Rs 1,000,000
You may think that why finance lease obligation is not recognised with full amount i.e Rs 2,000,000. The answer is that the fiance lease facility was availed for only Rs 1,000,000 and the remaining is down payment.
Subsequent Accounting entries will be made for payment of lease rentals(principal repayment), finance charges, depreciation expense and payment of residual value of Rs 1,000. Which are known by everyone in this forum.
ACCOUNTING UNDER IFAS 2
Under IFAS 2 the transaction shall be recognised as operating lease therefore no asset shall be recognised.
The only entry shall be made for the payment of rentals.
My question are
1. How at the end of the lease term the asset shall be recognised in the books of lessee?.
2. How Down payment shall be recognised?.
Please provide reasons and accounting entries supporting reponse.
I am facing difficulty in applying ICAP's IFAS 2, as the SECP has made it mandatory to apply IFAS 2 instead of IAS 17 for IJARAH transactions.
The issue is to account for a transaction as a operating lease which is in substance a Finance lease.
To further elaborate the issue following example will help
Lessor Islamic institutions
Lease type IJARAH
Lessee Manufacturing Company
Leased Asset Car
Lease amount Rs 2,000,000
Lease term 1 year
Down payment Rs 1,000,000
Lease facility Rs 1,000,000
Residual value at
the end of lease Rs 1,000
Ownership shall
be transferred at
the end of lease YES
ACCOUNTING UNDER IAS 17
The lease should be treated as finance lease as the ownership of the leased asset shall be transferred to the lessee at the end of the lease.
Accounting Entry for recognition
Vehicle (Debit) Rs 2,000,000
Finance lease obligation (Credit) Rs 1,000,000
Cash (Credit) Rs 1,000,000
You may think that why finance lease obligation is not recognised with full amount i.e Rs 2,000,000. The answer is that the fiance lease facility was availed for only Rs 1,000,000 and the remaining is down payment.
Subsequent Accounting entries will be made for payment of lease rentals(principal repayment), finance charges, depreciation expense and payment of residual value of Rs 1,000. Which are known by everyone in this forum.
ACCOUNTING UNDER IFAS 2
Under IFAS 2 the transaction shall be recognised as operating lease therefore no asset shall be recognised.
The only entry shall be made for the payment of rentals.
My question are
1. How at the end of the lease term the asset shall be recognised in the books of lessee?.
2. How Down payment shall be recognised?.
Please provide reasons and accounting entries supporting reponse.
