Example 1

ABC Airlines Berhad (ABC) enters into an Ijarah contract for an aircraft from XYZ Leasing Berhad (XYZ). The aircraft has an expected useful life of 10 years and XYZ's net investment in the aircraft is RM 10,000,000.

ABC agrees to pay XYZ RM 15,000,000 in Ijarah payments for the right to use the aircraft for 10 years. At the end of the 10 years, ABC has the right to exercise an option to purchase the aircraft for RM1.

Under MASB approved accounting standards on leases, this Ijarah contract may be treated as a finance lease. This would recognise ABC's right to use the aircraft as an asset and its obligation to settle the Ijarah payments as a liability. In this particular case, ABC's right to use the aircraft would likely be shown as an item of property, plant and equipment in its financial statements.

XYZ would recognise its right to the Ijarah payments as a receivable, while its interest in the corpus of the aircraft would likely be recognised at a nominal value, given that it is devoid of the usufruct transferred to ABC.

In addition to the disclosure requirements of MASB approved accounting standards, ABC and XYZ may disclose additional information to explain compliance with Shariah precepts.

ABC may disclose that the item of property, plant and equipment in its financial statements represents its right to use the aircraft under the terms of the Ijarah contract, rather than ownership of the aircraft.

XYZ may disclose that while it is the owner of the aircraft, its ownership is devoid of the usufruct transferred to ABC under the terms of the Ijarah contract. Consequently, the aircraft is carried at a nominal value in its financial statements. XYZ may also disclose that ABC has an option to purchase the aircraft at the end of the Ijarah period.

Example 2

Ahmad enters into an Ijarah-based arrangement with a bank. The bank purchases a car that Ahmad wishes to use for RM 50,000. Ahmad will then pay the bank RM 898 a month for 5 years for the right to use the car. Ahmad and the bank have undertaken that Ahmad will purchase and the bank will sell the car for RM 1 at the end of the 5 year Ijarah period. The car has an estimated economic life of 5 years.

The mutually agreed terms of the contract stipulate that Ahmad will bear the costs of maintenance and insurance of the car.

Under MASB approved accounting standards on leases, this Ijarah contract may be treated as a finance lease because it transfers substantially all the risks and rewards incidental to owning the car to Ahmad.

Ijarah treated as an operating lease

Example 3

Private Air Berhad (Private) agrees to pay XYZ RM 7,000,000 in Ijarah payments for the right to use an aircraft for 5 years. The aircraft is similar to the one in Example 1. Private does not have an option to purchase the aircraft.

Under MASB approved accounting standards on leases, this Ijarah contract may be treated as an operating lease because the risks and rewards incidental to ownership are not transferred to Private. However, in treating this Ijarah contract as an operating lease, Private's financial statements would reflect neither its acquisition of a right to use the aircraft as an asset, nor its incurrence of an obligation to pay Ijarah payments as a liability.

In XYZ's financial statements, the 'full value' of XYZ's net investment is assigned to the aircraft, without taking into consideration the usufruct transferred to Private. XYZ's right to receive Ijarah income would not be recognised as an asset in its financial statements.

In addition to the disclosure requirements of MASB approved accounting standards, Private and XYZ may disclose additional information to explain compliance with Shariah precepts.

Private may disclose that although the Ijarah contract is classified as an operating lease under MASB approved accounting standards on leases, the contract gives rise to the acquisition of an asset in the form of a right to use the Ijarah item over the Ijarah period, and the incurrence of a liability in the form of an obligation to settle Ijarah payments. Private may disclose information on the obligation to settle Ijarah payments according to the provisions of MASB approved accounting standards.

XYZ may disclose that the aircraft recognised as an asset in its financial statements is under an Ijarah contract, and that under the terms of Ijarah, Private owns the usufruct of the aircraft over the Ijarah period.

Example 4

Abu wishes to use a car from Alif Auto Berhad which costs RM50,000. Abu enters into an Ijarah-based arrangement with Alif Bank Berhad, which is a related party of Alif Auto. Under the arrangement, Abu will pay the bank RM 932 a month for 5 years for the right to use the car.

The mutually agreed terms of the contract stipulate that the bank will bear the costs of maintenance and insurance and provide 24-hour road assistance. The bank will provide Abu with a substitute car while the leased car is undergoing maintenance works. In addition, Abu can exercise an option to replace the car with another make or model.

Under MASB approved accounting standards on leases, this Ijarah contract may be treated as an operating lease because the terms of the contract do not transfer to Abu substantially all the risks and rewards incidental to owning the car.