03-08-2011, 12:36 AM
Thanks KamranACA for such comprehensive response. However there's an issue regarding recognition of Deposit. Is this recognition in accordance with Financial asset as defined under IAS 32?
Waiting for your reply.
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by kamranACA</i>
<br />
Following are paragraph 7 and 8 of IFAS-2
QUOTE
7. Ujrah payments under an Ijarah should be recognized as an expense in the income statement on a straight-line basis over the ljarah term unless another systematic basis is representative of the time pattern of the userâs benefit.
8. For ljarah, ujrah payments are recognized as an expense in the income statement on a straight- line basis unless another systematic basis is representative of the time pattern of the userâs benefit, even if the payments are not on that basis.
UNQUOTE
1. How to account for Down Payment and Other Payments
In the backdrop of this guideline, it is clear that all payments on account of Ijarah, made by Lessee, have to be expensed out in his books of account. This even includes the Down Payment, as IFAS-2 has made no distinction.
Yes, as far as recognition of expense and its TIMING FOR RECOGNITION is concerned the standard clearly says that ujrah payments are recognized as an expense in the income statement on a STRAIGHT- LINE BASIS UNLESS ANOTHER SYSTEMATIC BASIS IS REPRESENTATIVE OF THE TIME PATTERN OF THE USERâS BENEFIT, EVEN IF THE PAYMENTS ARE NOT ON THAT BASIS.
Therefore, if considered prudent, the down payment can be recognized as pre-payment and then charged to profit and loss on straight-line basis or some other systematic basis. This will have to be seen in every case on the basis of its merits.
2. How to account for asset at the end of Ijarah
At the end of lease term, the LESSEE will record the asset in its fixed assets register (memorandum/subsidiary record) and will make no accounting entry in monetary terms in the financial ledger. However, legal transfer of vehicle/asset in Lesseeâs name will be ensured. This is the essence of the standard. However, if some financial control is considered necessary the asset may be booked at Rupee 1. This is only for control purpose, otherwise there will be no monetary terms accounting entry of such Ijarah asset acquired at the end of lease term unless some additional payment is made by lessee to the lessor beyond what agreed as per Ijarah repayment schedule.
In IFAS-2 there is no concept of Residual Value for the Lessee as depreciation is charged by the lessor in his books and such residual value estimation is only necessary for the lessor.
I suggest a thorough reading of IFAS-2 for further clarity. http//www.icap.org.pk/Tech_services/Ijarah.pdf
I hope it would be helpful.
Notwithstanding the above, the accounting entry suggested in your post for Finance Lease is correct in nutshell if we go to T-Ledger balances eventually, but is incorrect for practical reasons. Principally and practically, the Lease Obligation has to be credited with full amount and the down payment has to be recorded as SECURITY DEPOSIT or LEASE KEY MONEY DEPOSIT. At the end of the lease term such security deposit is adjusted against the Lease Obligationâs outstanding amount.
Regards
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
Waiting for your reply.
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by kamranACA</i>
<br />
Following are paragraph 7 and 8 of IFAS-2
QUOTE
7. Ujrah payments under an Ijarah should be recognized as an expense in the income statement on a straight-line basis over the ljarah term unless another systematic basis is representative of the time pattern of the userâs benefit.
8. For ljarah, ujrah payments are recognized as an expense in the income statement on a straight- line basis unless another systematic basis is representative of the time pattern of the userâs benefit, even if the payments are not on that basis.
UNQUOTE
1. How to account for Down Payment and Other Payments
In the backdrop of this guideline, it is clear that all payments on account of Ijarah, made by Lessee, have to be expensed out in his books of account. This even includes the Down Payment, as IFAS-2 has made no distinction.
Yes, as far as recognition of expense and its TIMING FOR RECOGNITION is concerned the standard clearly says that ujrah payments are recognized as an expense in the income statement on a STRAIGHT- LINE BASIS UNLESS ANOTHER SYSTEMATIC BASIS IS REPRESENTATIVE OF THE TIME PATTERN OF THE USERâS BENEFIT, EVEN IF THE PAYMENTS ARE NOT ON THAT BASIS.
Therefore, if considered prudent, the down payment can be recognized as pre-payment and then charged to profit and loss on straight-line basis or some other systematic basis. This will have to be seen in every case on the basis of its merits.
2. How to account for asset at the end of Ijarah
At the end of lease term, the LESSEE will record the asset in its fixed assets register (memorandum/subsidiary record) and will make no accounting entry in monetary terms in the financial ledger. However, legal transfer of vehicle/asset in Lesseeâs name will be ensured. This is the essence of the standard. However, if some financial control is considered necessary the asset may be booked at Rupee 1. This is only for control purpose, otherwise there will be no monetary terms accounting entry of such Ijarah asset acquired at the end of lease term unless some additional payment is made by lessee to the lessor beyond what agreed as per Ijarah repayment schedule.
In IFAS-2 there is no concept of Residual Value for the Lessee as depreciation is charged by the lessor in his books and such residual value estimation is only necessary for the lessor.
I suggest a thorough reading of IFAS-2 for further clarity. http//www.icap.org.pk/Tech_services/Ijarah.pdf
I hope it would be helpful.
Notwithstanding the above, the accounting entry suggested in your post for Finance Lease is correct in nutshell if we go to T-Ledger balances eventually, but is incorrect for practical reasons. Principally and practically, the Lease Obligation has to be credited with full amount and the down payment has to be recorded as SECURITY DEPOSIT or LEASE KEY MONEY DEPOSIT. At the end of the lease term such security deposit is adjusted against the Lease Obligationâs outstanding amount.
Regards
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
