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CH 3 Accounting For Mudharabah Financing 1
CH 3 Accounting For Mudharabah Financing 1
8
Illustration of
Multilateral Mudarabah
C1 provides RM50,000 If loss is RM20,000
C2 provides RM50,000 C1 bears the loss of
RM10,000 and recover
PSR is 70:30, If profit is RM 40,000 RM40,000 capital
C1 recovers RM50,000 capital and shares C2 bears the loss of
RM14,000 profit RM10,000 and recover
C2 recovers RM50,000 capital and shares RM40,000 capital
RM14,000 profit
E2 shares RM12,000 profit
9
Illustration of Re-Mudarabah
CI provides RM100,000 If profit is RM40,000
PSR between C1 and E1 (intermediary) E2 shares profit of RM16,000 (40,000
is 70:30 x 0.4)
PSR between E1(intermediary) and E2 is E1 shares profit of RM 7,200 (40,000x
60:40 0.6x 0.3)
C1shares RM16,800 (40,000 x 0.6x0.7)
If loss is RM 20,000
C1 bears the loss of RM20,000 and
recover RM80,000 capital
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Recognition and Measurement of
Mudaraba Financing
FAS 3, Mudaraba Financing is a standard for the provision
of mudaraba financing by the Islamic bank and does not
deal with the deposit side of receiving the funds on
mudaraba basis. However, in this chapter we will consider
both.
When the capital is paid to the mudarib or placed in his
disposition (for example, credited to his account) then
Mudaraba financing capital is recognized by debiting
Mudaraba Financing and crediting cash.
If the capital is paid in installments, each installment is
recognized as capital when paid.
Recognition and Measurement of
Mudaraba Financing
If payment of capital is conditional of an
occurrence of a future event or delayed to a
future time, capital is recognized only when it is
paid to the mudarib.
If the capital is in the form of non-monetary
assets such a plane or building then the heading
of non Monetary mudaraba asset.
Recognition and Measurement of
Mudaraba Financing
If capital provided by the Islamic bank is in kind (trading
assets or non-monetary assets), the capital shall be valued
at fair value of the assets. Any difference between fair
value and book value shall be recognized as profit or loss
to the bank.
Expenses of contracting procedures such as feasibility
studies are not considered mudaraba capital unless
specifically agreed.
Accounting issues on Mudarabah
ILLUSTRATION RECOGNITION OF MUDARABA FINANCING
Profit Recognition
1. Realisation Method: according to Hanbali and Shafie is when the
revenue is earned i.e. after determining its costs
2. Distribution Method: according to Maliki it is realised upon
distribution between the two parties
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Measurement of Mudaraba Capital at the end
of the financial year after contracting.
Mudaraba capital should not be revalued subsequent to the
execution of contract.
Any repayment of capital should be deducted from the Mudaraba
Financing Account.
If a partial loss of the capital occurs (e.g. theft or fire) before the
work on the mudaraba is started (and this is NOT caused by
negligence of the mudarib.), this should also be deducted from
mudaraba financing account and debited to pofit and loss account.
If the whole of the mudarba capital is lost, (not due to mudrib)
then the Islamic bank must bear the loss, and terminate the
mudarba contract.
Any unpaid amounts remaining becomes a receivable of the bank
from the ex mudarib.
Recognition of the Islamic banks share
in the profit and losses
If a mudaraba starts and finishes within the financial year of the bank,
profit and losses (banks share) should be recognized by the bank in
that financial year.
If a mudraba transaction carries on after the financial year end, the
profit or losses should be recognized in the accounts for that period.
To the extent that profits are distributed. The Islamic Banks share of
losses should be recognized to the extent such losses are deducted
from the Mudaraba capital.
If the mudraba is terminated or settlement is made and the mudarib
has not paid the profits to the bank, this will be treated as a
receivable from the mudarib.
Recognition of the Islamic banks share
in the profit and losses
Losses due to liquidation is recognized at the time of liquidation by reducing
the Mudaraba capital.
ANY MISCONDUCT OR NEGLIGENCE OF THE MUDARIB RESULTING IN LOSSES
WILL BE BORNE BY THE MUDARIB AND IT BECOMES A RECEIVABLE DUE FROM
THE MUDARBIB.
Non Monetary MudarabaH capital
Is discouraged by fuqaha
Valued at fair value , any difference between fair value and book value goes
to the profit and loss
Any provision made for the decline in the value of Mudaraba assets should be
DISCLOSED in the notes to the accounts.
AAOIFI : Presentation and Disclosure of
Mudarabah Financing
Balance Sheet
Income statement
Mudarabah income XX
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Accounting Problem
Bank Syariah Malaysia Berhad contributed $2,000,000 for a four-year Mudaraba
financing contract (Mudarabah Muqayaddah) at the profit sharing ratio of 2:1
between the Bank (Rabb al-Mal) and Ihsan Corporation (Mudarib) respectively.
Assume that the venture incurred a loss of $150,000 in the first year; realized
profit of $375,000 in the second year; incurred a loss of 250,000 in the third year;
and realized profit of $350,000 in the fourth year.
Required:
A. Prepare the necessary journal entries to recognize asset and profit/loss of the
above transactions, and show how profit/loss will be allocated between the Bank,
and the Mend of first, second, third and fourth year, if the profit of Mudarabah is
determined at the end of:
I. each period
II. at the end of the contract
B. Comment on the impacts different basis of profit allocation (i.e. each period vs.
end of the contract) on the income of the Bank and the Mudarib.
C. What are the different forms and types of Mudarabah contracts?
Solution:
Each period method :
Year 0: Dr. Mudharabah Financing 2,000,000
Cr. Cash 2,000,000