Accounting Policy for Murabaha

IFAS 1 - Murabaha
Accounting Policy for Murabaha

Transaction Recording
• Funds disbursed for purchase of goods are recorded as ‘Advance for
Murabaha’. On culmination of Murabaha i.e. sale of goods to customers,
Murabaha financings are recorded at the deferred sale price net of profit.
Previously, Murabaha financings were recorded at the time of disbursement
of funds.

• Goods Purchased but remaining unsold at the balances sheet date are
recorded as inventories.

Previously these were recorded as Advance against Future Murabaha.

• Financing are stated net of specific and general Provisions against non-
performing financings, if any, which are charged to the profit and loss account.
Accounting Policy for Murabaha

Revenue Recognition

• Profit on Murabaha Financings is recognised on accrual basis.

Effective January 01, 2006, profit on Murabaha transactions for
the period from the date of disbursement to the date of
culmination of Murabaha is recognised immediately upon the
later date.

Previously, profit on Murabaha was recognised from the date of

disbursement.
Reason for Change in accounting Policy

Below is a brief summary of recording procedure of the Bank for

Murabaha transactions both post and pre adoption of “IFAS-1
Murabaha”.
Pre-adoption Post-adoption
1) Murabaha Financings were recorded at 1) Funds disbursed for purchase of goods
the time of disbursement of funds. are recorded as ‘Advance for Murabaha’.
On culmination of murabaha i.e. sale of
goods to customers, Murabaha Financings
are recorded at the deferred sale price net
of profit payment.

2) Goods purchased but remaining unsold 2) Goods Purchased but remaining unsold
at the balance sheet date were recorded as at the balances sheet date are recorded as
‘Advance against future Murabaha’. Inventories.

3) Profit for the Murabaha transaction was 3) Profit for the period from the date of
recorded from the date of disbursement. disbursement to the date of culmination of
murabaha is recognized immediately after
the date of culmination of Murabaha..
Case Study for Murabaha
Below is the case study for the understanding of
Murabaha transactions carried out at Meezan Bank
in various scenarios:
Example Amount in Rs./%
Purchase price/Cost/Principal 1,000
Profit Rate 10%
Tenure One year
Total profit on transaction 100
Sale price (Contract price) 1,100
Date of Disbursement to supplier/customer January 01,2007
Date of Culmination of Murabaha Transaction January 15,2007
Date of Maturity of Murabaha December 31,
2007
Scenario-A

A-When there is bullet payment of profit and Cost (Principal) at the

end of the period:

1) At the time of payment to the client for the purchase of goods on behalf of bank
or directly to the supplier by the bank the transaction will be accounted for as
follows:

January 01, 2007

Dr Advance against Murabaha (B/S Asset side) 1,000

Cr Pay Order / Party Account (B/S Liability side) 1,000
Scenario-A

2) At the Culmination of Murabaha i.e. at the time of sale of goods to the customers with signing of
Declaration by the bank and the client following entries would be passed:

January 15, 2007

Dr Murabaha Financing 1,000

Dr Unearned Murabaha Profit Receivable 100
Cr Advance against Murabaha 1,000
Cr Deferred Murabaha Income 100

3) Booking of Accrual of profit@ 10% from the date of disbursement to the date of culmination, the
following entry would be passed. [(1000 x 10%) x 15 / 365]:

January 15, 2007

Dr Deferred Murabaha Income 4.10

Dr Murabaha Profit Receivable 4.10
Cr Income on Murabaha Financing 4.10
Cr Unearned Murabaha Profit Receivable 4.10
Scenario-A-continued
4) Booking of Accrual of profit@ 10% for remaining days of the month,
the following entry would be passed. [(1000 x 10%) x 16 / 365]:

January 31, 2007

Dr Deferred Murabaha Income 4.39

Dr Murabaha Profit Receivable 4.39
Cr Income on Murabaha Financing 4.39
Cr Unearned Murabaha Profit Receivable 4.39

And so on this entry will be passed at the end of EACH month till maturity for the accrual of profit.

Disclosure in Balance Sheet as on January 31, 2007

Murabaha receivable-gross 1,100

Less: Deferred Murabaha Income {100- (1000x10%x31/365)} (91.51)
Murabaha Profit Receivable shown in other assets (8.49)
Murabaha Financing Receivable 1,000
Scenario-A-continued

5) On Maturity of Murabaha transaction i.e. on December 31, 2007 and at the

time of receiving of final payment following entry would be passed:

December 31, 2007

Dr Party Bank A/c 1,100

Cr Murabaha Financing 1,000
Cr Murabaha Profit Receivable 100
Scenario-B
B-In case Declaration is not received on January 15, 2007 and is received on February 15,
2006:

1) At the time of payment to the client for the purchase of goods on behalf of bank or
directly to the supplier by the bank the transaction will be accounted for as follows:

January 01, 2007

Dr Advance against Murabaha 1,000

Cr Pay Order / Party Account 1,000

On January15, 2007

No entry would be passed

At the end of First Month i.e. January 31, 2007

No entry would be passed for accruals of profit, as Declaration has not been received from
the customer.
Scenario-B

2) On February 15, 2007, at the culmination of Murabaha i.e. at the time of sale
of goods to the customers with signing of Declaration by the bank and the client,
the following entries would be passed:

February 15, 2007

Dr Murabaha Financing 1,000

Dr Unearned Murabaha Profit Receivable 100
Cr Advance against Murabaha 1,000
Cr Deferred Murabaha Income 100
Scenario-B-continued

3) Booking of Accrual of profit@ 10% from the date of disbursement to the date
of culmination, the following entry would be passed. [(1000 x 10%) x (31+15)/
365]:

February 15, 2007

Dr Deferred Murabaha Income 12.60

Dr Murabaha Profit Receivable 12.60
Cr Income on Murabaha Financing 12.60
Cr Unearned Murabaha Profit Receivable 12.60
Scenario-B-continued
4) Booking of Accrual of profit@ 10% for remaining days of the
month, the following entry would be passed. [(1000 x 10%) x 13 / 365]:

February 28, 2007

Dr Deferred Murabaha Income 3.56
Dr Murabaha Profit Receivable 3.56
Cr Income on Murabaha Financing 3.56
Cr Unearned Murabaha Profit Receivable 3.56

And so on this entry will be passed at the end of EACH month till maturity for the accrual of profit.

NOTE: In case the Murabaha declaration is NOT received on the due date, NO Entry would be passed
until the declaration is received.

Disclosure in Balance Sheet as at February 28, 2007

Murabaha receivable-gross 1,100

Less: Deferred Murabaha Income{100- (1000x10%x(31+28)/365)} (83.84)
Murabaha Profit Receivable shown in other assets (16.16)
Murabaha Financing Receivable 1,000
Scenario-B-continued

5) On Maturity of Murabaha transaction i.e. on December 31, 2007 and at the

time of receiving of final payment following entry would be passed:

December 31, 2007

Dr Party Bank A/c 1,100

Cr Murabaha Financing 1,000
Cr Murabaha Profit Receivable 100
Treatment for Inventory

If goods purchased for Murabaha remain unsold on the reporting

date they are shown as “Murabaha Inventory” in Other Assets.

Following are possible scenario:

1) Bank is holding assets for future sale to its customers against a

promise
2) The Goods are imported as Bank’s agent and are not sold to the
importers i.e. they are in PAD
3) Any other reason due to which the goods remain unsold.