IFRS 16 IJARAH / FINANCE LEASE

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ibrahim.ferozi8
Posts: 1
Joined: 16 Sep 2020, 13:44

IFRS 16 IJARAH / FINANCE LEASE

Post by ibrahim.ferozi8 »

Hi,

We are a real estate company and in process to obtain loan from islamic bank through financing tool called "Ijarah / finance lease" . The deal with bank is that our company must transfer existing property ownership to bank. And the property is worth USD 100 and bank will give us loan usd 60 (60% of property worth) through finance tool "Ijarah / finance lease" to operate property and reap the rewards from property to repay loan with interest in a ten years tenure and the property legal title will be transferred back to us after repayment of loan.

My question is once we transfer legal title of property @ 60 USD then it will be deemed as we dispose the property and incurred a book loss USD 40
Entry 1
DR. cash 60
dr. loss 40
cr. property 100

on signing finance lease agreement the entry should be :

Entry 2
dr. right of use of asset USD 60
cr. Finance lease liability USD 60

after 10 years the loan is repaid and property value in the market is lets say remain same USD 100, ignoring the depreciation on right of use of asset

ENTRY 3
dr. property USD 100
cr. right of use of asset usd 60
cr. gain on property usd 40

kindly give your valuable suggestion if the above scenario is wrong and give your input with valuable suggestion.
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Marek Muc
Site Admin
Posts: 1710
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland

Re: IFRS 16 IJARAH / FINANCE LEASE

Post by Marek Muc »

I would not derecognise the property at all - it's just a collateral with a temporary transfer of the legal title. You still keep risk and rewards of ownership.

So the entries would be:
Dr cash 60
Cr loan 60

and then subsequent accounting under amortised cost:
https://ifrscommunity.com/knowledge-bas ... rest-rate/
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