ACCOUNTING ISSUES

ON MUSHARAKA
Topic 3
Spring 2012/2013
University College of Bahrain

01/09/16

Nature
Nature of
of Musharaka
Musharaka Financing
Financing
A partnership between the Islamic bank and its clients
where both parties:
Contribute equal or varying amounts of capital to
establish a new project or share in an existing one;
Capital can be on permanent or declining (capital) basis
and will have his due share of profits ; and
Partners share proportionate losses according to the
capital contribution and not otherwise

Musharaka
Musharaka principles
principles
Competent contracting
parties
The capital shall be in
cash, gold, silveror
equivalent; realty
(goods,real estate
machines); or intangible
rights (patents) or
equivalents
The partner does not
guarantee another
partners capital or
funds except in the case
of negligence or
omission

Any exchange or sale

to the other partner
should not be at
historical cost but at the
fair value at the time of
sale.
Profits can vary with
the agreement and
capital contribution and
to be distributed upon
completion
Loss to be shared
according to capital
contribution (credit
guarantee) and can be
carried forward or offset.

Journal
Journal entries
entries
Dr. Musharaka Financing
Cr. Cash
(Being financing for customers / partners)
Dr. Cash/ Account Receivable
Cr. Musharaka Financing
(Being repayment by customers/ partners)
Dr. Cash/ Account Receivable
Cr. P/L Account (Profit)
(Being profit received from Musharakah financing)
Dr. P/L Account
Cr. Musharaka Financing
(Off-setting the loss against capital repayment by
customer/ partners)
4

TYPES
TYPES OF
OF MUSHARAKAH
MUSHARAKAH
CONSTANT Musharakah- The partners share in
Musharakah capital remains (constant) throughout
the period.
Musharaka DIMINISHING to Ownership- One party
has the right to purchase a part of other partys
share which declines until one become the sole
proprietor of all capital (Musharaka Mutanaqisah)

Illustration
Illustration of
of Diminishing
Diminishing
Musharaka
Musharaka (Musharaka
(Musharaka Mutanaqisa)
Mutanaqisa)
A

Constant CCR or
PSR?

Accounting
Accounting TreatmentTreatment- Musharaka
Musharaka
Financing
Financing (FAS
(FAS 4)
4)
RECOGNITION &
MEASUREMENT
Upon receipt or when
deposited in a
Musharaka Account
known as Musharaka
Financing

DIMINISHING
MUSHARAKA CAPITAL
Measured at historical
cost after excluding the
sold portion (fair value)
is the basis of
measurement.
Any difference
CONSTANT MUSHARAKA between fair value and
historical cost is the
CAPITAL
The capital at the end banks profit or loss
UPON TERMINATION
of period is measured
based on historical cost Outstanding capital
becomes receivable.
7

Recognition
Recognition of
of Capital:
Capital:
Bank Capital in Musharaka shall be recognized
when :
When Paid to partner.
Or
When Made available to him.

Presentation:
Presentation:
Bank capital in Musharaka shall be presented as
follows:
In books of A/Cs as Musharaka Financing
with name of partner.
In financial statements under Musharaka
Financing:.

Measurement
Measurement of
of Capital
Capital at
at time
time of
of
Contracting:
Contracting:

Measured by Amount Paid

if paid in cash .

Measured by Fair Value of Assets if provided in kind.

Fair Value is amount agreed between partners, preferably
assessed by independent assessor.
Difference between fair value of assets and their book value shall
be recognized as profit or loss for bank.

Measurement
Measurement of
of Capital
Capital after
after
contracting:
contracting:
For Constant Musharaka Capital is measured at Historical
Cost .

For Diminishing Musharaka capital is measured at Historical

Cost less historical cost of any share transferred to the
partner.

Cont.
Cont.
On liquidation of diminishing Musharaka before
complete transfer: Amount recovered should be
credited to Musharaka financing A/C.

On liquidation or termination of Musharaka: Unpaid

capital shall be recognized as receivables.

Recognition
Recognition of
of Musharaka
Musharaka
Profits/losses:
Profits/losses:
At time of liquidation for transactions falling within financial
period.
At Time of distributing profits- end of each accounting
period for transactions continuing for more than one
financial period.
Losses are recognized to the extent they are deducted from
bank capital

Cont.
Cont.
Bank share of profits not received at time of liquidation or
termination of Musharaka shall be recognized as Receivables
due from partner.
Losses due to negligence/misconduct of partner shall be
recognized as Receivables due from him.
Provisions should be created if Musharaka Receivables are
doubtful.

Disclosure
Disclosure Requirements:
Requirements:
Bank should disclose in Notes if a Provision was made for
Musharaka Receivables.

General disclosure requirements as per FAS 1 should be

observed.

ACCOUNTING QUESTIONS &

ANSWERS ON MUSHARAKAH

Musharakah
Musharakah Accounting
Accounting Question
Question 11

Bank Islam provided a working capital to Tijarah Constructions based

on the principal of Musharakah Mutanaqisah amounting to
$400,000 for a 4-year periods. Profit and loss sharing ratio as
agreed by both parties is similar to the ratio of capital contribution
which is 30:70 (Bank:Customer) at the beginning of the contract.
The repayment shall be equal throughout the contract period.
However Tijarah had financial problems in year 2 and this managed
to pay 50% of the agreed repayment amount. Half of the amount
outstanding in year 2 has been paid in year 3 and another half was
paid in year 4. Tijarah also experienced difficulties in year 4 where
the repayment outstanding at the end of the year was $35,000.

Musha
Musharakah
rakah Accounting
Accounting Question
Question 11
continued
continued

The profit and loss for the project is below:

Year 1 = Profit - $180,000
Year 2 = Loss - $150,000
Year 3 = Profit - $ 220,000
Year 4 = Loss - $ 80,000
Prepare the extract of the journal entries using the accrual basis as
recommended by AAOIFI.
Which data will go to the balance sheet and which to the income
statement!

Journal
Journal Entry
Entry -- Year
Year 11

Dr. Musharakah Financing

Cr. Cash

400,000
400,000

Dr. CASH
Cr. Musharakah Financing

100,000
100,000

Dr. Cash
Cr. (P/L) Musharakah

54,000
54,000
54

Journal
Journal Entry
Entry -- Year
Year 22

Dr. Cash
Dr. P/L
Dr. Receivable
Cr. Musharakah Financing

50,000
33,750
16,250
100,000

Journal
Journal Entry
Entry -- Year
Year 33

Dr. Cash
Cr. p/l Musharakah

33,000
33
33,000

Dr. Cash
Cr. Musharakah Financing
Cr. Receivable

108,125
100,000
8,125

Journal
Journal Entry
Entry -- Year
Year 44

Dr. Cash
Dr. p/l
Dr. Receivable
Cr. Musharakah Financing

59,000
6,000
35,000
100,000

Dr. Cash
Cr. Receivable

8,125
8,125

Musharakah
Musharakah Accounting
Accounting Question
Question 22

A musharakah financing between Bank Muamalah and Hamid Developers

has a profit and loss sharing ratio of 30:70 (Bank:Customer) at the
beginning of the contract. The customers capital was $1,400,000. The
repayment is divided proportionally throughout the contract period
which is 6 years. Hamid had financial problems in year 2 and only
managed to pay 40% of the agreed repayment amount. Half of the
amount outstanding in year 2 has been paid in year 3 and another half
was paid in year 4. Hamid also experienced difficulties in year 4 where
the repayment outstanding at the end of the year was $50,000. He
managed to pay the outstanding in the 5th year and wanted to finish the
whole payment immediately making the contract to only 5 years.

Mu
Musharakah
sharakah Question
Question 22 continued
continued

The profit and loss for the project is below:

Year 1 = Profit
- $180,000
Year 2 = Loss
- $150,000
Year 3 = Profit
- $ 220,000
Year 4 = Loss
- $ 80,000
Year 5 = Profit
- $ 400,000
Prepare the extract of the journal entries using the accrual
basis as recommended by AAOIFI.
Which data will go to the balance sheet and which to the
income statement!

Journal
Journal Entry
Entry -- Year
Year 11

Dr. Musharakah Financing

Cr. Cash

600,000
600,000

Dr. CASH
Cr. Musharakah Financing

100,000
100,000

Dr. Cash
Cr. P/L Musharakah

54,000
54,000
54

Journal
Journal Entry
Entry -- Year
Year 22

Dr. Cash
Dr. P/L
Dr. Receivable
Cr. Musharakah Financing

40,000
37,500
22,500
100,000

Journal
Journal Entry
Entry -- Year
Year 33

Dr. Cash
Cr. p/l Musharakah

44,000
44
44,000

Dr. Cash
Cr. Musharakah Financing
Cr. Receivable

111,250
100,000
11,250

Journal
Journal Entry
Entry -- Year
Year 44

Dr. Cash
p/l
Receivable
Cr. Musharakah Financing

38,000
12,000
50,000
100,000

Dr. Cash
Cr. Receivable

11,250
11,250

Journal
Journal Entry
Entry -- Year
Year 55

Dr. Cash
Cr. Receivable
Cr. Musharakah Financing

250,000
50,000
200,000

Dr. Cash
Cr. p/l Musharakah

40,000
40,000

Prese
Presentation
ntation and
and Disclosure
Disclosure of
of Musharakah
Musharakah Financing
Financing

BALANCE SHEET
Musharakah Financing

XX

Less: Provision for loss in

Musharakah Financing

(XX)

Net Musharakah Financing

XX

INCOME STATEMENT
Musharakah income

XX