News
Islamic Financing Instruments (Sukuk)
26-Oct-2017
Prepared by: Dr. Rafiq Tawfiq Al Dweik
ASCA (Jordan) BOD Member
The second part of the article: accounting treatments for the issuance and trading of Islamic Sukuk
The most important Islamic Sukuk issuance and trading processes that require accounting treatment are as follows:
(1) Accounting treatment for the issuance of Islamic Sukuk.
(2) Accounting treatment for the purchase of the project or transzction’s assets subject to Sukuk
(3) Accounting treatment of the issuance of sukuk expenses and the like.
(4) The accounting treatment of the current expenses and the periodic returns of Sukuk.
(5) Accounting treatment of operating profit of Sukuk.
(6) Accounting for the distribution of the operating profits of Sukuk.
(7) Accounting treatment of operating loss of sukuk.
(8) Accounting treatment for amortizing and liquidating of Sukuk.
(9) Accounting treatment of capital gains of Sukuk.
First: The books of the issuing company of the Sukuk
(the Special Purpose Company – SPC)
(1) Accounting treatment for the issuance of Islamic Sukuk.
If it is assumed that the Company (SPC) has issued a prospectus of public offering for sukuk (lease contract of residential complex) for JD (34) million, and was fully underwritten by the participants.
Recording IPO transaction:
Debit /the bank account JD 34 000 000
Credit /sukukholders JD 34 000 000
(2) Accounting treatment for the purchase of the Project or transaction’s assets subject to Sukuk.
Assuming that the purchase was made for an amount of JD (34) million:
Debit / real-estate (the asset) JD 34 000 000
Credit /the bank account JD 34 000 000
(3) Recording of conversion of project’s assets account to the project accounts:
Debit / Project assets (contra account) JD 34,000,000
Credit / real-estate (the asset) JD 34 000 000
(4) Closing the sukukholders’ account and recording it as contra account:
Debit /sukukholders JD 34 000 000
Credit /sukukholders (contra account) JD 34 000 000
(5) Accounting treatment of the issuance of sukuk expenses and the like:
If it is considered that the issuing company that will manage the issue process of the Sukuk will incur underwriting expenses, it must open an account under the name of "Studies, Advertising and Issuance Expenses" and the like and to be amortized over several years. Sukukholders will not be liable for such expenses.
If it is stated in prospectus that these expenses are the expenses of the sukuk, in this case underwriting expenses shall be treated on the same manner of Mudaraba expenses. In this case, such expenses are treated as deferred charges which are amortized over several periods depending on the duration of the Project or the transaction for which the Sukuk was issued.
The first opinion is most likely and the accounting treatment is as follows:
An account shall be established in the SPC books under the name of “ deferred expenses” and to debit it with all items of deferred income expenses, including but not limited to the following:
Debit / deferred expenses: studies and consultancy expenses.
Debit / deferred expenses: advertising expenses.
Debit / deferred expenses: promotion and marketing expenses.
Credit / bank account
(6) The accounting treatment of the current expenses and the periodic returns of Sukuk:
- Current expenses of sukuk are accounted for in the Income Statement.
- Current proceeds (gains) arising from Sukuk are treated in the Income Statement.
Transactions records are as follow:
Debit / …. expense
Credit / bank account
Debit / Project account ( up to receive the revenue)
Credit / revenues
Debit / bank account (when receiving the revenue)
Credit / Project account
(7) Expenses paid on behalf of the project:
Debit / Project account ( up to receive the amount)
Credit / bank account
Debit / bank account (when receiving the amount)
Credit / Project account
Second: The Project’s books
(1) Recording receiving assets process from SPV:
Debit /lease buildings JD 34 000 000
Credit /sukukholders JD 34 000 000
(2) Recording the assets within the assets’ accounts (in case of a financial lease):
Debit /assets for lease JD 34 000 000
Credit / lease buildings JD 34 000 000
(3) Debiting lessee account by the financial lease contract value:
Debit / lessee’s account JD 36 772 713
Credit / lease installments JD 34 000 000
Credit / lease revenues JD 2 541 500
Credit / SPC’s account (its revenue portion) JD 231 213
(4) Recording any expenses related to the Project:
Debit /…….. expense JD 000
Credit / bank account/SPC/ payables JD 000
(5) Recording depreciation expenses annually until the accumulated depreciation reaches the value of the leased assets:
Debit /depreciation expense JD 34 000 000
Credit /accumulative depreciation JD 34 000 000
(6) Recording the receipt of the semi-annual installments of the tenants until the full value of the tenants is amortized at the end of the Project life:
Debit /bank account JD 36 772 713
Credit / lessee’s account JD 36 772 713
(7) Recording the payment of the share of SPC from the periodic revenues until the full value of their share is paid:
Debit / SPC’s account (its revenue portion) JD 231 213
Credit / bank account JD 231 213
(8) Amortizing the accumulated depreciation at the end of the project life:
Debit / accumulative depreciation JD 34 000 000
Credit / assets for lease JD 34 000 000
(9) Recording profits at the end of the project life on the Sukukholders’ accounts:
Debit / lease revenues JD 2 541 500
Credit / sukukholders JD 2 541 500
(10) settling the Sukukholders’ accounts:
Debit / sukukholders JD 36 541 500
Credit / bank account JD 36 541 500
(11) Accounting treatment of amortization of investment Sukuk:
It may be the policy of the issuer (SPC) to amortize sukuk by purchasing them from the sukukholders according to the prevailing market value at the time of purchase. The difference between the par-value of the repurchased sukuk and the nominal carrying amount has a capital gain or capital loss that is earned or fined by SPC away from the sukukholders. The transaction record to be:
Debit /sukukholders (amortized par-value)
Debit /capital loss (as the case may be)
Debit / bank account
Debit / capital gain (as the case may be)