Zakat Pa Ja05

Vol # 38
Accountant
Issue # 4
July - August 2005
EDITORIAL OFFICE
The Pakistan Accountant
Chartered Accountants Avenue Clifton Karachi (Pakistan) Phone: 9251636-39 Fax: 9251626 E-mail: asad.shahzad@icap.org.pk Website: www.icap.org.pk
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Zakat
Editorial ZAKAT - As a tool for Poverty Alleviation

Abdul Rahim Suriya, FCA
Presidents Message
S. M. Shabbar Zaidi, FCA
P U B L I C ATIONS COMMITTEE
Chairman Abdul Rahim Suriya,
FCA
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Questions and Answers on Zakah

Justice Maulana Taqi Usmani
Zakat & Ushr in Modern Times

Sadia Kaleem, ACA
Vice-Chairman Ahmad Saeed, FCA Members Salim Chamdia, FCA Faisal Habib, FCA Tausif Ilyas, FCA Asif Jamal, FCA Fazal Mahmood, FCA Shakil Akhtar Qureshi, FCA Abdul Rashid, FCA M. Arshad Siddiqui, FCA Sophia Ahmed, ACA Jehan Zeb Amin, ACA Muhammed Amin Bhimani, ACA Faisal Imran Hussain, ACA Muhammad Mahmood Marfatia, ACA Adnan Ahmad Mufti, ACA Ahsan Ghaffar Mehanti, ACA Rahil Rafiq, ACA Hena Sadiq, ACA Junaid Haji Zikar, ACA
Rudiments of Zakat
Irfan Ahmad Khan, ACA
Zakat Self Assessment Form

Contributed by School of Business Studies
General Rules Governing Calculation of Zakat

Contributed by Ishaque Noor
Islamic Economic System

Issues in Islamic Banking
Kamran Akhtar, ACA
The Basic Principles of Islamic Economy and Their Effects on Accounting Standards-Setting
Mohammad R. Taheri
Murabaha
Contributed by Yasin Zairy, FCA
THE COUNCIL
Council and Office Bearers President Syed Mohammad Shabbar Zaidi, Vice Presidents Imran Afzal, FCA Ahmad Saeed, FCA Members Rafaqat Ullah Babar, FCA Dr. Tariq Hassan Shahzad Hussain, FCA Nasimuddin Hyder, FCA Syed Shahid Husain Jafri, FCA Farrukh Viqaruddin Junaidy, FCA Dr. Faizullah Khilji Arif Mansur Shaikh Saqib Masood, FCA Rashid Rahman Mir, FCA Asad Ali Shah, FCA Abdul Rahim Suriya, FCA Mohammad Abdullah Yusuf, FCA Executive Director: Moiz Ahmad, FCA Secretary: F. H. Saifee, FCA
Publications Coordinator: Asad Shahzad
FCA
Financial Reporting
IAS 17 - Changing Facemask
Yasir Khan, ACA
Internal Auditing
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Pre-payment checks, compliance audit or risk-based audit what is the most effective role for internal audit
Andy wynne
Institute News
48 49 51 52 53
Obituaries
Moosa Yousuf Lulat, Abbas Mohamed Peerbhoy Mohsin Mustafa and Syed Iftikhar Ali
VCD of CPD Activities Conducted by SRC
Health News
Medical Experiment Miracles with Water
Contributed by Dr. Khawaja Amjad Saeed, FCA
Thats Life
Me Deaf
Altaf Noor Ali, ACA
Students Section
Collective Zakat System
Nadia Wahid
Pakistan Accountant can be downloaded from Institutes website at www.icap.org.pk

The views expressed here do not necessarily represent the official policy of the Institute.
Editorial
ZAKAT - As a tool for Poverty Alleviation
Although Pakistans economy has grown at an appreciable rate over the last few years the poverty level in the country has not reduced. Despite the governments poverty reduction program, it is believed that roughly one-third of the population currently lives below the poverty line. The situation is indeed pretty grim, and radical measures are required to redress the situation. Of the many options available to the economic managers of the country, Zakat one of the fundamental pillars of Islam - has the potential to provide a quick fix solution to the problem. Its potential can be gauged from the spate of advertisements in the print and electronic media by the NGOs and Charitable Organizations for collection of Zakat as the holy month of Ramadan approaches. Why do people prefer to pay to these organizations rather than the government? The answer is pretty simple. People have confidence in them. They share information with the donors - how much Zakat did they collect and how did they utilize it. Furthermore, the work that these organizations do or not do is physically evident to the people. Although the Zakat and Ushr Ordinance have been on the statute books for many years now, the government has not realized the full potential of this levy. Unfortunately, the system suffers from a lack of transparency, and the public has no trust in it. No one knows how much is collected by the state as Zakat, and how it is spent. As a first step to restore confidence in the system the government should make public the accounts of the Central Zakat Fund. Apart from paying to the government and the charitable organizations people pay zakat directly to the needy. While this practice ensures that the money reaches the needy, the drawback is that the Zakat is used for satisfying their immediate needs, and not much heed is paid to strengthening their economic base on a long-term basis. As a result they become dependent on Zakat for survival from year to year. This certainly is not an objective of Zakat. The endeavor should be to make the needy self-reliant as soon as possible. As this issue was going to the press, the country suffered its worst natural disaster. A massive earthquake hit the Northern areas of the country, and Azad Kashmir. There is death and misery all over. Thousands have perished, many more have been injured, millions have been rendered homeless, cities, towns, and villages have been wiped out, the communication network has been badly mauled. Our heart goes out to the bereaved families, and we offer our profound sympathies to them. The whole nation has risen to the challenge. Donations in cash and kind are pouring in. Indeed so much has been donated in kind that transporting these goods to the affected people is becoming a logistical nightmare. The Institute too is cognizant of its responsibilities in this regard, and has launched an appeal to its members to donate funds. I would urge the members to contribute generously to this noble cause. Finally, I pray to Almighty Allah to protect us all. Aameen!
Abdul Rahim Suriya, FCA Chief Editor

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July - August 2005
Presidents Message
The newly elected council has taken charge on September 12, 2005. I reiterate the comments made in the council's meeting whilst taking charge as the President for the term 2005-2006 that I consider this office as a responsibility for maintaining the high standards set by my predecessors; and the trusteeship bestowed upon us by the members. Accounting is not the end but a mean to attain the end of economic prosperity and development. All of our members, whether in practice and industry have to acknowledge and demonstrate that we are engaged in providing 'service' to businesses. This includes our role as accountants as well as 'auditors'. There is no place in the modern world for 'Inspectorial' role. Development of the profession is directly linked with the economic development, that too in organised and documented sector, therefore, the first priority of the profession has to act as a facilitator, and 'service provider' to businesses which leads to overall economic development of the country. There cannot be any sustainable reduction in unemployment and poverty unless there is a creation of wealth by businesses and its reinvestment. The role of governments has changed. Private sector is now the only player in this field. Accountants, specially those, in practice, have to act like 'Umpires' rather than 'judges' whilst rendering their services. An umpire will only interfere if someone plays against the rules of the game. The new council would endeavour to bring about awareness for change in the paradigm of the role of accountants in the economy. In the forthcoming issues, I will describe in detail, the strategy for the growth of the profession as envisaged by your new council.
Main theme of this issue viz Zakat in my view relates to subject of social responsibility. Objective of such obligations is to remove disparity in the distribution of wealth; however, it would be a restrictive interpretation if we keep the same to one fortieth (1/40th) of net increase in wealth only. This threshold is the minimum responsibility only. Philanthropy has played a vital role in promotion of health and education in development of economies. All big research and educational institutions in the developed economies are being financed by endowments. In our country, there are misapprehensions in respect of utilisation of sum so collected, including zakat. In the recent past, trends have changed and now institutions like Aga Khan Hospital, Shaukat Khanum, SIUT, Shifa Hospital etc. are receiving substantial sums on that account. This trend should be continued as the overall shortfall is immense. Nevertheless, it is important to note that all these institutions are related to 'health services' sector where there is an immediate need in this country, however, unless philanthropy in our country, which includes zakat, is used for development of modern education, including science and technology, the objective of sustainable economic development cannot be achieved. Education of masses on modern lines is imperative for survival in the present world. Members are requested to improve their role in social services including proactive participation in the financial management of non-profit organisation. I will dilate further on the matter discussed above in the following issues.
Syed Shabbar Zaidi
July - August 2005
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Zakat
Questions and Answers on Zakah

by Justice Maulana Taqi Usmani
How to Calculate Zakah on Business?

Q.1 Is zakat payable on business? If so, how does one calculate the amount? I have overdrafts and loans in business too, as well as receivables outstanding. Is zakat payble on stocks? I have stocks from various periods starting from 30 days to over 365 days. There are certain stocks which are not sellable anymore. First of All, you should set a particular date of a lunar month for the valuation of your assets for the purpose of zakah. Better you choose the first of Ramadaan for this purpose, because this is the date on which the government also collects zakah from all the citizens. This date will be your zakah valuation date for each year as long as you remain sahib-e-nisab (the one on whom zakah is obligatory). Then, you should calculate the value your zakatable assets as it stands at that valuation date. The zakatable assets are the following: a) Cash (including the balance of your bank deposits) at that date.
ii) Amounts payable at that date a rent to the landlord or to the lessor if equipment is acquired on lease. iii) The Principal amount of loans borrowed from financial institutions and employed in acquiring zakatable assets, or any personal loans. iv) The amounts deducted by the government at source as zakah. After the deduction of these amounts from the total value of the zakatable assets, as mentioned above, the balance will be your zakatable value. 2.5 percent of this zakatable value is payable as zakah. The period of retention of the stock is not material. The balance standing at the date of valuation shall be valued, no matter whether some stocks are acquired some month ago, and some are acquired just one day earlier. The completion of one year is needed only for the minimum amount of nisab. If somebody has been owing the minimum amount of nisab for the most parts of the year, he has to pay zakah on the balance remaining with him, on the date of valuation. 'Retention for one year' is not necessary in respect of each and every item. Therefore, whatever comes or goes during the year has no bearing on the calculation of zakah. It is only the balance remaining on the valuation date which is subject to zakah. You have also asked about the stocks which are not "sellable any more". If you mean that these stocks are kept for personal use or for charitable purpose, they shall not remain zakatable any longer. But if you mean that they are available for sale, but nobody comes forward to purchase them, they are still zakatable. However, it should be remembered that zakah can also be paid in kind, therefore you can pay their zakah from those assets themselves i.e. you can give 2.5 % of those stocks in kind to a person entitled to receive zakah.
July - August 2005 05
Q.2
A.
b) The market value of the shares of joint stock companies of NIT units or mudaraba certificates held at that date. c) Face value of the financial papers, like bonds, KDCS, NDSCS etc. d) The whole-sale value of the balance of stock-intrade (including raw material) at that date, irrespective of the period of their retention. e) Receivable amounts (book debts) as on that date. From the total amount of the aforesaid assets, the following amounts may be deducted: Amounts payble to the suppliers of stock (including raw material)
i)
Zakat
Payment of Sadaqatul-Fir to a Non Muslim

Q. Can the Sadaqatul-fitr be paid to a needy non-Muslim? A. According to Imam Abu Hanifah, the Sadaqatul-fitr can be paid to a needy non-Muslim resident in an Islamic country if he does not own the nisab (a surplus amount equivalent to the value of 52.5 totals of silver).
humiliated if we tell him that it is a zakah money? (d) If he pays some or all of his debts by zakah money, then he again becomes a rich man, should he return the money of Zakah to its original owners, or can he pay it to other poor people, or he need not do it? (Ibid) A. (a) The principle is that if the debts of a person are equivalent to his surplus assets (including his receivables) or are more then that, he is entitled to receive Zakah. Likewise, if his sirplus assets are sufficient to clear his debts, but after paying his debts, his remaining surplus assets do not reach the quantum of nisab he can also receive Zakah. However, if his surplus assets are such that even after clearing all his debts, they are equivalent to or more than the nisab, he cannot receive Zakah. It is worth mentioning that the term "surplus assets" includes money and all those household goods and properties which are not required for his day-to-day needs. In the light of this principle, the businessman under question can receive Zakah, because his debts are 2 million while his surplus assets (including his receivables) are less than that. Therefore, one can help him in clearing his debts out of the Zakah. (b) If his debts are intended to be paid out of Zakah, the creditors should not be paid directly. Instead, money should be given to the indebted person who will pay it to his creditors, if he so wishes. (c) It is not at all necessary to tell the beneficiary of Zakah that he is being helped out of Zakah. One can give him the amount as a gift or
as a persent without referring to Zakah. The only condition is that while giving it to him, one should have a clear intention in his heart to pay Zakah. Even if a person gave money to the beneficiery as a Qard or a loan, while in fact he intended to pay zakah and never intended to get it back from him, the obligation of Zakah is discharged. How- ever, if he comes thereafter to repay the loan, he should refuse to accept it. (d) Once a person has received Zakah while he was entitled to receive it, he is not required to return it to the original payer, how rich he may become late...Therefore, if that businessman becomes rich once again, he is not required to pay back the Zakah, neither to the original owners, nor to other poor people. However, he will be required to pay this own zakah according to his assets owned by him at that time.
Paying Zakah to an Indebted Person

Q. A businessman suffered a loss in his business. He sold all his properties and paid his debts. He hired a house on rent and shifted from a posh locality to an ordinary locality in a far off area of the city and joined a service. From appearance his standard of living still looks like his previous one (although he is without a car, telephone and other luxuries). He is still under the debt of approximately Rs. 2 million. He pays some amount every month from his salary to his creditors. Now, the question is: (a) Can his debts be cleared by Zakah money? (b) If it is permissible, should we pay his debts directly to his creditors, or should we pay him first and then ask him to pay off his debts? Please also note that this businessman has to receive about Rs. one million from other people which is being received by him in parts and after long intervals. (c) Is it necessary to tell him that it is the Zakah money, or can we pay him without any reference to Zakah, because he may feel
Zakah on Unquoted Shares

Q. "How is zakah calculated and paid on the unquoted shares which cannot be sold through stock Exchange?" A. Zakah is obligatory on the market value of the shares of every joint stock company. Although the market value of the unquoted shares cannot be determined through the stock Exchange, yet there are two ways to determine their value. 1. Some unquoted shares are sold and bought through "over the counter" transactions i.e. by mutual agreement of the buyer and seller and without the meditation of a stock Exchange. These "over the counter" transactions may determine the market value of the unquoted shares.
Zakat
2. If the market value cannot be ascertained in this way for some reason, then the value of the unquoted shares should be calculated on the basis of the balance sheet of the company. It has already been explained in Albalagh (June 1990 p.20) that a share holder can deduct from the Zakatable value a proportion equivalent to that of the fixed assets of the company. The same principle is applicable to the unquoted shares also. proportionate share in the capital gain the portfolio earns. Thus, a unit of a "Trust Fund" does not represent cash only, like the bonds, but it represents a proportionate share in the assets of the relevent companies also. Therefore, it will be treated like a share of a quoted company for the purpose of Zakah, and all the rules mentioned with regard to the shares of a company are also applicable to the 'units' of a Trust Fund. Therefore, zakah will be payable on the market value of the such units, irrespective of the amount of divident declared on them. It is like the stock in trade on which zakah is payable on the basis of its market value, irrespective of the rate of profit earned on it. zakah will be payable on the aggregate balance of his assets (including the balance of the amount received from the Fund) on the valuation date.
Who is Entitled to Receive Zakah?

Q. Can you tell precisely who is entitled to receive zakah? Can we spend the zakah money for the following purposes: (a) In building a religious school which is a profit making concern for the operator? (b) In buying a computer or an airconditioner for a religious or a social body?" (Ibid) A. Zakah should always be given to a poor person who does not own the nisab. The nisab is 613.35 grams of silver. Any person whose surplus belongings do not reach the value of 613.35 grams silver can receive zakah. Zakah can be paid in cash or in kind, but in both cases the ownership of the property given in zakah must be transferred to a particular real person (and not a fictitious person) who is entitled to receive zakah. So, the construction of the building of a charitable institute is not a valid way of the disbursement of the zakah money, becuase in this case the property is not transferred to a particular real person. Likewise the donation of a computer or an airconditioner for a religious or a social organization cannot be made out of the zakah money. However, if these things are given to a poor person (entitled to receive zakah) by making him the owner of a computer, or of the building, the obligation of zakah is discharged.
Zakah on Trust Fund

Q. "Instead of our managing a portfolio of ahares, we have invested some spare cash in some trust funds i.e. private ones and also those set up by the government. The price of the fund is closely linked with the index of quoted shares and the price is given each day. Dividends are also declared and given each year. Do we have to treat this as cash and pay zakah on its market value or only on its dividents? In this case the dividends should be enough to cove rfor the zakah of 2.5 % of total market value, therefore, it would not cause undue hardship as we do not have to sell the capital portion to pay the zakah." (Ibid) A. A "Trust Fund" is a mutual fund where a portfolio of the shares of different listed companies is maintained. The share of a participant in such a fund is represented by a negotiable instrument usually called a 'unit'. These 'units' represent their holders' proportionate share in the portfolio, and ultimately a proportionate share in different companies, as well as a
Zakah on the Employees Provident Fund

Q. In Malaysia, 20% of monthly salary is paid to the Employees provident Fund which keeps and manages the funds for us until retirement age. we are not allowed to take the money before retirement except in the case of death of the employee where it is paid to the heirs. How do we treat this asset in the payment of zakat? (Ibid) A. If 20% of the salary is deducted at source without giving this amount to the employee, zakah is not payable on the amount kept in the employees' Provident Fund until the same is received by the employee. When an employee receives it on his retirement, the amount so received shall from part of his zakatable assets of that year only, and such part os it as is not spent before the valuation date shall be subject to zakah, and
Zakat
Zakah on Agricultural Produce

Q. "There is no need to pay zakah on salary unless there is a saving left for a period of one year, whereas 10% of the farm produce is payable based on the current value of the produce irrespective of whether produce is sold or not. The Zakah in such circumstances is paid upfront whereas the salary earner has the liberty of choosing how to use his earnings without having to deduct a certain portion first for zakah. It means that if he chooses to spend all his earning then there is no need to pay zakah. Would it not be a dis-incentive to the farmer as compared with the salary earner? Perhaps you can clarify this further". (Ibid) A. Let me first clarify some misconceptions found in your question: 1. The rate of zakah levied on the agricultural pruduce is normally 5% and not 10%. The rate of 10% is confined to unirrigated lands only. The majority of cultivated lands are irrigated by canals, wells etc. The rate of Zakah on all these lands is 5%. 2. The zakah of the agricultural produce is payable in kind. Although it may be paid in cash, yet it is at the option of the owner only. It means that if the produce is sold, he can pay the zakah in kind. 3. The agricultural produce should not be compared with personal savings. It should be compared with the stock-in-trade, because trade and agriculture are both productive activities. So, both of them are subject to the same principle. Zakah is payable on the stock-in-trade at the current market
value irrespective of whether it has or has not been sold. Similarly, the agricultural produce is subject to zakah, even before it is sold. But in both cases the obligation is fulfilled by paying zakah in kind. The rate of zakah on agricultural produce is no doubt, double the rate of zakah on stocks, but the reason is obvious. The initial input in the case of agriculture is lesser than the initial investment in stocks, and the rate of output is greater in agriculture than in stock. There may be some exceptions to it, but the rules are always framed according to the normal conditions and not on the basis of exceptions. A salary-earner has an advantage only when he does not invest his money in any type of trade, nor does he keep the surplus with him. This can only be imagined where the income is so little that he can neither save it nor invest it in a profitable business, and his salary suffices only for his personal needs. Zakah is not payable in such circumstences. He cannot be compared with a farmer who cultivates land for productive purposes. However, if the produce of a farmer is so little that there is no surplus after providing food for his family, zakah is not payable according to the majority of the Muslim jurists.
the valuation date, he again became Sahib-e-Nisab. Now, the question is, whether Mr. "A" should pay the zakah of the wealth accumulated on his previous valuation date when it comes in 1992 or by virtue of his becoming Sahib-e-nisab after a gap of two years, he should let one year pass on his new wealth and then pay the zakah?" A. In this case, the previous valuation date will not be applicable for the purpose of calculation of zakah. He will be liable to pay zakah after one full lunar year will pass on his newly acquired nisab of zakah. The principle is that the valuation date, for the purpose of zakah, is the day on which the person acquires the amount of nisab for the first time. This valuation date will remain applicable as long as he remains Sahib-e-Nisab and he shall calculate his zakah on the basis of the valuation of his assets on that date each year. For example, Mr.A became Sahib-e- Nisab for the first time on the 1st of Muharram in 1408 A.H. Now, he shall calculate his zakah on the 1st of Muharram in 1409 A.H. if he is still Sahib-eNisab on the that date. Thus, the first of Muharram is his valuation date for all the following years as long as he remains Sahib-e-Nisab. He will calculate his zakah on the first of Muharram each year. If he does not remain Sahib-e-Nisab on the first of Muharram in any of the following years then the first of Muharram will case to be his valuation date. Therefore, if he acquires the nisab once again, the zakah will be subject to the new valuation date i.e. the date on which he acquires the nisab second time.
Change in Finanacial Status and Zakah

Q. "Mr."A"is Sahib-e-Nisab and pays zakah regularly. Say, in 1989 he paid his zakah, and when the valuation date came in 1990, his financial condition became adverse. Consequently, he did not have the minimum wealth which is liable to zakah. In other words, on
Zakat
on which he, for the first time, acquired the ownership of the nisab (minimum quantum) of Zakah, i.e. the value of 613,35 grams of silver. For example, you have acquired the ownership of 613,35 grams of silver for the first time on the first of Muharram. The first of Muharram is your valuation date for the purpose of Zakah. You should calculate the value of your zakatable assets owned by you on that date every year. The amount spent before that date need not be included in the zakatable assets. Only the balance remaining with you on the valuation date is subject to Zakah. If you do not remember the exact date on which you became the owner of the nisab for the first time, you can estimate the valuation date. Therefore, the month of Ramadan is not the valuation month for everybody, the valuation date differs from person to person. However, once the amount of zakah is calculated on the basis of correct valuation date, it may be paid any time after the valuation date. But the payment should not be delayed unnecessarily. Q. 8We pay income tax and wealth tax regularly. The rate of wealth tax often corresponds to the rate of Zakah. Can we deduct the amount of such taxes from zakah? A. The payment of government taxes cannot discharge you from the obligation of Zakah. However, if you have paid the taxes prior to Zakah valuation date, as explained in answer to the previous question, the amounts of taxes so paid need not be included in your zakatable assets. But if you have not paid the taxes upto the 'Zakah' valuation date, even though they have become due, you cannot deduct the amount of taxes from the zakatable assets.
Various Zakah Questions

Q.1 (a) Is 'Zakah' payable on Bungalow/House irrespective how big it may be, which occupied by us? If 'Zakah' payable, should it be on cost on the Market Value? a of is is or
Q. 4 Is 'Zakah' payable on the cost or the market value of an investment made in open land (Residential plot)? A. If the residential plot is purchased for the purpose of resale then Zakah will be liable at the market value, but if the plot is acquired for purposes other then being resold then Zakah will not be payable.
(b) If any loan is taken against the Bungalow or House, should Loan amount be deducted before calculating 'Zakah' Amount? A. (a) Zakah is not payable on the Bungalow/House which you own and utilize for residential purposes. However, if the Bungalow/House is purchased or built with the intention of resale, then Zakah will be payable on it's market value. (b) A loan taken against the Bungalow/House can be deducted from the Zakatable amount. Q. 2 Is 'Zakah' payable on Furnitures, Fixtures, such as Electric Equipment, Airconditioners, Carpets, Crockery, etc.? If payable, should it be on the cost or on the market Value? A. Zakah is not payable on furniture, electric equipment, airconditioners, carpets, crockery, and their items that are for household utilization. A.
Q. 5 JEWELLERY (a) Is 'Zakah' payable on jewellery and Diamonds? If so, on the purchase value or on the market value? Is 'Zakah' payable on Gold/Silver jewellery in use by wife, daughter or kept as investment-If so, is zakah payable on the purchase value? or the market value? (a) Zakah will be payable on gold and silver jewellery, if such jewellery exceeds the minimum weights: For Silver: 52.2 Tolas / 613.35 Grams For Gold: 7.5 Tolas / 87.479 Grams Zakah will be paid as follows : [Number of Tolas / Grams x cost of 1 Tola / Gram (Silver / Gold)] multiplied by 2.1/2 % = Zakah amount Zakah is not payable on diamonds, despite their value. (b) Zakah is not payable on jewellery of Gold / Silver even if it is used by your wife or daughters (Hanafi view). Such Zakah is calculated on the market value of the gold or silver used in the jewellery.
(b)
Q. 3 Is 'Zakah' payable on Bungalows/Houses or Flats which are given on rent or which remain vacant. If payable, should it be on the original cost or on the market value? A. Zakah will be paid only on the rent accrued from the properties owned. Zakah will not be paid for vacant property, unless if procured for resale purposes; more specifically, for the sale of such assets.
Zakat
Zakat and Ushr in Modern Times

Sadia Kaleem,
ACA
About 1,400 years ago Zakat was imposed as a compulsory levy on all Muslims. A lot has changed since then - our ways and standards of living, economic systems, nature and scope of wealth, means of making livelihoods. A glance at the schedule of rates in Hadith shows that it contains items like cattle, animals, agriculture, gold and silver. Today, the composition of assets has changed and comprises items, such as: Plazas, buildings, plots, shares, insurance, factories, fleet of vehicles, ships, aeroplanes, bank balances, etc However, while computing zakat, numerous problems and difficulties are encountered. This article attempts to describe these difficulties and suggest practical solutions to overcoming them.
exactly after one year of each transaction. The intervening events, losses and even bankruptcy may change the situation and lot of assets may escape Zakat. Since the transaction of Zakat is between man and Allah, and its main objective is that the rich should help the poor, one must exercise caution in calculating it. It is proposed that the day for valuation should be a date of the current year, and not of the last one. No doubt, in such a case, earnings and savings of less than one year shall also be subject to Zakat, but it is prudent to err on the higher side in this case. b. Valuation Time: In this modern age, an individual's total wealth in the morning and in the evening may be different. As such, it would be better if with the date, the time of valuation were also given, e.g. the time of appearance of Ramazan moon. c. Year: It will not be solar (Christian) year of 365 days, but the Lunar (Hijri) of 354 days.
1. Liable to Zakat
According to the Holy Quran and Hadith, an individual is liable to Zakat. Firms, companies and association of persons are not natural persons and are, therefore, not liable to zakat. Individuals' interest in such organisations is surely liable to zakat. However, valuation of such interests is altogether a different matter.
4. Amwale Batina
a. Valuable kept in bank locker and safe deposit vaults should also be included in Amwale Batina. Even though being in bank, these are not considered as deposit in banks. b. Zakat on Amwale Batina and current deposits should not be compulsorily collected, but be payable voluntarily. The Return of Zakat must show the details of such Amwale Batina. c. SAVINGS CERTIFICATES i. Rate of zakat on government savings certificates should be 2.5% per year of the accumulated value. ii. The issuing agency should transfer zakat to zakat fund every year, rather than piling it up till redemption and that also 2.5% once only for 3 or 10 years.
2. Nisab
Nisab is defined as net assets equal in value to 87.48 grams (seven tolas) of gold or 612.36 grams (52.5. tolas) of silver whichever is less. These days value of 87.48 grams gold tezabi is Rs.62, 102 and of 612.36 grams pure silver is Rs.5, 878. The rates of these metals are changing. Who knows in future, silver being in high demand, and might be more valuable? As such, the minimum nisab (exempt limit) should be lower of the two. Usher is not payable annually. It is payable on production, which may be twice a year or even more frequently.
3. Valuation Date, Time & Year

a. Zakat is payable after an asset (savings) has remained with an individual for one year. In this day and age of frequent changes it is quite difficult to calculate Zakat
Zakat
d. SHARES i. Shares quoted on the stock exchange should be valued at their market values. In case of private company, it should be face value or break-up value. ii. There is an additional interest in owning the controlling shares and the persons holding such shares should add this. For example, if a limited company's share is quoted at par on the Stock Exchange but a family is holding 51% of the equity, it will not sell its holding at par because they are availing a privilege of managing and ownership of the concern. Therefore, in such cases the persons holding the interests should add a premium for the holding the privilege. e. LIFE INSURANCE POLICY Zakat on life insurance policy @ 2.5% on maturity does not appear reasonable. Premiums paid are a sort of savings. As such the rate of Zakat should be 2.5% per year on premiums paid plus bonuses added to the policy or surrender value which ever is lower. Life Insurance Companies should transfer such 2.5% every year to the Zakat Fund. f. PROVIDENT FUND Employees' contribution plus profit on it is his savings and so is liable to zakat @ 2.5% per year. After a period of service, employee gets entitlement to employer's share also. From this date 2.5% zakat per year should be calculated on both the employer and employee contribution plus accumulated interest/profit on both the balances. It may be added that this measure will not involve any undue hardship on poor employees (or poor insurance policy holders), as the interest on provident funds (and bonus on insurance policies) is generally higher than the Zakat of 2.5% per year. Furthermore, if a person files a declaration of being under Nisab, no deduction should be made. g. STOCKS All sorts of business stocks are liable to Zakat. Therefore, along with the raw material and finished goods, material in process should also be included. b. Zakat paid in excess should be carried forward to the next year. c. Dues of Zakat, in case of deceased, can be recovered from the wealth after death upto 1/3rd of his total wealth. It should have priority over and above other claims. d. Recovery of Zakat shall be affected at a place nearer and convenient to the payer. e. Zakat on animals in Pakistan would not be economical to collect in view of scattered and small farms.
6. Exempted Assets
Keeping in view the basic spirit of Zakat, vehicles and house in personal use, household effects, and all other assets in regular and personal use should be exempted from Zakat.
7. List of Assets Liable to Zakat

Followings should also be added in the list of assets liable to Zakat. a. TRANSPORT VEHICLES It is said that because few camels of a Companion of the Holy Prophet (Sahabi) engaged in transportation were exempt from zakat, trucks, buses, wagons, rickshaws and other means of transportations should also be exempt. If this rationale is accepted, a transporter, despite increasing his fleet over time, and being a millionaire will not be paying zakat. On the other hand a petty shopkeeper would be liable to Zakat on his stocks. This situation is patently unjust and unfair, and cannot be approved. b. PROPERTY ON RENT Several individuals rent out buildings and plazas. They earn their livelihood through this business. 1,400 years ago, this business of renting property was not existing (Land was free, construction cost was negligible) so the question of zakat on rented property has not been discussed in Hadith. In the modern days, rent is a source of business income, so such property should be liable to zakat. The question will remain how to value the building, because the actual market value due to occupation by tenants is reduced to much lower level. According to occupied buildings market rates, the value should be 9 years net rental income for zakat purpose. Zakat as such comes to about 2 months rent. Landlord gets 9 months rent plus any capital gain in the value of such properties.
5. Other issues
a. If a loan is taken against an asset, such loan should be deducted from that asset up to the value of that very asset.
Zakat
c. Plant and Machinery It appears to be quite lubricious that plant and machinery worth millions of rupees owned by an individual or individuals should not be liable to zakat. It is business wealth and must be added for zakat. It may be noted that those who considers it to be exempt, should also bear in mind that gross production is liable to Zakat @ 2 %, which shall be much more than the two and a half percent paid on the value of plant and machinery. d. INTEREST IN PARTNERSHIP FIRMS It is exactly similar to a share of a company. Similar to Rule 8(8) of the Wealth Tax Act, to ascertain market value of the assets of the Firm, beyond the book value, some additions must be made for the hidden reserves, rise in fixed assets value and goodwill. In other words, present value of interest in a Firm should be the capital in books plus something to arrive at market value of ownership of the Firm.
9. Recovery of Ushr
Ushr may be recovered both in kind or cash. Pakistan has four major cash crops: cotton, sugar cane, wheat & rice. Cotton is generally procured by ginning factories; wheat by the Food Department and local markets, sugar cane by sugar mills and rice paddy by the rice mills. If it is made compulsory for these organisations to recover 5% of the price from the gross proceeds, the recovery would be easier and leakage would be more difficult and complicated. Similar steps may be taken for recovery of Ushr on mining and sea products.
10. Check on Evasion

a Honesty, integrity & intention of both the payers & collectors are also different from what it was 1,400 years ago. For instance a week before Ramzan there is a heavy demand for prize bonds while bank deposits decline sharply. This phenomenon occurs year after year because the public knows that two and a half percent will be deducted as zakat on their saving deposit balances on the first day of Ramzan. To check evasion it is proposed that technology should be fully utilized. Records of vehicles, houses, current deposits, postal savings and deposits, shares, debentures, NIT units, provident funds, life policies, agricultural lands, fruit farms and similar other investments can easily be kept on computers and counter checked. Benami assets on Power of Attorney will come to light very easily. b. A provision should be made that the Government can acquire the asset on a declared value plus 10% of the declared value. It will enforce zakat payer to declare the values much nearer to the amount on which an individual is willing to dispose these off.
8. Ushr
a. Not only gross agricultural or forest produce, but also mining and fishing are also liable to Ushr on the basis of gross production. Ushr is calculated on the Gross Product while Zakat is determined on the Net Assets of a person at a given date. However, its proceeds are subjected to the same use as Zakat, and in Hadith its discussion is clubbed with Zakat. Therefore, its merger with the Zakat Fund is quite in order. It may further be noted that fishermen, agriculturists, and mine owners, are liable to Zakat even after payment of Ushr because ZAKAT IS ON THEIR SAVINGS. This situation is similar to income tax wherein; agriculturist income to the tax-free limit is liable to Wealth Tax. b. LEVY OF USHER i. Honey is also liable at 10% on the gross product. ii. Vegetable, grass, dry fruit, firewood are exempted according to Hadith iii. Fishing and sea products are also subject to Usher on gross product. iv. Amber & pearls are liable to 20%
About the Author: Mrs. Sadia Kaleem ACA is also Chartered Secretary (UK). She has also completed Final Exam of CIMA (UK). She is also finalist of ACCA.
Zakat
Rudiments of Zakat
Irfan Ahmad Khan,
ACA
Zakat is one of the pillars of Islam. Allah describes the taking of zakat in the following manner. "Take alms from their wealth in order to purify them and sanctify them with it." [Soorah at-Tauba 103]. The payment of Zakat becomes obligatory on every sane and mature Muslim and Muslimah whenever there is an economic activity resulting in the net increase in their wealth. The following are the categories of production. Profit, investments and savings are subject to Zakat. 1. They produce of land. The rate is one tenth of the produce of the unirrigated and undeveloped land and one twentieth of the produce of the irrigated and developed land. 2. Pure economic profit business. 3. Inheritance, once for all. 4. Cash, investments, food, merchandise, jewelry, gold and silver kept in the inventory for full one year and above the certain value defined as Nisab. The rate of Zakat on each of the above categories is different. The rate of Zakat and the amount of Nisab can be decided by the Islamic State taking into consideration the prevailing standard of living and the risks and uncertainties of different modes of productions. For the articles in category four the rate of Zakat is two and half percent on the amount which is more than the Nisab. If the individual items in category 4 do not come up to the Nisab but the combined value of all the items is more than Nisab, Zakat is obligatory. It should be kept in mind that these rates of Zakat are the minimum rates and the Muslims have been urged by Allah and the Prophet time and again to pay as much as they can after providing for their legitimate needs.
Thus the rate of Zakat and the amount of Nisab is dynamic with a given minimum, but the maximum amount is left to the Ijma of Ummah.
Who is deserving of Zakat

The Holy Quran describes the following eight categories who are entitled to receive Zakat: 1. Fuqara: the people who have some money but not enough to meet their needs. They live in precarious circumstances but do not ask for help. 2. Miskins: these are a very miserable people who do not have anything for food, clothing and shelter. The Khalifa Umar ibn al-Khattab also included in them those who are fit to earn but do not have means to earn. 3. Aamileen (Collectors of Zakat): the officials engaged in the collection and distribution of Zakat are paid from the Zakat fund. 4. Muallafat-ul-Qulub (Those whose hearts are to be reconciled): this includes the new Muslims, to strengthen them in Islam, as well as those for whom it may be necessary to give Zakat to win their heart. 5. Fir-riqab.(Emancipation of slaves): this means the person who wants to free himself from the shackles of slavery should be given Zakat so that he can pay to this category (those persons who are imprisoned for nonpayment of fines). 6. Al-Gharimeen: this means the people who are in debt, which is more than the assets so that after paying the debt, their wealth that is left is less than the Nisab.? 7. Fi Sabeelillah (in the cause of Allah): this is a common word used for all good deeds, but in the case of Zakat it means rendering help to an endeavor to serve Islam such as the propagation of Islam, Jihad, etc.
Zakat
8. Ibn-us-Sabil (the wayfarer): a
The collection of Zakat

In the Islamic state, it is the responsibility of the state to collect and distribute Zakat. The Prophet (PBUH) says: I have been commanded to collect Zakat from the rich among you and distribute it to the poor among you. In case an Islamic society does not exist or in a non-Islamic society, the local organization of the Muslims should make arrangements for the collection and distribution of Zakat. Wherever such arrangements exist, every Muslim is required to pay Zakat to this organization and conform to the rates and the amount of Nisab decided by the organization. Allah has made Zakat one of the pillars of Islam and has often mentioned it in the Quran immediately after the Prayer, saying, "And perform Prayer and give Alms ". The Prophet (PBUH) said, "Islam has been built on five [pillars]: testifying that there is no god but Allah and that Muhammad is the Messenger of Allah, performing the prayers, paying the Zakat, making the pilgrimage to the House (Hajj), and fasting in Ramadan" (Bukhari, Muslim). Allah has warned those who do not give Zakat that they will face dire consequence. He says, "O you who believe! Verily, there are many of the rabbis and the monks who devour the wealth of mankind in falsehood, and hinder (them) from the way of Allah. And those who hoard up gold and
traveler, if he is in need of money while traveling , is entitled to Zakat .
silver, and spend it not in the Way of Allah-announce unto them a painful torment (Quran 9:34). Today, how many Muslims in the world honestly, sincerely and properly pay zakat to purify their wealth and to help their Muslim brethren. Is it any surprise that: So many Muslims are starving and in need today. So much Muslim wealth is wasted on luxury. So much Muslim wealth is spent on forbidden items. So little Muslim wealth is spent on jihad and sacrificing for the sake of Allah. The Messenger of Allah (peace be upon him) was ordered to fight the people until they made the shahada, established prayer and paid zakat. Hazrat Abu Bakar (RTU) continued that teaching after him. What does that mean for us today? Does that mean that if they were alive today, we would be from those who would be fighting alongside them or would we be from those whom they would be fighting?
Some essential Points about Zakat

1. A person who qualifies to pay Zakat is not eligible to receive. 2. It is not permissible to pay Zakat to your husband, wife, parents, grandparents, and the children and grandchildren. 3 Expenditure to Zakat fund is not permissible on the construction of mosque. 4. It is preferable to pay Zakat to deserving relatives. 5. The Zakat of every locality should be spent on the poor inhabitants of the same community except if there is a calamity in other parts of the country or the world. 6. Any one who qualifies to receive Zakat, can be given it as assistance or a gift, without telling him that it is Zakat. 7. All articles of household use and properties given on rent are exempted from paying Zakat. 8, Zakat money of a particular year could be spent during the same year in advance, could be given all at once or in installments.
About the Author: Mr. Irfan Ahmad Khan is an Associate Member of ICAP, currently working as Financial Controller of Descon Engineering Qatar-L.L.C, Doha, Qatar. Readers are welcome to contact him at : irfanaca@yahoo.com
Zakat
Zakat Self Assessment Form

Name of Assessee : Lunar Date on which Zakat has become due ZAKATABLE ASSETS NISAB: 52.5 Tolas or 612.36 grams of Silver or its equivalent value Details of possessions on this date, which qualify for Zakat: 1. Value of Gold (in whatever form or for whatever purpose) 2. Value of Silver (in whatever form or for whatever purpose) 3. Cash: a. In hand or at bank or with someone else for safeguarding or in the form of Prize Bonds or in foreign currency. b. Cash deposited for some future purpose, e.g. for Hajj, cash paid in an insurance policy. c. Money given out on loan, as long as the borrower accepts it as a loan lent and not as a grant, money deposited in as Bachelors Committee (BC) or Voluntary Committee etc. d. Money invested in business (Partnership or Shares, etc.) All forms of saving certificates, NIT, FEBC, Shares, etc. All cash that has been invested in Provident Fund of any organization etc. through ones own choice. (Investment as per employees advice). 4. Goods, Property, shares, raw material, etc. bought for resale/trade. a. Money due for goods already sold. (Credit Sale) b. Value of any item obtained in exchange of Trade goods or in lieu of any rent due on them. Total Zakatable Assets LIABILITIES: 1. Loans (Borrowed money, Goods bought on credit, Wifes Mehr (if there is an intention to pay), remaining amount due in a Bachelors Committee (BC). 2. 3. 4. Wages due to employees as at this date. Taxes, rent, utility bills, etc., due at this date. Any Zakat due for previous years. Valuation for Zakat Assessment year
Total Liabilities Value of Total Possessions Qualifying for Zakat _ Liabilities = Net Amount on which Zakat is due
Net Amount on which Zakat due
2.5%
= Amount of Zakat Payable
Circulated by SBS School of Business Studies. Karachi, to facilitate the correct calculation of Zakat. Please e-mail your comments for improvement to sbsca@cyber.net.pk
Zakat
General Rules Governing Calculation of Zakat

A VERSE FROM THE HOLY QURAN
And be steadfast in Salat (prayers) and give Zakat. And whatever good you send forth for yourselves, you will find it with Allah.
From Surah (No. 2) om Al Baqarah Verse 1 erse 110 10
A SAYING OF THE HOLY PROPHET (peace be upon him) The Holy Prophet (peace be upon him) said, Islam is based on five things: bearing witness that there is one God and Mohammad (peace be upon him) is his messenger, to establish salat, pay zakat, perform Haj pilgrimage to Allah's house and fasting in the month of Ramadhan.
Sahih Bukhari & Muslim Hadith
IMPORTANCE / BLESSINGS
Zakat is Ibadah (worship) not a tax. Giving Zakat is one of the signs of Taqwa (obedience of Allah). Payment of Zakat attracts Allah's blessings. Zakat purifies and protects wealth. Payment of Zakat causes ones sins to be forgiven and Paradise is promised for him/her.
PUNISHMENT FOR NOT PAYING ZAKAT

As for those who accumulate gold and silver and do not spend it in the way of Allah, give them the 'good' news of a painful punishment, on the day it will be heated up in the fire of Jahannam, then their foreheads and their sides and their backs shall be branded with it: "This is what you had accumulated for yourselves. So, taste what you have been accumulating."
From Surah (No.9) om Al-T Taubah aubah VVerse 34 and 35
METHOD OF ZAKAT CALCULATION ITEMS OF ASSETS
GENERAL RULES OPINION OF JUSTICE (Rtd.) MUFTI MOHAMMAD TAQI USMANI

Dividend on Shares Investment in shares of banks and insurance companies is not permissible. Hence all income on these should be given in charity. However, if specific permissible activities in banks and insurance companies can be identified then zakat would be payable on such portion(s) and the balance to be paid as charity. Income from all other equities is zakatable. Value of Shares - zakatable. Acquired for trading purposes - zakat is payable on market value. Acquired for dividend income (long term investment) - at break-up value if known, otherwise on market value. However, whether at break-up value or market value, in both cases, the value of shares so determined would be reduced by percentage of nonzakatable assets included in the total assets of the Company e.g. if the total assets of the company is 100 including nonzakatable assets of 25, then the value of shares so determined would be reduced by that ratio (e.g. 25%) to arrive at the zakatable value. Note: Investment in shares of bank and insurance companies is not permissible and one should not retain these. However, if at Zakat date this is included in the assets, the amount of zakat should be paid on it as above in order to lessen one's liability towards Allah.
Equities- (shares of all companies, banks, insurance companies whether publicly quoted or private)
Properties including real estate, vehicles, yachts etc. for personal use
Real Estate and other assets acquired for the purpose of residence or personal use is nonzakatable. Any loans taken to acquire such non - zakatable assets will also be excluded from calculation of net zakatable assets.
Zakat
Real Estate acquired for Leasing (for renting out) Non Zakatable Properties acquired for trading purpose Cash in Hand & at Banks Gold held for trading purpose Gold held fo for personal use by family Loans given to independent third party Cos. Zakatable - at Market value Zakatable Zakatable - at Market value Zakatable per Hanafi School. Non-zakatable per Hanbali, Maliki and Shaafie School. Zakatable on the face value of the loan amount. However, it is allowed to exclude such loan amount from zakatable assets and defer zakat on it until the loan is received back. But once such loan is received back then one will have to pay zakat for all the past years that this amount was excluded from the zakatable assets. Zakatable on the principal amount paid to purchase them or market value if it is lower than the principal amount (because the difference represents the loss of the assets). Interest or capital gain accrued thereupon, being impermissible, should all be given in charity. Zakatable. Subject to rules relating to underlying investments. Hedge Funds will be subject to same rules as the bonds, that is, the principal will be subject to zakat and not the gains. The entire amount of gains is to be paid as charity. However, if thereare Hedge Funds of commodities then it will depend on the nature of underlying contracts as specific activities may be acceptable from a Shariah point of view.
Treasury and other corporate bonds / bills
Mutual funds Other funds (such as Hedge funds)
Other question with regard calculation of Zakat for a Group of Companies

Is Zakat calculated on the individual company assets or on the consolidated Group assets. Can losses in one company be offset against profits in another company through consolidation. If Zakat is calculated on the assets of the overall company, would there be a further liability forZakat on the individual shareholders once theyreceive the dividends in their hands because they hold shares in that company, or is there a mechanism for a setoff. If all the companies of the group belong to the same owners, and there is no difference in shareholding of any one of them, then Zakat may be calculated on consolidated basis. Therefore, if the liabilities of one company exceed its zakatable assets, these liabilities may be deducted from the aggregate zakatable assets of the whole group. But if there is a company with a different shareholding, it should not be included in consolidated calculation. If Zakat is paid by the company as a corporate entity and all the zakatable assets have been included in the calculation on their fair value, the shareholders do not have to pay zakat on their shares. However, the dividends they receive will be included in their cash, the balance of which at the zakat valuation date is zakatable. The amounts spent during the year need not be calculated.
WHO IS TO PAY ZAKAT (NISAB OF ZAKAT)

Any one who has a 'net worth' above 87.48 grams of gold or 612.36 grams of silver or its cash equivalent (Dh.4,310*) as of his/her zakat date has to pay Zakat. The 'net worth' for this purpose will be arrived at after deducting any loans and all items retained for personal use or consumption like residential house, transport, utensils in use, clothes and furniture all of which are non-zakatable. * as per market value of gold (US $ 417 per oz) on 4th October 2004.
RATE OF ZAKAT
Zakat is 2.5% per Lunar Year. If for any reason Zakat must be calculated at Gregorian year it should be adjusted proportionately for excess number of days i.e. if one is paying on the basis of Gregorian year, the rate of zakat would be 2.578%.
PAYMENT OF ZAKAT
Zakat is payable every year on the Zakat date. Zakat can be paid in advance and thereafter adjusted at the Zakat date. Zakat of one year should preferably be paid before the next Zakat due date. In the Holy Quran (Surah No. 9, Al - Taubah, Verse 60) Allah has Himself determined the recipients of Zakat. In general, Zakat should be paid to poor persons who do not own the Nisab and preference should given to the one who is the closest i.e. close relatives followed by neighbours, fellow countrymen and then people in other countries.
ISSUES IN ISLAMIC BANKING

Kamran Akhtar, ACA
Islamic Banking has seen tremendous growth in Pakistan with opening of new banks as well as Islamic banking branches being opened by commercial banks. The banks are offering a number of financing and investment products, which are claimed to be shariah compliant while being very competitive in the market as well. Islamic banking products have been designed with the aim of eliminating Riba and providing Riba-free and shariah compliant substitutes to the conventional banking solutions. These products have been built on the basis of transactions that are considered halal in Islamic jurisprudence and the transactions have been structured in a way to make them appear halal transactions but a deeper study of those reveals that in some cases the substance of the transactions appears different from their legal form. It is a well-understood principle of Islam given by a Hadith of Holy Prophet PBUH: Actions are judged according to their intentions It is interesting to note that a similar concept has been embodied in IASB Framework for the Preparation and Presentation of Financial Statements as a principle of Substance over Form as a qualitative characteristic of Financial Statements. This principle of Substance over Form has been explained in para 35 of the Framework and extract of which is reproduced below for reference. If the information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance of their substance and economic reality and not merely their legal form. Since IASB framework and the financial reporting standards have been designed without any religious bias so they can be considered a reliable reference point to evaluate the substance of transactions. Now let us analyze the Islamic banking products to understand the underlying substance of the transactions and real intention behind the legal form of these transactions.
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Trade Financing - Murabaha

The basic concepts of Murabaha in brief are:
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It is a kind of sale in which seller discloses its cost and markup to the buyer. Murabaha can be on cash as well as credit (or deferred payment basis), which is called Bai Muajjal. In a Bai Muajjal transaction, the seller may charge price higher than cash price. Originally, Murabaha is a particular type of sale and not a mode of financing, however considering the practical difficulties in Mudarabah and Musharaka instruments, contemporary scholars have allowed the use of Murabaha on deferred payment basis.
The following issues arise when Islamic banks adopt Murabaha as a mode of financing. Since Allah SWT says in AlBaqarah verse no. 285 And Allah has permitted trading and prohibited Riba. This means that Allah considered trading something clearly distinct from lending based on Riba. Lets analyze some basis aspects of trade and trader and analyze these in Islamic banks perspective.
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Trader is a person who trades in one or more identified commodities and possess knowledge about its market and secrets of trade. A trader is not a trader of all or any commodity. Trader is person who buys goods, and assumes risk before selling it in the market. The risk of holding the commodity includes risk of loss due to damage to goods as well the risk of loss due to fall in value of goods after purchase by the trader. Trader sells goods in cash as well as on credit. There can be traders who sell goods only in cash but it is hard to imagine a trader who sells only on credit.

Islamic banks when undertake Murabaha transactions, they actually assume the role of trader. However, if we analyze the Murabaha undertaken by Islamic banks, it is devoid of typical characteristics of trade or trader.
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The basic concept of Ijarah (lease) in Islamic Fiqh can be summarized as follows:
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the bank as it is not at all interested in how the lessee is maintaining the car but rather it is interested only in timely payment of lease rentals.
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Bank does not have any set of commodities in which it specializes in trading, and is willing to do trade (Murabaha) of any commodity for which a customer comes and wants to obtain financing. Bank does not assume any risk of the commodity as it only purchases a commodity when it already has a buyer who is willing to buy it from bank at a fixed margin over cost. When banks margin over cost is fixed, how it can be said that bank is assuming the risk of holding the commodity. Bank is willing to sell a commodity only on credit and not on cash basis. If a person is selling goods only on credit and people are coming to buy goods from that person at a higher price because they do not have means to purchase it on cash basis, isnt it obvious that he is providing a financing facility and any markup on cash price he is charging can not be called as a halal trading profit or Riba free?.
The asset remains the property of the owner or lessor and its usufruct right to use is transferred to the lessee. All risks and rewards incident to ownership remain with the lessor while the risk and rewards relating to the use of the asset are with the lessee. Ijarah allowed in Islamic Fiqh is similar to rental agreements such as renting a car, apartment, machinery etc for use and it is NOT A FIANCING TOOL. The rental paid during Ijarah is against the consideration of using that asset and it is never considered a payment against the purchase price of the asset. Leasing as practiced by a number of banks and financial institutions as a mode of financing is called Finance Lease which is strictly not allowed in Islamic Shariah which allows only Operating Lease.
Rentals paid in Ijarah are not only for the use of that asset but also includes a principle repayment portion. At the end of the lease term assets are sold to the lessee at a price, which is usually significantly lower than the original cost. This is same in case of leasing by a conventional bank and Islamic bank with the only difference that in case of conventional banks, purchase option is usually stipulated in the lease agreement thats why it is considered a Finance Lease, however in case of Ijarah by Islamic banks this option is not explicit in the lease agreement but is in the form of a unilateral promise by the bank to the lessee that the bank will sell that asset at a particular price to the lessee. Since the price which is set by the Islamic bank for the ultimate sale to the lessee is significantly lower than the cost as well as expected market value of the asset, it is reasonably certain that lessee will exercise this option. Since this intention is present at the start of the agreement, doesnt it become Finance Lease right from the start?
In view of above is it justifiable to equate the murabaha transaction undertaken by Islamic banks to be a trade transaction or it is merely a financing tool.
Islamic banks are mainly involved in Ijarah Financing of cars. Lets analyze the Ijarah Financing being done by Islamic Banks in the light of above principles.
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Car Financing - Ijarah

Ijarah is a term of Islamic Fiqh and it means to give something on rent. This term Ijarah is used in two situations, one in case of hiring some persons services against wages and secondly when hiring some asset or property against rent. This second type of Ijarah, which is also called lease, is used by Islamic banks for fixed asset financing.
The individual who comes to the Islamic bank for obtaining a car has a clear intention of buying a car and wants to obtain financing for it from the bank. Bank has also the same intention that it wants to ultimately sell the car to the lessee and never wants to keep it for further Ijarah. This defeats the first principle of Ijarah that the asset remains the property of the owner. Risk and rewards incident to ownership of car are also not with
Below is an extract from Mr. Taqi Usmanis book An introduction to Islamic Finance, Chapter Ijarah, pg 174-175. Another important feature of Finance Leases is that after the expiry of the lease period, the corpus of the leased asset is usually transferred to the lessee. . Leased asset is generally transferred to the lessee at the end of the lease, either free of any charge or at a nominal token price..This condition whether express or implied

is not in accordance with the principles of Shariah. It is a well settled rule of Islamic Jurisprudence that one transaction cannot be tied up with another transaction so as to make the former a pre-condition for the other. Here the transfer of the asset at the end has been made a necessary condition for the transaction of the lease, which is not allowed in Shariah. In case of Ijarah financing by Islamic banks, ultimate sale of the leased asset is clearly connected with the lease transaction and although not expressly mentioned in the contract. Is lease a precondition for the sale? Islamic banks usually argues that these two transactions are not linked as one is of a lease transaction through Ijarah agreement and other is a sale transaction through a separate unilateral promise to sell to the lessee and they are not linked. If we accept this argument then following question arises.
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d)
At the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of leased asset;
Conclusion
It appears from the structure of the above mentioned products that these Islamic Finance products have been designed by contemporary Islamic banks as an easy alternative to Riba based lending while in most cases the underlying substance of these transactions differ from the legal form. The main issues in each product can be summarized as:
l
House Financing Diminishing Musharka

House Financing is being done by Islamic banks through diminishing musharka. It is based on the concept of Shirkatul Milk, which means joint ownership of property. In this case, bank and client jointly purchase a property say with 80% banks share and 20% clients share. Client occupies the property and gives rent to the bank and also gives some amount to gradually purchase the share of the bank in the ownership. As banks share in the property reduces and clients share increases, the amount of rent also reduces accordingly. Lets analyse this transaction from the concept of Shirkatul Milk. Under the concept of shirkatul Milk or joint ownership, both partners would share the risk and reward incident to the ownership. Risk includes decline in the value of property and reward includes an appreciation in the value of the property. If we analyse the house financing transaction by Islamic banks, we see that the price of property is fixed at the time of purchase and client is bound to repay the banks portion in it irrespective of actual increase or decrease in the value of the property. If the value of the property increases, it is the client who would be happy and not the bank as it will be receiving its fixed portion. In view of this how can it be considered a joint ownership, when only one partner is bearing the risk and reward of ownership? It appears that the client merely has a financial obligation towards bank and it is discharging it with an element of Riba in it.
Murabaha is a mode of trade allowed in Shariah while Murabaha Financing is being used in place of working capital financing and in practice it is devoid of basic spirit of trade while contains closer proximity to Riba based lending. Ijarah is an operating lease transaction allowed in Shariah, while the Ijarah Financing is the name given by Islamic banks to a purely Finance Lease transaction. The underlying substance of the transaction makes it a Finance Lease; however it is called an Ijarah. Shirkatul Milk is a mode of joint ownership of property allowed in Shariah. This concept is being used by Islamic banks to develop a house-financing instrument based on diminishing musharaka, which lacks the basic concept behind a joint ownership i.e. joint sharing of risk and reward. The customer of the bank is concerned with the change in the value of the property while the bank is only concerned with its income stream that has been determined on the basis of initial price of the property.
If the transactions are not linked, why is the bank only willing to sell the asset to the lessee and why not any other person who also is willing to buy that asset at that price. If the transactions are not linked, would the bank still honor its unilateral promise to sell the asset if the lessee terminates the lease agreement earlier than the term and without payment of all rentals.
The answers to above questions are very obvious and that makes it a clear case of Finance Lease that is not allowed in Shariah. Besides the principles of Shariah, if we apply a neutral yardstick of International Financial Reporting Standards to analyse the transaction of Ijarah as practiced by Islamic banks, it will fulfill at least the following two criteria of Finance Leases as per IFRS 17 Para 8: b) The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised;
Hope this would be a food for thought for researchers and scholars in Islamic banking. About the Author:
Mr. Kamran Akktar is an Associate Member of the Institute of Chartered Accountants of Pakistan, currently working as Finance Manager of Allied Engineering & Services Ltd. - Rental Division. Readers are welcome to contact him at: kamranakhtar77@hotmail.com
The Basic Principles of Islamic

Economy and Their Effects on Accounting Standards-Setting
Mohammad R. Taheri
Abstract
This paper examines the basic principles and other salient features of Islamic economy, such as the principles of multifaceted ownership, economic freedom within a defined limit and social justice. Then their effects on users of financial statements and objectives of financial statements have been considered. This paper compares the British- American model with an Islamic model in term of financial statement users, objectives and theoretical concepts of financial accounting. The theoretical concepts of accounting in the BritishAmerican model are self-evident statements or axioms that represent the nature of accounting entities operating in free economy characterized by private ownership of property. Whereas behind them there are hidden basic principles of economies which have not been written in accounting literature because they are assumed as axioms. The most important attribute in Islamic economy is social justice. One of the most important elements for establishing social justice is zakat. Another important element is Riba [Interest]. Riba is forbidden in Islam and people are not allowed to make money by lending their capital on interest. In the Islamic view, State has responsibility to create a suitable environment to implement Shari'ah [Islamic Teaching] in society. An Islamic accounting model is based on Macroeconomics. While the British-American, accounting model is based on Microeconomics. Key Works: Basic Principles of Islamic Economy; An Islamic Accounting Model; Standard-Setting.
economy the most important users of financial statements are investors and creditors. Thus, other groups such as government, social authorities, and people are in the second steps. The theoretical concepts of accounting in the BritishAmerican model are self-evident statements or axioms that represent the nature of accounting entities operating in free economy characterized by private ownership of property. Whereas behind them there are hidden basic principles of economies which have not been written in accounting literature because they are assumed as axioms. The concept of " Basic Principles of economy " in accounting standard setting has been mostly ignored in spite of its potential to provide a more systematic appreciation of the standard setting process. In the west, however, ever since the eighteenth century the economists such as Smith, Ricardo, Marshal, and Mill began to write about the significance of amassing wealth and the importance of economic activity. Economics became gradually both a scientific discipline and a distinct activity of its own and in many areas, it became divorced from ethics. It must not be forgotten, however, that classical economics, which arose in the eighteenth century and which was brought to the new world by the Puritans was related to a certain aspect of Protestant ethics which emphasized the virtue of hard work and the amassing of wealth in contrast to Catholic ethics. But very soon the religious roots of capitalist economics become more or less eclipsed and there arose, as a result of the excesses of this type of economics based only on the importance of the incentive to amass wealth, the reaction to capitalism by socialism which was espoused by Marx and other socialists. Nasr (1993, 205).
Introduction
The Basic Principles of Islamic Economy
There is a little attention about the basic principles of economic in the accounting literature. Generally, accounting standards setters start their discussion from needs of users or objectives of financial statements though the assumptions of each economic community have strict considerations for characterize in various dimensions of accounting. Cultural, social, economical, and political factors have considerable effects on the kind of financial statements to be provided. However, these factors are not similar in all countries and each country uses an accounting system, which fits its own specifications. In western countries with regard to basic principles of
Before to explain the basic principles of Islamic economy, the basic principles of economic of liberalism from an Islamic view is expressed, because it is useful for comparison. Then some of the salient features of basic principles of Islamic economy and their effect on accounting standards setting will be consider. According to Holton (1992, 54-69) the basic principles of economics of liberalism as outlined here, represents an amalgam of ideas derived and adopted from a range of sources. These include the 18th century economist Adam Smith, the neo- classical school of economics and more recent post-war economists such as Milton Friedman. The basic principles of this tradition include the following:

Private Property Rights, Individual Sovereignty, Self-interest, Rationality, Self- Regulating Market. Needless to say, economics as that part of man's activity which, deals with the production of goods, the amassing of wealth, labor, work, trade and exchange of material objects, etc, has been important in every civilization. From Islamic view, as in other traditional civilizations, economics was never considered as a separate discipline or distinct domain of activity. Consequently, there is no even a word for economics in classical Arabic. The term of Iqtisad (economic) being a fair recent translation of the modern term "economics" in Arabic and having a very different meaning in classical Arabic. Where it means primarily moderation and keeping to the golden mean as witnessed by the famous book Ihya Ulum-id-Din, Gazzali. (1971,265). According to Sadr (1994,51-55), the Islamic economy is composed of three basic components, according to which its theoretical content is defined. Thus it is distinguished from other economic theories in terms of the broad lines of these components, which are: The principle of multi-faceted ownership; The principle of economic freedom within a defined limit; The principle of social justice. Islam differs essentially from capitalism and socialism in the nature of the principle of ownership, which it acknowledges. Capitalist society believes in the private individual form of ownership, i.e. private ownership. It allows individuals private ownership of different kinds of wealth in the country according to their activities and circumstances. It only recognizes public ownership when required by social necessity and when experience demonstrated the need for nationalization of this or that utility. Socialism society is completely contrary to that. So common ownership is the general principal, which it is applied to every kind of wealth. However, the basic characteristic of both societies are not applicable to Islamic society because Islamic society does not agree with capitalism in the doctrine that private ownership is the principle, or with socialism in its view that common ownership is a general principle. Rather it acknowledges different forms of ownership at the same time. Thus it lays down the principle of multi-faceted ownership. That means from Islamic viewpoint ownership is accepted in a variety of forms-instead of the principle of only one kind of ownership, such as, private ownership, public ownership and state ownership. For this reason, it would be a mistake to call Islamic a capitalist society, even though it allows private ownership of a number of kinds of property and means of production, because in its view private ownership is not the basic rule. In the same way it would be a mistake to use the term "socialist society" for Islamic society, even though it has adopted public ownership and state ownership for some kinds of wealth and property, because in its view the socialist form of ownership is not the general rule. According to Quaranic verses, every thing in this universe belongs to God almighty. "Whatever is in the heavens and whatever is in the earth belongs to Allah." [Al-Baqarah, 2:284]. He is the real owner of everything "And Allah's is the kingdom of the heavens and the earth, and Allah has power over every things." [Al- Imran, 3:189]. Sadr (1994, 98-114) make clear that individual ownership, state ownership, and public ownership are three parallel forms in Islamic law. Real ownership belongs to Allah, man holds property in trust for which he is accountable to Him, in accordance with rules clearly laid down in the Shari'ah Islami'iah [Islamic Teaching] underlined above. According to Siddiqi (1981, 191-209) acquisition of property as well as its use and disposal are subject to limits set and should be guided by the norms laid down by Allah. Absolute ownership of man is a concept alien to Islam, as it belongs to Allah alone. There are definite obligations towards others attending upon the individual rights of ownership. The respective scopes of the three kind of ownership are not rigidly defined but left to be determined in the light of certain principles, depending on the needs and circumstances.
The principle of economic freedom within a defined limit

The second of the components of the Islamic economy is to allow individuals, at the economic level, a limited freedom, within the bounds of the spiritual and moral values in which Islam believes. The execution of this principle in Islam was performed in the following way: 1. The sacred law, in its general sources, provided the textual stipulation to forbid a group of social and economic activities, which hinder, in the view of Islam, the realization of the ideals and valued adopted by Islam, such as usury, monopoly and the like. 2. The sacred law laid sown in principle the supervision of the ruler over general activities and the intervention of the state to protect and safeguard public interest through the limitation of freedom of individuals in the actions they perform. Regarding self-interest, Islam emphasizes that the success of both the individual and the society depend a balance between the spiritual and the material needs of man. Based on principle of

stated that Suq [Market] enjoys having a distinctive place in the history of Islamic economy. Markets are regulated by price mechanism. The essential feature of the price mechanism is its capacity to regulate and bring into equilibrium the demand for and the supply of commodities. According to Chapra (1980,126) with refer to Islamic principles, the force of supply and demand has been well recognized on market. People are left free to transact and exchange goods and services and the state can only intervene if a Dhulm [transgression] is unlawfully committed against one party. According to Beheshti (1992, 126) the Shari'ah calls for fair and free trading, fully complying with principles. Besides, price control merely as a means of vindicating this freedom and fighting corruption is reasonably validated. In fact, although Islam has recognized the market system because of the freedom it offers to individuals, it is not to be considered sacred and inalterable. It is the goals of the Muslim society, which are more important, i.e. Ihtikar [hoarding and profiteering] of people's urgent need for particular commodities are absolutely prohibited. The principle of social justice The third component in the Islamic economy that is the most important attribute in Islamic economy is the principle of social justice. This is embodied in Islam by the elements and guarantees which, Islam provided for the system of the distribution of wealth in Islamic society. The Islamic image of social justice contains two general principles each one of them has its own lines and particularities. The first of them is the principle of general mutual responsibility the other is the principle of social balance. Islam permits difference in wealth within reasonable limit but does not tolerate this difference growing so wide that some people spend their life in luxury and comfort, while the great majority of people are left to lead a life of misery and hunger. According to Tabatebaei (1980, 94105) the key social justice of Islamic economy lies in man's relationship with Allah, his universe and his people, and the nature and purpose of man's life on earth. Tawhid [monotheism] defines Man-God relationship. If a man believes in God and Day of Judgment, he is fully conscious of his duty and responsibility to God and his creatures. Thus, the success of man depends upon following His commands and creating harmony between morality and the material aspect of life. The second element after Tawhid for execution of social justice is Ijithad according to Enayat (1991, 217) Ijtihad means independent legal judgment, effort, or ability to deduce rules from sources. It is true that principles given by the Holy prophet were given in a particular age, under particular condition, and were applied to a particular society under entirely different conditions from today. Hussain (1992, 260) points out that these days Muslims society is facing numerous political, economical and social problems which can be solved only through Ijitihad, particularly issues in regard to which, no clear injunction is available in the Quran, or Sunnah [The Prophet's act or saying]. The third element for enforcement of social justice is ethics. It is important to mention here that in the West among those who have sought to relate economics to ethics, itself is mostly considered in a purely humanistic vein created by man. In contrast, in Islam, economics is considered to be related to ethics and ethics in turn is related to religion. Therefore, it is really the Shari'ah Islami'ah within which what is called Islamic economic social justice must function and find its meaning. Zakat, Riba [Prohibition of Interest], Stability on the Real value of Money, and State Responsibility for income distribution are the Original tools to carry out social justice in society.
limited ownership which is derived from the Qur'anic text that mentioned above, man is neither the absolute owner nor the total possessor of the earth and its resources. He does not have the right to possess as much as he desires or to obtain material wealth in any way he may choose. Indeed, because vicegerency belongs to all people, each individual is a guardian of the public trust. In addition, his ownership should be limited for the public welfare. According to Maudoodi (1973, 87-98) It must sustain a right balance between the needs of the body and of the soul so that its personal interests as well as the welfare of the society might be protected. In addition, this must not be ignored that human progress necessarily depends on the successful coordination of and the essential harmony existing between the spiritual and material aspects of life. When the spiritual life is detached from the economic struggle of man, the required dominant balance will be upset. Of course, the prevalence of such a constructive balance is very crucial to the maintenance of stability in the economic structure. In respect to Rationality, various views and different senses often exist in reference to the defining meaning of it. According to Weber (1970, 56) rational action is explicitly defined as a delimiting characteristic in terms of which the ways adopted to reach the ends are specified. As a matter of fact, values or emotions in this respect are not in themselves considered rational. Islam has its way of thinking of life according to which the life of a Muslim in this world is a temporary phase in his eternal life Hereafter. "But seek the abode of the Hereafter in that which God has given you and neglect not your share of the world." [Qasas 28:77]. According to Islahi (1978, 122128) his success in the Hereafter is dependent on the utilization of the resource of this world in the best and right way. On the subject of self-regulating market, Kamali (1994, 25-36) has
One of the most important elements for establishing social justice is zakat. According to Rahman (1986, 318-462) zakat is not a general tax but is a special tax which levied upon the Muslim members of the state only and is paid by them as a religious duty and act of worship to please the God Almighty. The importance of zakat can be judged by the fact that it has been included among the pillars of Islam, second only to prayers. The obligatory duty to pay zakat is emphasized in the Quran, but the types of assets that are subject to zakat are not determined. Thus, properties in the early days of Islam on which are applicable for zakat are not same as today properties, because the type of properties are changed during two period. There are different opinions about the properties, which are applicable for zakat among jurists. According to Sadr (1994, 237) instances of zakat and Nisb [exemption limit] and their amount in each period are determined by Ijitihad with regard to the condition of time and place.
Zakat
measure and weight with justice" [An'am 6: 152]. The verse of Quran should not be applied only to individuals but also to social and the state and should not be confined merely to conventional weights and measures but should also encompass all measures of value. It may hence be considered obligatory for the Islamic state to resort to healthy money, fiscal policies and appropriate controls when necessary, to minimize erosion in the real value of money.
State Responsibility
The most important of an Islamic State Responsibility is to provide a suitable environment for implementation of Islamic rules in society. The Islamic rules [Shari'ah], the "broad path" can be described as the entirety of Divine commands concerning human actions, for God is the Sole Legislator. There is a difference of opinion among Muslim scholars regarding the use of force in taking over the surplus of the rich. Some of them remark that the state can take the surplus only by persuasion or with the consent of the rich. Others such as Shari'ati (1987, 124-128) have argued that Abu Zar, a famous companion of the Holy Prophet, believed that the surplus wealth of the rich must be taken over by the state with or without their consent for meeting the needs of the poor and the helpless. According to Qutb (1977, 43) the Islamic state is responsible for the provision of basic needs to its members. In fact, the foundations of correct and just economy based on Islamic rules without establishing Islamic State is impossible.
There are many other countries whose their economy is based on macroeconomics. The Islamic economy based on macroeconomics is not similar to other countries such as Eastern Europe or even like Sweden. On the other hand the opinion about Islamic economy even among Muslim scholars are different. Therefore, macroeconomics is not only the main feature for establishment of an Islamic accounting model. Hence the main source for development of an Islamic accounting model is to take advantages of Shari'ah Islami'iah, or Islamic laws. The motion of law in the West economical subjects in the life of modern world is differ from the Islamic viewpoint. In the west law is considered to be an expediency based on current social exigencies. The concept of law in Islam is very different. In the Islamic view, law comes from God (Allah) and human beings can only apply and extend it to different situations. In the west, laws are passed to accommodate existing situations while, in the Islamic view, existing situations must be transformed to conform to Divine Law. Mutahhari (1993, 206). Islam, like all the major world religions, requires people to exercise ethical behavior in their dealing with each other and with the resources available to them.
Riba
The Holy Quran used the word Riba for interest. According to Maududi (1973, 92) riba is earned when a man lends his money to another on the condition that after a certain time he will be charged a fixed amount of money in addition to his money. Interest is forbidden in Islam and people are not allowed to make money by leading their capital on interest. It is therefore probable that they will invest their capital in productive manner, and thereby increases their profits. Keynes (1936,154) has noted that "interest has nothing to do with influencing the volume of savings. Practically, it is the rate of return on investment that determines the rate of saving". Islam prohibits interest but encourages investment.
Users and objectives of financial statement

Private ownership of property is one of the most important basic principles of liberalism economy, which effect on accounting system. Its basic theme is that accounting should focus on the entity and provide financial information for investors and creditors. Whereas concerning Islamic basic principal economy public ownership and state ownership are more important than private ownership. Therefor accounting should focus on the state and provide financial information for government and society.
According to Chapra (1980, 152) honesty and justice in all measures of value have been absolutely stressed in the Quran, for instance, "And give full
Stability on the Real value of Money
An Islamic Accounting Model is based on Macroeconomics. While the British-American, accounting model is based on Microeconomics. In this latter model, the focus is on the enterprise as an economic entity that affects the economy through its operations in market.
Islamic Economy and Accounting StandardsSetting

For an Islamic accounting model, primary user of financial statement is the government. Because collection of tax such as, zakat and other state taxes and spent of them are in the Islamic State authority. Financial accounting statements must be useful for: Relevant for social economic decision and judging management's ability and all of employee's efficiency to use from enterprise resources with regard to Islamic norms to achieving the primary enterprise and social goals. Evaluating the efficiency of management in the distribution of income to achieve the economical justice. Financial statements for achieving above mentioned purposes to provide full disclosure of enterprise activities in accordance with principles enshrined in the shari'ah. In other words, all of the business activities, which are unlawful (haram), should be revealed. The accountability and decision usefulness contexts that have been used for development of financial accounting statements from an Islamic view meant to provide information for prohibition of interest in the firms.According to Baydoun and Willett, (1997, 12-19) accounting implication of the shari'ah includes four titles. The need to properly compute zakat, the prohibition of interest, the concept of social accountability and the concept of full disclosure. and distinct from providers of capital. In the Islamic view, everyone is answerable for his actions. All the individuals but not entities are personally responsible for their commission or omission in religious as well as economical affairs and financial worship. The Islamic accounting model is based on the Proprietary Theory. According to Belkaoui (1993, 233) in the proprietary theory, the proprietor is the center of interest. Under the proprietary theory, assets are assumed to be owned by the proprietor and the liabilities and debts owed; expenses are decreased in proprietorship and revenues are increased. This theory is balance sheet oriented. In the British - American model, the primary focus is on the income statement and then balance sheet is considered. Income statement based on microeconomic assumptions is limited to the exchange of transactions between economic entities. In this model until recently, the social effect has ignored. In addition, income statement is based on revenue expense approach. In the Islamic Accounting model, primary focus is on the balance sheet. The impact of exchange between a firm and its social environment is considered and distribution of income in the firm and society are noticed. In this model income is based on asset - liability approach. Income, which is in the form of comprehensive income, may be used by the combination of socioeconomic accounting and valueadded statement for presentation. In the British - American model, the classification of assets and liabilities are based on the going - concern assumption. While, Gambling and karim (1991, 84) have argued that: from an Islamic perspective, no reason is relevant, they suggested the classification should be based on zakat orientation. In the British - American model, asset valuation is justified basically by the concept of conservatism. While, Gambling and Karim (1991, 88-99) have argued that the concept of conservatism is not related by Islamic teaching. Valuations basis of wealth, which is liable for religious taxes, should be based on current exit price.
This paper examines the basic principles and other salient features of Islamic economy, and then their effects on users of financial statements and objectives of financial statements have been considered. Some aspects of accounting such as asset valuation, theoretical concepts have been noticed. The similarities and differences accounting elements in standard setting for an Islamic accounting model versus BritishAmerican model are summarized in table 1. There is no doubt that the use of the British-American model in Islamic countries, according to Choi and Muller (1992, 57) is not for its superiority, but for its political and economic reasons. Today in the West, as well as in the Islamic world itself, there is a need to study both values and norms of Islam from its own point of view and their effects on accounting practices. Mueller, Gernon and Meek In third edition of their book (1994, 12) have stated that Islamic accounting model is emerging model, and wrote one paragraph about it. But in the fourth edition of their book (1997), they eliminate even that paragraph. In short, without application Shari'ah Islami'ah setting of Islamic Accounting Standards are impossible. Elements which should be considered include: Islamic economy elements the most important of which is social justice through application of prohibition of riba, zakat, and Islamic ethics. Other factors such as Environmental and International elements which influence Muslims community and adoption of these elements are possible based on Ijtihad through application of "Time" and "Place".
Summary and Conclusion
The Theoretical Concepts of Accounting and Their Effect on Financial Statement

The British-American model is based on the Entity Theory. Under the entity theory, the net income does not belong to the proprietors or owners, but to the entity, which is regarded as separate

Elements
Economic Approach Primary Users Accounting Policy Asset Valuation Income Determination Time Value Money Time Period Primary Focus Theoretical Concept Going Concern Postulate Fixed Interest Legalistic Orientation Accounting Rules Accounting Ethics Stock Exchange Market Bonds Accounting Approach Dichotomy of Business
British-American Model
Micro Investors and Creditors Goal Oriented Historical Cost Price Revenue-Expense Approach Yes Yes Income Statement Entity Theory Based on Income Yes Common Law Technical Professional Ethics Yes Yes Value Approach Yes
An Islamic Model
Macro State, Management, People Value Oriented Current Exit Price Asset-Liability Approach No Yes Balance Sheet Proprietary Theory Based on Islamic Law No Religious Law Ethical Religious Ethics Yes Yes with request condition Event Approach No
Gazzali, I. M.(1971). Ihya Ulum-id-Din, English translation by Al-Haj maulaana Fazlur Karim, Sind Sagar Academy, Lahore, Pakistan. Holton, R. (1992). Economy and Society, Routledge, UK. The Holy Quran, text, translation and commentary by A. Yusuf Ali, (1983). Amana Corp., Hussain. Z. (1992). The Reconstruction of Islamic Society, Ferozsons Ltd. Lahore. Islahi. S. D. (1987). Islam at a Glance, Call to Islam and How the Prophets Preached, Lahore, Pakistan. Kamali. M. H. (1994). Tas'ir (Price Control) in Islamic Law, The American Journal of Islamic Sciences. Vol.11 No.1. Spring, pp. 25-36. Karim. R.A.A, (1996).Economic Consequences of Accounting Standards and Islamic Banks, Research in Accounting Regulation, Vol. 10, pp. 111-138. Keynes, J. M. (1936). The General Theory of Employment, interest and Money New york: Harcourt, Brace and company. Maududi, Abul Ala, (1973). Economic Problem of Man. Lahore, Pakistan. Mueller, G. Gernon, H. and G.K. Meek, (1994). Accounting An International Perspective,Richard D. Irwine Inc. USA. Mutahhari. M. (1993). Islamic Economic, Sadra Pub. Tehran, Iran. Nasr. S. H. (1993). A Young Muslim's Guide To The Modern World, Cambridge. UK. Qutb. M. (1973). Islam The Misunderstood Religion, Beassat . pub. Tehran, Iran. Rahman, Afzalur. (1986). Muhammad Encyclopedia of Seerah, seerah foundation. London, UK. Sadr, Muhammad .B. (1994). Iqtisaduna (our economic). 2nd Edition, Tehran, Iran. Shari'ati A. (1987). Abu Zar , (Companion of the Prophet ) Ershad Pub. Tehran, Iran. Siddiqi M. N. (1981). Muslim Economic Thinking: A survey of Contemporary Literature, The Islamic Foundation, United Kingdom. Tabatebaei. M. H. (1980). Understanding Islamic Social Economy, Anteshar pub. Tehran, Iran. Weber. M. (1970). 'The Prophet' in personality and Religion: The role of religion in personality development, Sadler W (ed), SCM Press Ltd, London.
and Private Morality Fortunately, Financial Accounting Organization for Islamic Banks and Financial Institutions (FAOIBFI) was established in 1991and its name changed to Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) to set accounting standards based on the Islamic shari'ah. At present, the AAOFI has no power to enforce its standards. The best way for implement of AAOIFI standards in the various Muslims countries is depending on the cooperation of Muslims accountant's scholars. States of the Islamic Organization Conference (IOC) must be supports financial resources for development researches for Islamic accounting standards and authorized them for enforcement in the Muslims countries.
References:
Baydoun N and Willett R, (1997). Islam and Accounting: Ethical Issues in the Presentation of Financial Information; Accounting, Commerce & Finance: the Islamic Perspective; Vol. 1, No. 1, June, pp. 15-19. Behesh'ti, S.M. (1992). Islamic Economic, Fajar Press Tehran. Belkaoui, A.(1993). Accounting Theory. Dryden Press, NY. Chapra, Umar (1980). The Islamic Welfare State and its Role in the Economic Studies in Islamic Economics, UK, Redwood Burn limited.UK. Choi, F D S and Mueller G G, (1992). International Accounting, 2nd Edition, Prentice Hall international. Enayat H. (1991). Modern Islamic Political Thought, Macmillan Pub. London. 1991. Gambling T E and Karim R.A.A, (1991). Business and Accounting Ethics in Islam, Mansell, London.UK.
About the Author: Mr. Mohammad R. Taheri is an Associate Professor of Shahid Chamran University of Iran.
MURABAHA
Scripts from the book Islamic Finance written by Hafiz Mufti Taqi Usmani Contributed by Yasin Zairy, FCA
MURABAHA is in fact, a term of Islamic Fiqh and it refers to particular kind of sale having nothing to do with financing in its original sense. If a seller agrees with his purchaser to provide him a specific commodity on a certain profit added to his cost, it is called a murabahah. The basic ingredient of murabahah is that the seller discloses the actual cost he has incurred in acquiring the commodity, and then adds some profit thereon. This profit may be in lump sum or may be based on a percentage. The payment in the case of a murabaha may be at spot, and may be on a subsequent date agreed upon by the parties., therefore, murabahah does not necessarily imply the concept of deferred payment, as generally believed by some people who are not acquainted with the Islamic jurisprudence and who have heard about murabaha only in relation with the banking transactions. Murabahah, in its original Islamic connotation, is simply a sale. The only feature distinguishing it from other kind of sale is that the seller in murabaha expressly tells the purchaser how much cost he has incurred and how much profit he is going to charge in addition to the cost. MURABAHAH is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred and sells it to another person by adding some profit or markup thereon. The Profit in Murabaha can be determined by mutual consent, either in lump sum or through an agreed ratio of profit to be charged over the cost. Murabahah is valid only where the exact cost of a commodity can be ascertained. In order to secure the payment of the price, the seller may ask the buyer to furnish a security whether in the form of a mortgage or in the form of a lien or a charge on any of the existing assets.
The buyer can also be asked to sign a promissory note or a bill of exchange, but the note or bill of exchange cannot be sold to third party at a price different from its face value.
Sale in Shariah
Sale is defined in Shariah as the exchange of a thing of value by another thing of value with mutual consent. The subject of sale must be existing at the time of sale, thus a thing which has not yet come into existence cannot be sold. If a non existent thing has been sold, though by mutual consent, the sale is void according to Shariah. The subject of sale must be in the physical or Constructive Possession of the seller when he sells it to another person, Constructive Possession means a situation where the possessors has not taken the physical delivery of the commodity, yet the commodity has come into his control, all the rights and liabilities of the commodities are passed on to him, including the risk of destruction. The sale be must instant and absolute. Thus a sale attributed to a future date or a sale contingent on a future event is void. The subject of sale must be a property of value. Thus, a thing having no value according to the usage of trade cannot be sold or purchased. The subject of sale should not be a thing which is not used, expect for haram purpose, like pork, wine etc. The subject of sale must be specifically known and identified to the buyer. The delivery of the sold commodity to the buyer must be certain, and should not depend on contingency or chance. The certainty of the price is necessary condition for the validity of a sale, If the price is uncertain, the sale is void. The sale must be un conditional, a conditional sale is invalid, unless the condition is recognized according to the usage of trade as a part of the transaction,
Financial Reporting
IAS 17- Changing Facemask

Yasir Khan, ACA
Liven a big machine, IAS 17 Leases has ever been just a small part but stimulated a sizeable debate since its birth. IASB has finally revised the standard in the harmonization process of financial reporting standards for the new era of 2005.The harmonization and revision process by IASB portrays not only the refined reporting but also the redefined reporting in many areas. However IAS 17 is being considered a good example of more refined reporting among reporting gurus. The changes in IAS 17 are numerous and IASB has just succeeded to verbalize many undefined principles embedded in the superseded standard. However, the old and golden rule of nothings perfect still plays. The changes in the IAS 17, pursuant to its revision, may well be categorized into two types. The first type changes are the inclusion and refinement of definitions. While the second type changes are the inclusion of new accounting and reporting issues, which had not been addressed by IASB even after their very presence in local reporting frameworks (like FRS, SFAS, AASB etc). All these changes can be studied under the following heads: recognition criteria for financial statement elements are not fulfilled until the actual acquisition/construction of asset by the lessor and its transfer to lessee for subsequent use takes place. Moreover, the inclusion of the term Commencement of lease term doesnt change the date of lease classification for subsequent accounting and reporting. It remains the actual date of inception when the agreement is entered into by lessor and lessee. In addition, the adjustments to MLP during the intervening period of inception and commencement would be deemed to have taken place at the date of inception. Such adjustments are normally anticipated and provided for in the lease agreements under escalation clauses. The classification of lease is to be made at the inception rather than on the commencement date. The situation may arise where the classification changes on the commencement date but it still have to be accounted for in accordance with the classification at the inception. w Singora Lessors plc enters into an agreement with a lessee. At the inception, the present value of MLP over the lease term equals the fair value of the leased asset. But the asset is still to be imported by Singora Lessors plc. During the intervening period of inception and commencement, the fair value of the asset increases reasonably. At the commencement of the lease term, the present value of MLP equals 65 % or say 70 % of the fair value. w Singora Lessors plc enters into an agreement to lease out an asset, which it has to be constructed first. All the principal provisions along with the MLP are agreed upon prior to the construction of asset. And the lease term covers the reimbursement of cost to be incurrent together with a reasonable return. Subsequently, on account of recession in market, the fair value substantially falls during the construction period. Consequently the profitable contract turns into a loss at the initial stage of sale recognition. This new requirements included in IAS 17 (for classification of lease at the inception and the effect of escalation clauses to be taken effective form the inception date), in the opinion of IASB, better reflect the true economic considerations that entered into agreement.
Inception Vs Commencement of lease term

The new definition introduced by IAS 17 is for Comm encement of lease term. The superseded standard only attended to the term Inception of lease and the accountants all over the world were still unclear about the timing of the recognition of financial elements (asset, liability, income & expense). This matter wasnt of much import as the framework provides a comprehensive guideline for this. The words Inception and Commencement surrogate each other but they may not be the representatives of the same date. The new IAS 17 clarifies the matter that the recognition stage of financial elements is not necessarily the time of inception of lease. These elements are to be recognized pursuant to the fulfillment of recognition criteria defined by the framework. Moreover, the changes in the lease terms between the date of Inception of lease and commencement of lease would be regarded applicable from the date of inception. (ibid: paras 5 & 13) The situation may arise where the lease agreement, even after being entered into, may not complements the completion of transaction owing to prospective acquisition or construction of asset by the lessor. This problem may arise in case of manufactures lease. In such circumstances, the
Financial Reporting
Such an opinion is in parity with the long established standard developed by FASB (Financial Accounting Standard Board) of USA in 1978 as an amendment to American Accounting Standard SFAS 13 (Accounting for Leases). The clarification of accounting treatment for contingent rentals over the lease term is pretty good step, though the implied accounting treatment was evident in the old standard. The contingent rents are to be recognized in the income statement in the period in the period of incurrence. (ibid: para 25)
Classification of leases
The second type modifications lies in the section named classification of leases. The criteria defined by revised IAS 17 are no different from those defined by earlier standard. However the loopholes in the old standard are still there which caused a huge debate among the accountants but still not addressed even by the new standard. These factors are as follows:
l
Joint Lease Arrangements for Land and Building

In additional, an explicit guideline has been provided by the new one about the classification of leases in respect of single rental agreement of land and building. The additional guideline is the result of a long debate about the recognition process of long-term leases of land and buildings quite common in many countries. The classification of such leases as either the finance lease or operating lease has been well defined by other accomplished reporting frameworks all over the world. The new IAS also defines the quantitative techniques for the classification of lease, which serves as a good back support in complex areas. In the financial reporting aspect of leases, its is well defined rule among the accountants all over the world that IAS 17 prescribes the qualitative characteristics a primary test for the identification of finance leases. The same primary tests are to be applied for the identification of lease type for land and building elements separately.
Interest rate implicit in the lease Contingent rentals Joint lease arrangements for land and building Leases in respect of investment properties
The interest rate implicit in the lease has been defined as the discount rate that, at the inception of the lease, causes the aggregate present value of (a) the minimum lease payments and (b) the unguaranteed residual value to be equal to the sum of (i) fair value of the leased asset and (ii) any initial direct cost of the lessor. Whereas the definition of MLP specifically excludes contingent rentals to be payable over the lease term. The definitions of implicit interest rate and the MLP fail to encompass the two facts; viz a) the use of probability theory is the basic part of accounting estimates. The leasing arrangements where the contingent rentals are the major part of the lease rentals pose the problem of inappropriate classification of the lease term. Moreover, this has ever been regarded as a gateway to creative accounting; the reporting standards have been developed as a cure of. b) The implicit rate is the same for MLP and unguaranteed residual value where the differences in risk factors about their estimation are quite apparent. However, the new standard also clarifies the estimation techniques which may be used by lessee at par with lessor for the recognition of interest element on finance lease over the lease term. The old standard gave the option to the lessor to use simplified method of apportioning interest income over the lease via sum of digit or any other method. While the same option was not prescribed for the lessee. (ibid: para 26)
Qualitative Questions
1. Does the lease transfer ownership of the asset to the lessee by the end of the lease term? (ibid: para 10-a) 2. Does the lease give lessee the option to purchase the asset at less than open market value? (ibid: para 10-b) 3. Does the lese contain terms that result in the gains or losses from fluctuation in the residual value of the asset accruing to the lessee? (ibid: para 11-b) 4. At the inception of the lease, is it reasonable to assume that the lessee and lessor either (a) expected to lease term to be for the major part of economic life of the building or (b) that the residual value on expiry of the lease term would be negligible? (ibid: para 10-c) 5. Has the payment structure of the lease been derived with reference to specific interest rates and returns on risk, which would be required by the lessor? 6. Does the lease allow the lessee to cancel the lease and if so does the lessee have to bear the lessors losses, as predetermined in the lease term? (ibid: para 11-a) 7. Is the building of such a specialized nature that only the lessee can use without major modification? (ibid: para 10-e) 8. Whether lessee has option for secondary lease period with peppercorn rent? (ibid: para 11-c)
Financial Reporting
In addition, the following judgmental qualitative factors affirm the presence of operating lease. 1. Are the full repairing and insuring covenants in the lease and clauses to ensure the asset is reinstated, at the expense of the tenant, to its original condition at the end of the lease? 2. Does the lease provide for significant contingent rent variations during the term by reference to the open market turnover? 3. Were the initial passing rent and other aspects of the lease set at prevailing market rate? 4. Is the lease free of contractual terms, which might oblige the lessor to continue the lease at substantially less than normal market terms? 5. Is lessee default the only grounds on which the lease reverts to the lessor? 6. If the lessee wishes to sublet or sell (or assign) their lease rights, are there terms in the lease that allow the lessor to control the key terms of the sublet/sale? The embedded principal in IAS 17 is to use abovementioned qualitative measures to identify the lease type, whereas the other quantitative criteria have been defined to account for the lease transactions in the books of accounts. However the quantitative test may also be used to identify the lease type and the most prominent one is the comparison of present value of MLP with the fair value of the asset. (ibid: para 10-e) The new IAS 17 introduces something special for identifying the lease type of where the lease involves the joint arrangements for land and building. The standard also prescribes the accounting treatment for leases involving investment properties. The IAS 17 prescribes the same accounting treatment and identification of lease for separate contracts of leasing land and building as prescribed by the old standard. However, the joint lease arrangement is the new concept for IAS 17 which is no different from those prescribed by SFAS long ago. However in this case also, the dealing of the leasing for land and building has been defined in the separate manner. The entire myth, as embodied in IAS 17, may be classified under four different situations. a) where the leasing arrangements involve the leasing of either land or building alone, they are to be dealt with in normal way. The only criteria for leasing of land to
be treated as finance lease is the transfer of title at the end of the lease term owing to its infinite useful life. While the criteria for identifying lease type of building (and other assets within its scope) have been clearly prescribed by IAS 17. (ibid: para 14) b) where the leasing arrangement involves the leasing of land and building as a composite unit and the lease rentals are defined in composite term, the both items have to be accounted for separately unless they fall under the same classification. In case, both items falls under operating lease, they have to be accounted for compositely as operating lease unit. The lease rental are to be allocated to the both elements if necessary pertaining to quantitative criteria defined by IAS 17 which may also be of great help for classification. This classification is to be based on the leasehold interest in the land and building element. However such a quantitative exercise may not necessary in all situations. Where interest in both elements is of operating nature, the separate accounting may not be necessary and both elements can be treated as a composite unit. For a long time, there has been the confusion whether value apportionments of land and building and residual values at lease inception, needed to be obtained as a precursor to the determination of lease classification. But there also has been a well-developed conclusion that this is unnecessary whilst a purely qualitative assessment is being made (ibid: para 16 & 18). c) where the leasing agreement arranges for land and building element but the leasehold interest in the land element is immaterial, both land and building elements are to be treated as a single unit and is to be treated under finance or operating lease accounting. In this situation, the economic life of the building is to be treated as the economic life of entire lease unit. In this situation, the composite unit accounting treatment, in substance, ignores the land element and the operating or finance lease accounting would be applicable. (ibid: para 17). where the headlease of both land and building is subject to further sublease as an investment property and fair value model adopted, the bifurcation and separate identification is not required. We discuss this matter under the following paragraphs. (ibid: para 18 & 19.)
d)
Financial Reporting
Singora Enterprise enters into a lease agreement to acquire a commercial unit for its administration office in the locality of Lancashire, consisting of land and building, on lease from Simon Lessors plc. The fair market values of the land and building, in the vicinity Singora Enterprise operates, have been established after due consultancy of British Property Valuers (BPV) and which come to be: Land Building 5,000,000 4,500,000 in value. Moreover, the economic life of building comes to be 20 years. In the above case, the apparent lease classification for land element is of operating nature as it reverts back to the lessor at the end of lease term, and for further occupation the ground rent is to be paid annually. Whereas in the case of building element, the lease classification depends on the guideline given by IAS 17. At the end of the lease term, no more payment is to be made for further use of building. The guidance given by IAS 17 refers to the finance lease type for the building element of commercial unit. The proper accounting and reporting of the lease unit requires the bifurcation of entire MLP into MLPs relating to land and building elements. The criterion given by IAS 17 is the ratio of lessees interest in the leasehold property. The lessor just requires the annual cost of capital for investment in land and doesnt requires the true investment to be reimbursed through leasing arrangement owing to infinite economic life of land and its slipping back at the end of the lease term. The normal market rate of return in such case is 8 %. Thats the annual return (5,000,000 x 8 % = 400,000) relates to the land element while the remaining amount is to be allocated to building element to be accounted for separately. The implicit interest rate is 12 % and the present value of MLP (5.650 x 800,000 = 4,520,000) equals the fair value of building at the inception of the lease. Thus, in effect, the MLP allocated to the building element not only covers the entire capital cost but also a reasonable market return over the investment and constituting it a finance lease arrangement. However IAS 17 requires such allocation in the ratio of inertest in lease, the other established frameworks including that American SFAS require the use of fair value of land and buildings for such an exercise. In this regard, IAS 17 still has logical superiority over the other frameworks and this fine move by IAS 17 is a good example of giving priority the most logical solutions while working for the harmonization process.
The lease term agreed with Simon Lessors plc covers 10 years after which the Singora Enterprise would be liable to pay only ground rent while no other payment is to be made for the lease of building. Singora Enterprise would continue to operate from the same office for next years to come. Singora Enterprise is liable to pay 1,200,000 at the end of each year for 10 years of lease. Thereafter Singora Enterprise is liable to pay 400,000 at the end of each year as a ground rent. The required rate of return on the investment in building is 12 % whereas the required cost of capital for investment in land comes to be only 8 % owing to no risk of fall
Leases in respect of Investment Properties

The accounting treatment for Investment Properties taken on operating lease is just a drastic move that IASB takes in IAS 17. In the opinion of reporting gurus, this move seems to provide much better presentation to companies involved in long term subleasing of headleases as investment properties. Under the new standard, the investment properties taken on operating lease are permitted to be accounted for as properties held under finance lease provided that fair value model under IAS 40 is used. This change in IAS 17 is the consequence of corresponding change in IAS 40 in this regard. This accounting treatment provides the opportunity of recognizing assets to companies involved in rather long term lease of land and buildings as investment properties. These companies were unable to recognize the assets on account of operating lease agreements. However, the adoption of such an option would also give rise to the corresponding liability in the balance sheet and consequently affecting the companys gearing. This lack of off-balance sheet financing may hinder the application of such an accounting treatment by companies involved in letting out of buildings. On the other side, the companies involved in this business and exposed to low gearing may opt this treatment to enhance asset backing. The normal accounting treatments defined by IAS 17 and IAS 40 are fine enough to present all transaction by a business not involved solely in investment properties. But the business of letting out of long term commercial warehouses is not uncommon in the countries like Britain and USA. In such a business, the leased out investment property is normally
acquired on operating lease which are normally renewable for long enough to make them little different from finance lease agreements. Now a company having freehold investment properties and the company having only leasehold investment properties reflect the entire different positions of asset, liabilities, income and expense. However, the long term operating lease agreement in respect of investment properties, if classified under finance lease standards of IAS 17, may not pose such a huge comparison mismatch. Moreover, the permitted accounting treatment for such investment properties is the result of worldwide insist of accountants for such kind of a business. IASB has just taken a fine step to make it optional for such businesses that are interested to make their financial statements better for comparison at parity with other companies having freehold investment properties portfolio. The separate accounting treatment for land and building element is not necessary for above mentioned investment properties.
About the Author: Mr. Yasir Khan qualified Chartered Accountancy in June 2005. Presently he is associated with SKANS School of Accountancy. He dedicate this article to his father Prof. Muzaffar M. Khan, from whom He inherited approaching every task with honesty, hard work and boundless zest! Readers are welcome to contact him at : yasirkhan80@hotmail.com
Internal Auditing
Pre-payment checks, compliance audit

or risk-based audit what is the most effective role for internal audit?
Andy Wynne This article was first published in Accounting & Bussiness, the professional journal of the Association of Chartered Certified Accountants.
Internal audit comes in all sorts of shapes and sizes. A wide variety of approaches may be adopted and the particular one which is used will differ from organisation to organisation and country to country. These approaches form a continuum from pre-audit, through regularity or compliance audit, to risk-based audit. This article introduces these three main approaches to internal audit, considers the relative merits of pre-audit and compliance audit and introduces risk-based audit. Future articles will provide a more detailed outline of the risk-based approach to internal audit. The origins of internal audit are as an internal check on the accuracy and validity of all payments made by an organisation. No payments could be made without them first being reviewed and stamped for payment by the staff of the internal audit section. Internal audit practice now forms a spectrum from this, original role of internal audit, to riskbased audit. The latter consists of internal audit reviewing the organisation's risk management and internal control systems and processes with only limited testing of internal controls to ensure that they are actually applied as required. The Combined Code of the London Stock Exchange requires the boards of all its listed companies to "maintain a sound system of internal control to safeguard shareholders' investment" and that "the directors should... conduct a review of the effectiveness of the group's system of internal controls". In most companies the directors will rely on the company's internal audit function to directly undertake this review of internal control. Many people would agree that the objective of internal audit should be to help to ensure that the internal control system of an entity is adequate and effective. Adequate can be construed as meaning fit for purpose, so in the context of internal controls, that the controls are appropriate for the risks which the organisation faces and that they are actually implemented on a routine basis. The term effectiveness demands more than this and infers an interest in the actual outcome of the controls, for example ensuring that the transactions are actually appropriate, accurate and valid. As a result, if internal audit is to conclude on whether the risk management and internal control systems are effective, it should undertake at least some substantive testing to confirm whether or not the internal controls have operated as expected and thus ensured that the transactions are accurate and valid.
In addition, external audit will often rely on internal audit and as part of this reliance, may expect internal audit to undertake a degree of substantive testing of at least a sample of transactions that have been processed by the main financial systems. Pre-payment audit checks (or pre-audit for short) are examinations of payment vouchers and other documents before the associated payments are made. The objective of pre-audit is to ensure that payments made are: w w w valid necessary and accurate; and expenditure is in line with the approved budget.
The advantages of pre-audit are said to be that it can help to: w w ensure that all expenditure is necessary and appropriate ensure that all payments are properly authorised before being made ensure that expenditure is in accordance with relevant laws and regulations prevent management fraud reduce the incidence of fraud or irregularity confirm the accuracy of the classification and the coding of expenditure and w ensure arithmetical accuracy of the transactions which are checked.
w w w
The pre-audit approach to internal audit is found in many developing countries, but also in France, Portugal, Spain and many other continental European countries with a legal tradition based on the Napoleonic Code. In these countries, an emphasis is put on the controls that are exercised by a third party entity, at the centre of government, often an agency
Internal Auditing
Figure 1: Compliance or risk-based audit?

compliance audit Financial Regs & Procedures Actual Practice
risk-based audit Risks Actual Control Procedures
Managers often expect internal auditors to identify breaches in financial regulations and to inform them when staff are not following established practice. This can be a relatively minor outcome of an internal audit assignment, however, and this approach overlooks the wider benefits that can be achieved when internal auditors take on the more important role of assessing the whole control environment and its adequacy and reliability in managing risk. Under this latter approach (the risk-based approach), internal auditors have to determine whether compliance with financial regulations and other instructions will be sufficient to adequately mitigate the risks which the organisation faces to the achievement of the organisation's objectives. If not, internal audit may make recommendations to amend financial regulations or other financial instructions. There may also be circumstances, where staff are not complying with financial regulations or other official instructions, but where the revised practices that they have adopted are actually more cost effective at reducing risks to an acceptable level. In this case internal audit may recommend that financial regulations etc are amended to require these revised practices to be adopted. However, in the short-term, until these amendments are introduced, staff should follow the standing regulations or instructions unless they are given official permission otherwise.
Effective internal control systems should not only include suitable checks and other control procedures, but they should also include review processes to ensure that the checks and controls are actually implemented and complied with. Managers who see internal audit's role in compliance terms believe that they can rely on internal audit to ensure that controls are actually reliably followed in all circumstances. For example, bank reconciliations are a fundamental control in almost all financial systems, but an effective internal control system will also include a review of each bank reconciliation by a supervisor or manager to ensure that it has been properly undertaken and completed promptly. Payment systems will include authorisation processes; they should also include checks that these have been completed for each payment by authorised signatories. These reviews involve line management in the internal control process independent of any internal audit presence. Managers should be responsible for implementing effective control systems. They should also be responsible for ensuring that these control systems are routinely complied with. Compliance audit may be an appropriate activity in an unchanging world. A comprehensive set of instructors and regulations are developed and reviewed by internal audit to ensure all existing risks will be avoided. All that is then required is for a regular check that these instructions are followed by all staff at all times.
Figure 2: Compliance checking and risk-based audit

compliance audit actual practice official instructions amendments cost effective risk management
risk-based audit
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Obituaries
Mr. Moosa Yousuf Lulat born on 22nd December 1924 at Surat, India. He had matriculated in 1946-47 from B.N. Cinwala High School, Ankleswar, India, Graduated in Commerce in 1951 from Maharaja Savajirao University of Baroda, India and then migrated to Pakistan in the same year. On having completed Articleship in September 1955 from Hashmi & Co. Mr. Lulat qualified as Registered Accountant in October 1955 under the Auditors Certificate Rules 1950, and commenced professional practice in January 1956. He was admitted to membership of the Institute on 01.07.1961 and became fellow member in August 1961. Mr. Moosa Yousuf Lulat had been in professional practice eversince under the name and style Moosa & Co.eversince January 1956 which he continued till early June 2004. He died on 12 August 2005 due to cardiac respiratory failure. He left behind a widow and four sons.
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Mr. Abbas Mohamed Peerbhoy born on 18 April 1929 in Calcutta, British India, did his Inter Commerce from Sidharth College, Bombay (India) in 1947, underwent 5 years audit training with the then M/s Ashraf Sajun & Co. Chartered Accountants and passed Registered Accountants examinations in 1956 under the Auditors Certificate Rules in 1950. He was admitted to membership of the Institute on 01.07.1961 as an Associate member and became a fellow member in February 1982. He initially commenced his own professional practice as Chartered Accountant but preferred to take up employment in 1956 in the Pakistan International Airlines (PIA), where he served for over 30 years and retired as General Manager Finance in 1990. He died on 13.08.2005 due to protracted illness. He left behind a widow and two sons.
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Mr. Mohsin Mustafa son of Muhammad Ghias Shaikh born on 04 November 1969 graduated in Commerce from the University of Punjab in 1990, completed 4 years prescribed Chartered Accountants training with M/s Riaz Ahmad & Co., Chartered Accountants was admitted to membership with effect from 27 July 1998 of the Institute on having passed the Chartered Accountants final examination held in Nov. 1997. He worked as a qualified assistant with Riaz Ahmad & Co., for four Years 8 months and subsequently was admitted to partnership of the firm in April 2003. He was permitted to train students in Nov. 2003 He discontinued professional practice on 1st July 2005. Mr. Mohsin Mustafa expired on 08 October 2005 in Muzaffarabad when the earthquake hit the area. He left behind his mother, a sister and a brother to mourn his death. Syed Iftikhar Ali son of Syed Zulfiqar Ali born on 18 Nov 1933, passed Matriculation Examination in 1948 from the Board of High School and Intermediate Education United Provinces, India, Graduated in Commerce in 1952 from the Agra University, India, obtained Bachelors Degree in Law in 1956 from the University of Karachi and on having competed prescribed CA Training passed the Chartered Accountants Final Examinations of the Institute held in December 1962. He was admitted to membership of the Institute on 27 April 1963, and became a Fellow Member in February 1977. In profession, Mr. Iftikhar Ali remained affiliated as partner in Gardezi & Co., and Rahim Jan & Co., Chartered Accountants, Lahore for 5 years and Manager-in-Charge in Ford Rhodes Robson Morrow (now Ford Rhodes Sidat Hyder & Co.,) Chartered Accountants, Rawalpindi Office for 5 years. In industry he served as Chief Accountant / Company Secretary in Printing Corporation of Pakistan, Islamabad and Rawalpindi Electric Power Company Limited. His longest tenure was in Fauji Foundation where he served for almost 23 years working in different capacities and retired as General Manager Finance (Head Office). He commenced professional practice in July 1999 under his own name and style M/s. Iftikhar A. Syed, Chartered Accountants. He died on 13 October 2005 due to protracted illness. He left behind a widow, a daughter and five sons.
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VCDs of CPD activities conducted by Southern Regional Committee ICAP

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Seminar on Islamic Banking - A Complete Business Solution Speakers: Mr. Ahsan Saleem, Dr. Imran Usmani, Mr. Najam ul Hassan Session Chairman: Mr. Ebrahim Yacoob Sidat, FCA (Karachi) Seminar on Mutual Funds & Investments in Capital Market Speaker: Mr. Nasim Beg, FCA Session Chairman: Mr. Tariq Iqbal Khan (Karachi) Seminar on Audit: Adding Value Across the Board Speaker: Ms. Huma Pasha, FCA Session Chairman: Ahmed Dawood Patel, FCA (Karachi) Seminar on Auditing in a Computer Information Systems Environment Speaker: Mr. Yazdi R. Sidhwa Session Chairman: Mr. Ahmad Saeed, FCA (Karachi) Workshop on ISA-600: Using the Work of Auditor ISA-610: Considering the Work of Internal Audit ISA-620: Using the Work of an expert Speaker: Mr. Pervez Muslim, FCA (Karachi) Seminar on Strategic Management - A must for Successful Business. Speaker: Mr. Masoud Ali Khan Session Chairman: Ms. Uzma Bashir (Karachi) Workshop on ISA-260: Communication of Audit matters with those charged with governance. ISA-560: Subsequent Events ISA-220: Quality Control for Audit Work Speaker: Mr. Haroon Tabraze ACA (Karachi) Seminar on Basel II - An Evolutionary Approach Speaker: Mr. Ayaz Ahmed (Karachi) Workshop on ISA-505: External Confirmations ISA-570: Going Concern Speaker: Syed Faraz Anwer (Karachi) Pre-Budget Seminar 2005-2006 Speaker: Syed Mohammad Shabbar Zaidi, FCA, Mr. Ather Saeed (Karachi) Workshop on ISA-710: Comparatives ISA-720: Other Information in Documents containing Audited Financial Statement ISA-580: Management Representations Speaker: Mr. Nadeem Yousuf Adil, FCA (Karachi) Inauguration SAFA 2005 Speech: Mr. Abbas Mirza Seminar on Implementing SBP Guideline using COSO Framework on Internal Control Speaker: Asad Ali Shah, FCA, Syed Liaquat Ali FCA Session Chairman: Mr. Jameel Ahmad (Karachi) Seminar on Critical Factors for Successful I.T Project Speaker: Mr. Rasool Hoodbhoy Session Chairman: Mr. Ahmed Saeed, FCA The Federal Budget Seminar 2005-2006 Speakers: Syed Masoud Ali Naqvi, FCA, Mr. Ebrahim Yacoob Sidat, FCA Syed Mohammad Shabbar Zaidi, FCA, Session Chairman: Dr. Salman Shah Seminar on Recent Development at IFAC Education Committee Speaker: Mr. Abdul Rahim Suriya, FCA Session Chairman: Mr. Khaliq-ur-Rahman, FCA
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22.06.2005
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Note: Please contact Directorate of Continuing Professional Development (CPD) at 9251636-39 Ext 301 or cpd@icap.org.pk
Health News
MIRACLES WITH WATER

Japanese Sickness Association has published the following experiment with WATER. They claim 100% success for curing old and new diseases, as follows: (1) Headache, Blood Pressure, Anaemia, Arthrosis Paralysis, Palpitation, Epilepsy and Obesity. (2) Cough, Bronchitis, asthma and tuberculosis. (3) Meningitis and any other diseases connected with Urine and Liver. (4) Hyper-acidity, gastritis, dysentery, constipation, piles and diabetes. (5) Any other disease connected with eye, nose and throat. METHOD OF TREATMENT (1) Wake up early morning and drink 4 glasses of water (160 ml. Each) in any empty stomach. Thereafter, no solids or liquids should be taken upto 45 minutes. (2) Normal breakfast can be taken after the 45 minutes elapsed. (3) Nothing either liquid or solid should be taken for 2 hours after breakfast, the same as within lunch and dinner.
MEDICAL EXPERIMENT
bedtime or sleep.
Contributed by Prof. Dr. Khawaja Amjad Saeed, FCA
(4) After dinner, nothing should be taken before
Sick and old people will find it difficult to drink 4 glasses of water at an instant, in the beginning but can increase gradually to the following diseases have been cured on treatment of water for the period shown below:A) B) C) Hypertension Gastric Problems Diabetes -- 30 days -- 10 days -- 30 days -- 10 days -- 06 months -- 03 months
D) Constipation E) F) Cancer Tuberculosis
Those who are suffering from arthritis should try this experiment three(3) times a day for one (1) week and there after reduce to once in the morning, for the first few days you may experience to pass urine more than the normal but no side effects.
Thats Life
Me Deaf?
Altaf Noor Ali, ACA
Three cheers to my stars for not being a deaf; but what is one suppose to do when too many people - known and unknown who happen to be in my life do not apparently think so. Afterall, how would you explain why my fellow drivers honk so incessantly? Granted that safe driving and good driving manners is no criterion for granting of a vehicle by my Lord (bank balance and good credit is). Its as if most drivers do not have their hands on the steering but on the honk, making liberal use of their inherent right! Why do it? Ask them and they will tell you that its for your own safety. My kind hearted caring fellow drivers, more fit to flying an F16 or equivalent fighter jet by virtue of their driving, are however no match for silencer less rickshaws: if you have ever seen one or more in a grand prix. Once at a traffic light, I asked the one next to me for a direction. No response, not even a glance. Said it again and saw him smiling instead of responding. Said it again and he says, Whats that? Thats not all! Every other rivals for being in Top 10in abuse of cellular technology. No problem if service levels have hit the ground and still drilling, the national vision of each one having a mobile is yet to be realised. Strange, that a connection comes with countless ringtones but not a word on etiquettes. And, that would not debar us from being louder and louder every time if we are not clear to the other side (or someones making a monkey out of us?). Easy to take all around you to be deaf, even if you happen to be in an elevator on your way to the top floor (thats where my office is). I do not have any experience of oil drilling but the sounds sometimes emanating around my office appear to be somewhat similar. I will figure out one day why all such development activity takes place during the office hours but it makes me believe that our GDP must be rising by that fabulous figure the economists quote. Reaching home, I can often tell while parking that my family is hooked to Star Plus, watching one of its many rubbish soap operas. My apologies to the offended sensibilities, consensus being that its merely for fabric and jewellery shopping ideas. If so, how about doing so on a mute? Revolutionary!! Next, I visit a library frequently where right within an eyeshot of the sign silencemany literates chat loudly and freely (the height of delight being standing right beneath the sign and do it). Tell me if the speaker (or speakers because I hear more than one voice at the same time) takes me for a deaf or the one being addressed? Whatever said, none of the above however beats the excitement of being in a stadium watching a cricket match or a music concert or a disco (MMA lovers: sleep well, none around my vicinity). Its fair if you were to conclude that I love graveyard-like silence and should consider to have an abode in a jungle. Sure, but talking of graveyards take it from me that even they are not to be spared; my recent experience is that of an tearful mourner taking a call at a funeral. Doing so at prayers only surprises the skeletons! How about landing in a jail if I insist on staying within city? Not difficult at all given that being a criminal is no condition to be there. Upside? Its tranquillity has turned many into best selling authors! The fact is that not all sounds are undesirable ones. For instance, its fortunate to be up at the time of morning call for prayers and responding to it; following it with a walk, attending to the uttering of birds is as tranquil as it gets. The endangered specie of literates in this age have given up the habit of reading, not appreciating that it can be done almost without shrieking but involves some effort. So, am I out to change the deep disgusting personal habits of excessive honking, raising personal volume, etc. through this piece that would not move a hair on its own? Not really, just loathing the day when I too will find those around me to be deaf. About the Author: Mr. Altaf Noor Ali is Chartered Accountant practicing in his own name. Readers are welcome to contact him at: altafnoorali @yahoo.com
Students Section
Collective Zakat System

In the Holy Quran, Allah has mentioned: Of their goods take alms, that so thou mightiest purify and sanctify them and pray on their half verily thy prayers are a source of security for them and Allah is one who heareth and knoweth. (9/103). In simple language Take from their wealth and clear them, pray to them, your prayer is prosperity for them. Allah listens and knows all. In the days of our Prophet ( P B U H ), he was the chief of religion, head of the Government and Commander in Chief of the army. The above order of Allah was for him to take and so also these orders are for every proper Muslim Government. From the beginning of Islam till 7th century i.e. the days of Abbasi Caliphate, zakat was collectively received. It is a popular belief that Hazarat Abu Bakar announced to declare war against defaulters of Zakat. It is a clear proof that Zakat was received centrally. After the fall of Baghdad to Central Asian non-Muslim warriors, the system of Zakat became disturbed and no one was willing to pay Zakat to nonMuslim invaders. Even in those days it was unanimously decided by scholars that in the countries ruled by nonMuslims, a Muslim Ameer should be selected and pool the Zakat with him.
Nadia Wahid
says, Yes, I pay. If they are in very close terms, fit to ask how much and to whom, then the reply is generally, Thats all I paid and to those who approached me. It is not a correct answer to a fundamental Islamic directive. First of all Zakat should be calculated in detail in black and white presuming that not the Income tax officer but Allah is looking at it. It is individual Zakat payment system which is prevailing in most of the Muslim society throughout the world for the last few centuries. Under the collective system several questions would come up which have been tried to be discussed and solved here. 3. Molana Abul Kalam Azad about a century ago, started delivering lectures on Collective Zakat System. According to him, Friday prayers are subject to Imam and have not been discontinued in the non-Muslim Empire / rule. So how can Collective Zakat system be discontinued? He was also of the view that individually paid to poor can be anything but not Zakat. 4. After seven centuries of Islam, alongwith many other social and economic changes, Zakat also changed from collective to an individual basis. Then it was for each and every Muslim to decide himself to ascertain and distribute Zakat. The actual purpose of distribution of Zakat should not be only maintenance of needy individuals but should also be their rehabilitation and self-dependence, and not to make them beggars. There is a school of thought, which claims that Islamic Government must be prevalent for Collective Zakat System. If it is considered to be correct even, then it cannot be an excuse for clear-cut directions of Collective Zakat System, which has been in practice for seven centuries. 5. The needy in such a condition will not feel ashamed that he is getting Zakat from so and so. It should be kept secret, otherwise such people will feel degraded in the community or society.
Preliminary
1. In Islam, we can see that Salat, i.e. Namaz and Hajj are performed collectively and not individually. No doubt, Salat can be offered individually but priority and preference is for collective prayers. 2. In our family or friendly circle, whenever the payment of Zakat and Ushr comes under discussion, almost everyone
Students Section
6. In the practical life, we see many collective Zakat units, which are trusts, NGOs, associations, societies, welfare funds, anjumans, mosques, madrassahs, Jamiat, etc. They are working only for voluntary collection and consumption is for their own objectives. The main flaw is that neither the Zakat is collectively received from every citizen, liable to pay nor it is received in full and not also used for the benefit of the poor in general. 7. Beggars are a stigma on our civic life. All the beggars need not be compulsorily poor. In several press reports, we have seen that some of them have mobile phones and come in a taxi and even return in a taxi after a full days earning. They also share their income in a very low ratio with the administrative staff on the roads, markets and posh areas. 8. It is the duty of the Government and especially when compulsory Collective Zakat and Ushr is introduced, that should be helped in a reasonable way, and that beggary is eliminated throughout the country. 9. Since the late Gen. Zia-ul-Haqs introduction of Zakat beggars and Ushr, we heard rumors, news and observations of a lar g e number of malpractices in this field. Similar to many other malpractices, Allah and His Prophet (P.B.U.H.) have warned of severe punishment for misusing Zakat money but still, people of our society, in general, do not hesitate in pocketing Zakat money or indulge in its wrong distribution to their kith and kin. 1 0 .H o w e v e r, this does not mean that we should not support the Collective Zakat System, which is still in practice in many Muslim countries not as a nation as a whole but among families, societies, groups or even villages and towns. As for example, in Saudi Arabia, some of such collection is used to pay off the penalty of the prisoners and get them released. 11. Even today in NWFP there is a tradition that if a person becomes bankrupt or is in need of financial help, he invites known and unknown persons to Daal Roti. He puts a large earthen jar covered with a cloth in the center and the visitors put some money in it. No one can know who has given how much. It would have been better if the receiver is also not made public. It is possible only when Zakat and Ushr is collected and distributed by two or three senior respectable citizens. Only they would know who has been helped but the receiver would not come to light, except in the files. No doubt, every one would point out dozens of defects and shortcomings but with the pass of time, defects would surely be removed and time would teach us how to implement it properly with the fear of Allah and His Prophet (P.B.U.H.) balance carried forward, Debit or Credit. 2. ORGANISATIONAL STRUCTURE: a. No doubt there is dearth of honest, incorruptible and unapproachable persons. Proposed Administration Committees photos may be published for public opinion & objections, if any. Even t o d a y, every department, business community, NGOs have one or more persons who have these qualities and are fit for this purpose. b. Keeping in view the general reputation of revenue staff in the public, much care is required in the appointment as well as in making out the rules, regulations and procedure for their working. It would be better if the District Administration side and Government officials are not taken in Councils and Committees, otherwise public members, living in the same district, will feel difficulty and would be reluctant to disagree with District and other Officials. c. Oath taking from the staff should be an annual feature in which each individual should say on Holy Quran that he has neither accepted any gift or facility in cash, kind or service from the Zakat payers and shall also not accept the same in the next coming year, nor any distribution was unjustified. d. Unit of Collective Zakat may be city, town, district but not larger than district.
Practical
1. RETURN FORM: A detailed form to fill up every year by every individual should be designed, showing assets with description liable to Zakat, with present market value. Usher calculation, exempted assets less liabilities, Zakat & Usher figure, balance brought forward, paid &
Students Section
3. USHR: a. Produce means not only gross agricultural or forest produce liable to Ushr. Mining and fishing are also liable on gross production. b. Usher no doubt is different from Zakat but in Hadith it is in the same Chapter of Zakat and since its use is exactly similar to Zakat. Its merger with the Zakat Fund appears to be quite in order. The only difference is that Usher is on the Gross Product while Zakat is on the Net Assets of a person on a given date. c. It is further clarified that fishermen, agriculturists, mine owners, etc., even after payment of Usher are liable to Zakat ZAKATIS ON THEIR SAVINGS. d. Ushr is not payable yearly or on an annual basis, but it is payable on production, which may be twice a year or even more frequently or on regular actual production such as in case of mining and fishing. 4. RECOVERY OF USHR: a. It may be both in kind or in cash. Pakistan has four major cash crops: viz. cotton, sugarcane, wheat & rice. Cotton is generally procured by ginning factories; wheat by the Food Department and local markets, sugar cane by sugar mills and rice paddy by the rice mills. If a compulsory condition is made to these organisations to recover 5% of the gross proceeds, the recovery would be easier and leakage would be difficult. Similar steps may be taken for recovery of Usher on mining and sea products. b. Apart from the main consuming mills and markets, some wheat, sugarcanes, rice, etc., are consumed or sold privately. To encircle these types of utilisation, patwaris and agriculture department, keeping the record of crops and production can provide reasonable estimates. If all these are computerized, as is being done in Punjab, then obtaining such data for levy, collection and check on evasion of Ushr will be much easier. 5. RECOVERY OF ZAKAT: a. Payment of Zakat is at source and voluntary. There should be provision to recover it, if not paid voluntarily. b. For the recovery of income tax, we have the condition to pay the tax in advance at the time of filing the return. Why should not the Zakat also be paid immediately with the return? If Zakat is not recovered and subsequently the assets have reduced, the benefit goes to the payer and as such it should be the duty of the Government to recover the Zakat immediately without any concession, or installment. 6. PREFERENTIAL BENEFICIARY: Those who are paying Zakat and Ushr at the moment know some of the beneficiaries personally or by verification determine that they are really entitled to the help. Under the collective system, Zakat payer should be entitled to assign a percentage of his contribution for About the Author: Ms. Nadia Wahid got 8 As in O Level. After passing A Level in six months, she graduated in Commerce from Karachi University. She has completed ACCA (UK) and is a CA finalist. them say 30-50% of the Zakat paid can be assigned to particular institutions or individuals. It is a good idea. Apart from the institutions, several individuals would also be on the list of Zakat payers, who were being benefited in the past. 7. NON-MUSLIMS: In every Muslim country, there is a population of non-Muslims, maybe in minority. Every religion has a lesson on charity with good results, here and there. As for example, Christians have to pay 10% of their income, while Muslims have to pay 2.5% of their savings. In other words, religion will not affect Zakat or charity. To make it more logical separate funds for separate non-Muslims (Christians, Catholics, Protestants, Jews, Hindus, Parsi, Qadiani, Buddhists etc.) be maintained by their own priests and the rate may be as applicable to Muslims but with an audit by Muslims and supervision of Government. It shall be for social welfare of their own religious poor.

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Vol # 38

July - August 2005

Editorial ZAKAT - As a tool for Poverty Alleviation

Questions and Answers on Zakah

Zakat & Ushr in Modern Times

Zakat Self Assessment Form

General Rules Governing Calculation of Zakat

Islamic Economic System

VCD of CPD Activities Conducted by SRC

Pakistan Accountant can be downloaded from Institutes website at www.icap.org.pk

Abdul Rahim Suriya, FCA Chief Editor

The Pakistan Accountant

July - August 2005

Syed Shabbar Zaidi

July - August 2005

Questions and Answers on Zakah

How to Calculate Zakah on Business?

The Pakistan Accountant

Payment of Sadaqatul-Fir to a Non Muslim

Paying Zakah to an Indebted Person

Zakah on Unquoted Shares

Who is Entitled to Receive Zakah?

Zakah on Trust Fund

Zakah on the Employees Provident Fund

July - August 2005 07

Zakah on Agricultural Produce

Change in Finanacial Status and Zakah

Various Zakah Questions

Zakat and Ushr in Modern Times

3. Valuation Date, Time & Year

The Pakistan Accountant

July - August 2005 13

7. List of Assets Liable to Zakat

10. Check on Evasion

July - August 2005 15

Who is deserving of Zakat

The Pakistan Accountant

July - August 2005 16

The collection of Zakat

traveler, if he is in need of money while traveling , is entitled to Zakat .

Some essential Points about Zakat

The Pakistan Accountant

July - August 2005 17

Zakat Self Assessment Form

Net Amount on which Zakat due

= Amount of Zakat Payable

General Rules Governing Calculation of Zakat

PUNISHMENT FOR NOT PAYING ZAKAT

METHOD OF ZAKAT CALCULATION ITEMS OF ASSETS

GENERAL RULES OPINION OF JUSTICE (Rtd.) MUFTI MOHAMMAD TAQI USMANI

The Pakistan Accountant

Treasury and other corporate bonds / bills

Mutual funds Other funds (such as Hedge funds)

Other question with regard calculation of Zakat for a Group of Companies

WHO IS TO PAY ZAKAT (NISAB OF ZAKAT)

The Pakistan Accountant

July - August 2005 20

Islamic Economic System

ISSUES IN ISLAMIC BANKING

Trade Financing - Murabaha

Islamic Economic System

Car Financing - Ijarah

Islamic Economic System

House Financing Diminishing Musharka